Real estate exam terms
8 terms, each with a plain definition, the term it is most often confused with, and how the license exam actually asks about it.
An amount in a party’s favour on the settlement statement
Money that party has already provided or is owed. Earnest money already deposited is a credit to the buyer; the sale price is a credit to the seller.
A seller who prepaid the year’s taxes is credited and the buyer debited, because the buyer will enjoy the part of the year already paid for.
A charge against a party on the settlement statement
An amount that party owes or must bring to closing. The purchase price is a debit to the buyer; the payoff of an existing loan is a debit to the seller.
Every proration produces a matching pair — a debit to one party and a credit to the other — which is a useful check on your working.
A neutral third party holding funds and documents until conditions are met
The escrow holder takes instructions from both sides and releases nothing until the stated conditions are satisfied. The same word also names the lender’s ongoing account for taxes and insurance, which is a different thing entirely.
Watch which meaning a question is using. Closing escrow and an escrow account for taxes share a word and nothing else.
A signed statement of the current facts of a loan or lease that the signer cannot later contradict
Someone buying a mortgage, or a building with tenants in it, asks the borrower or the tenant to confirm the balance, the rent, the term and any claims they believe they have. Having signed, they are estopped from asserting something different afterwards.
The mechanism is the point: it converts a disputed fact into one the signer is barred from denying, which is why lenders and purchasers require it before closing.
A lender-held account collecting monthly amounts for taxes and insurance
Also called an escrow account. The lender collects a twelfth of the annual bills with each payment and pays them when due, protecting itself against a tax lien or a lapse in coverage. It is the T and the I in PITI.
It is why a fixed-rate loan can still have a changing monthly payment — the principal and interest are fixed, the impounds are not.
Dividing a shared expense or income between buyer and seller at closing
Property taxes, prepaid insurance, HOA dues and collected rent are apportioned so each party bears their own period of ownership. The exam will always tell you whether to use a 360-day or a 365-day year and who owns the day of closing.
Work out who has had the use of the money and who ought to end up with it, then assign the debit and credit. Taxes paid in arrears run one way, rent collected in advance runs the other.
The closing: funds and documents change hands and the transaction completes
Also called closing. The deed is delivered, the loan funds, prorations are settled and the documents go for recording. Practice varies widely by region — a table closing with everyone present in some states, an escrow closing where nobody meets in others.
The moment the purchase contract stops being executory and becomes executed.
A state or local tax on conveying real property, usually charged per unit of price
Also called a documentary stamp or deed tax. It is typically expressed as an amount per $500 or per $1,000 of the sale price, and who customarily pays it varies by state and even by county.
Count the units first, then apply the rate. Applying the rate to the whole price before dividing is the standard arithmetic error.
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