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What Is Real Estate?

A mortgage is a method of financing real property, or real estate, as it is commonly known. Real property, unlike other types of property, such as automobiles, jewelry, and clothing, is not portable. You can't pick it up and move it around. The location of the property defines the ownership of that land. A lot survey defines the parcel of land that you buy in terms that relate to other fixed points of reference that are known and agreed on by all. This information is usually recorded in permanent records that the local government maintains. Following are some common ways to own real estate:

• Fee simple property versus leasehold estates – All states recognize fee simple ownership of real property. Fee simple means that the land and all improvements on it (e.g., the house) transfer with the deed to the property. Leasehold means that a leaseholder who collects rent for the land owns the land. If you purchase a leasehold property, you obtain ownership of the improvements, but you incur an obligation to make leasehold payments, also known as ground rent, to the leaseholder. Residential leasehold properties are common in Hawaii and occur occasionally in Maryland.

• Condominiums – When you buy a condominium, you do not acquire land, you acquire a three-dimensional space defined as being within the exterior walls, ceiling, and floors of the condominium unit. The condominium unit itself may be an apartment unit in a highrise or lowrise building, but it can also be a townhouse or even a freestanding, detached singlefamily home. The land on which the condominium is located is owned by the condominium owners association, which is governed and controlled by the condominium unit owners and is almost a mini-government complete with bylaws and procedures, including the right to assess "taxes” in the form of association dues for maintenance and capital improvements to the common areas. The documents that created the condominium describe and define the condominium unit.

• Cooperative units or co-ops – When you buy a co-op, you do not acquire title to any real property. You actually buy “shares” in a cooperative that owns the real estate and all the improvements thereon. The cooperative, in return for your purchase of shares, grants you the right to occupy a specified living unit, the structure of which can take any form as with condominiums. Almost all states have cooperatives but they are most common in large cities such as New York and Washington, DC. Because cooperative ownership is substantially and legally different from other types of ownership, many lenders do not offer cooperative loans.

The real estate does not secure the loan; a lien against the shares of the cooperative secures it.

Different types of ownership do not affect how you will qualify for a home loan, but they do affect the types of documents that you sign at settlement and may affect some of the costs associated with ownership. For example, leasehold payments for leasehold estates and condominium or homeowners' association fees are included in your total housing cost for qualification purposes (see Chapter 3).

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