Mortgage transactions are a fundamental part of the real estate market in the United States. To better understand this process, it is essential to know the key English terms and concepts used in the industry. Here, we present a detailed guide to these terms, divided into various categories:

Elements of a Mortgage Transaction

Promissory Note

The promissory note It is a legal document in which the borrower agrees to repay the loan. It contains information about the amount borrowed, the repayment term, the interest rate, and the promise of repayment.

Mortgage

A mortgage is a collateral used in a mortgage transaction. It is used to pledge the property as collateral for the loan. If the borrower defaults on payments, the lender can foreclose and take possession of the property.

• promissory note: promise to repay loan
• mortgage: pledge of property as collateral for loan

Mechanics of a Mortgage Transaction

The process of a mortgage transaction involves several essential steps:

1. Delivery of the Promissory Note and the mortgage: The borrower delivers to the lender the promissory note and the mortgage as a guarantee.
2. Delivery of Funds and Registration of a Lien: The lender delivers the funds to the borrower and records a lien (lien) on the property as collateral.

• borrower gives lender promissory note and mortgage
• lender gives borrower funds and records to lien

Mortgage (Hypothecation)

The mortgage refers to the use of real property as collateral for a mortgage loan. If the borrower defaults on payments, the lender has the right to take possession of the property.

Financial Components

Main Original (Original Main)

He main original is the amount of borrowed capital on which interest payments are calculated.

Loan Balance

He loan balance is the remaining principal not paid at any time during the life of the loan.

Interest

He interest It is the charge for the use of borrowed money. It can be a fixed or variable rate.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) It includes both interest and all other financial charges. Lenders must disclose the APR on residential properties.

Point

A point It is equal to one percent of the loan amount and is used to purchase lower interest rates.

Loan Origination Fee

The loan origination fee is a fee charged by the lender at the time of loan origination to obtain a required return.

Term (Term)

He term refers to the period of time over which interest and principal payments will be made.

Payment

He payment It is the periodic payment of interest and/or principal made by the borrower.

Down Payment

He down payment is the borrower's cash payment that is applied to the purchase price of the property.

Loan-to-Value Ratio

The loan-to-value ratio It is the ratio between the loan amount and the total value of the property.

Equity

The equity is the borrower's cash investment in the property at closing. Next, it is the difference between the market value and the loan balance.

Trust Deed Transactions

Promissory Note

In a transaction with trust deed, the promissory note It is the trustor's (borrower's) promise to repay the loan.

Deed of Trust

The deed of trust is a document that transfers title to property to the trustee (third party) on behalf of the beneficiary (lender) until the loan is repaid.

Mechanics of a Trust Deed Transaction

In a trust deed transaction, the deed of trust transfers title from the borrower/trustor to a third-party trustee. This trustee holds title on behalf of the lender/beneficiary until the loan is paid in full.

Promissory Note

The promising note is a legal instrument in which the borrower declares the amount owed, the term, the interest rate, and the promise to pay. It is a negotiable instrument transferable to third parties.

Mortgage Clauses

Payment of Principal and Interest: Early and Late Payment Charges

The borrower must make timely payments in accordance with the terms of the promissory note. Late payments or early payments may trigger penalties.

Funds for Taxes and Insurance

The borrower must make monthly payments to cover property taxes and insurance. You may also need to pay flood insurance and mortgage insurance premiums.

Escrow Account

A Escrow Account It is a reserve account for periodic payments of taxes and insurance. The Real Estate Settlement Procedures Act (RESPA) limits the funds the lender may require for this purpose.

PITI

The borrower's monthly payment for principal and interest is called P&I payment (principal and interest). The amount that includes the escrow payment is called PITI (principal, interest, taxes, insurance).

Charges and Liens

The borrower is responsible for paying any fees, liens or other expenses that may take priority over the mortgage or trust instrument.

Property or Hazard Insurance

Borrower must maintain homeowner's insurance as required by lender.

Occupation, Preservation, Maintenance and Protection of Property

The borrower must occupy and maintain the property in accordance with the lender's requirements. Illegal use or abandonment is not permitted.

Protection of Lender's Rights in Property

The lender can take steps to protect its rights in the property if the borrower jeopardizes its value. The costs of these actions would be charged to the borrower.

Mortgage Insurance

The lender may require private mortgage insurance (PMI) to protect the lender in the event of a borrower defaulting. This applies to loans not backed by FHA or VA and with a down payment of less than 20%.

Inspection

The lender may inspect the property if it has reasonable grounds to fear damage to the collateral.

Sentence

If the property is condemned or taken by eminent domain, the lender reserves a claim on the resulting proceeds.

Transfer of Property or Beneficial Interest of Borrower

If the borrower sells the property without the lender's approval, the lender may demand immediate repayment of the loan balance. This is known as alienation clause either due-on sale clause, which allows the lender to avoid unapproved loan assumptions. The obligation to repay the loan before the scheduled due date is called acceleration.

Borrower's Right to Reinstatement

If the lender declares the borrower in default, the borrower has the right to reinstatement by taking certain actions, generally paying the missed payments plus the lender's expenses. This clause is called redemption clause and gives the borrower time to satisfy its obligations and avoid a forced sale.

Release

An agreement to release a lien obligation when the borrower has repaid the loan in full. This clause, also known as release clause either default clause, may require the lender to execute a satisfaction of mortgage either release of mortgage, or in the case of a trust deed, direct the trustee to execute a release deed either deed of reconveyance in favor of the borrower.

Escalation Clause

The escalation clause allows the lender to increase the interest rate on the loan.

Loan Qualification

Equal Credit Opportunity Act (ECOA)

The lender must evaluate the applicant based on their own income and credit information. You cannot deny credit based on several factors, including income from part-time work, future plans to have a family, location factors, or protected classes.

Income Qualification

Income qualification assesses the borrower's ability to repay the loan. Income ratios include proportion of income to 25-28% for conventional loans and 31% for FHA loans. Debt ratios include 36% for conventional loans and 43% for FHA loans and 41% for VA loans.

Cash Qualification

The lender verifies the borrower's sources of cash for the down payment. The additional cash improves the income rating assessment.

Net Worth

He net worth is the amount by which the applicant's assets exceed debts and serves as an additional source of reserves.

Credit Evaluation

The lender obtains credit reports to evaluate the applicant's payment history.

Loan Commitment

He loan commitment is a written promise by the lender to make a loan under specific terms.

Loan-to-Value Ratio (LTV)

The loan-to-value (LTV) ratio It is the ratio between the loan amount and the value of the property. For example, an LTV of 80% means that the loan is 80% of the value of the property.

Laws Affecting Mortgage Transactions

Truth-in-Lending and Regulation Z Act

The Truth in Lending Act and Regulation Z Require lenders to disclose finance charges and APR before closing. They also provide the borrower with the right to terminate the loan in certain cases.

Equal Credit Opportunity Act (ECOA)

He ECOA prohibits discrimination in the granting of credit based on factors such as race, religion, national origin, gender, marital status, age, and dependency on public assistance. Real estate agents who assist in qualification must also comply.

Real Estate Settlement Procedures Act (RESPA)

The Real Estate Establishment Procedures Act (RESPA) standardizes closing practices and ensures buyers understand closing costs.

National Flood Insurance Act

Los prestatarios de «préstamos relacionados con el gobierno federal» deben obtener seguro contra inundaciones si la propiedad se encuentra en una zona designada como de riesgo de inundación.

The Mortgage Market

Money Supply and Demand

The relationship between money supply and demand affects interest rates, consumer prices, and the availability of mortgage money.

Federal Reserve Control over the Money Supply between Banks

The Federal Reserve buys and sells Treasury bonds to influence the money supply and interest rates. It also establishes reserve requirements for member banks and establishes the discount rate.

Federal Home Loan Bank System (FHLBS)

He Mortgage Loan Banking System It is the equivalent of the Federal Reserve for savings and loan associations.

Federal Deposit Insurance Corporation (FDIC)

The FDIC insures deposits up to $250,000 per depositor, per insured bank and per account ownership category.

Primary Mortgage Market

The primary mortgage market involves the origination of mortgage loans directly to borrowers. This includes banks, savings and loan associations, life insurance companies, and other lenders.

Secondary Mortgage Market

The secondary mortgage market purchases existing loans to provide liquidity to primary lenders. Some of the key players in this market include Fannie Mae, Ginnie Mae, Freddie Mac, investment firms, and life insurance companies.

Role of FNMA, GNMA and FHLMC

• FNMA (Federal National Mortgage Association) purchases loans backed by FHA, VA, and conventional loans, and issues guarantees on mortgage-backed securities.
• GNMA (Government National Mortgage Association) guarantees payments on certain types of government-backed loans.
• FHLMC (Federal Home Loan Mortgage Corporation) buys and bundles mortgages, and sells mortgage-backed securities.

Mortgage Loan Originator vs. Lender/Banker vs. Broker (Mortgage Loan Originator vs. Lender/Banker vs. Broker)

• Mortgage Loan Originator: Apply for and negotiate mortgage loans. Requires an MLO license.
• Mortgage Broker: An intermediary that connects mortgage borrowers with lenders, but does not use its own funds to originate loans.
• Lender/Banker: A person or entity that finances or services loans for others and/or sells mortgages in the secondary market.

Types of Mortgages

Conventional Mortgages

• Originated by banks and other private financial institutions.
• No government insurance or guarantees, such as FHA or VA.
• They typically require a 20% down payment, although smaller payments may require PMI (Private Mortgage Insurance).
• The assumptions must be approved.

Government Loan Programs

• FHA (Federal Housing Administration): Federally insured loans for qualified borrowers. 15 or 30 year terms, specific income and debt requirements, and a minimum 3% down payment.
• VA (Veterans Administration): Federally guaranteed loans for qualified veterans and active duty service members. No down payment required.

Amortized Fixed Rate Loans vs. Adjustable Loans

• Amortized Fixed-Rate: Payments that include increasing increases in principal that reduce the loan balance over time. The interest rate is constant.
• Adjustable Loans: The interest rate fluctuates based on an index, which can lead to changing payments. They can include negative amortization if payments do not fully cover the interest owed.

Characteristics of Adjustable Loans

• Mechanics: Rate adjusts up or down based on index, payments may or may not change.
• Negative Amortization: The loan balance increases if payments are less than what is owed based on the balance and rate.
• Rate and Payment Limits: Set the maximum amounts that the interest rate or payments can increase in any adjustment period or over the life of the loan.
• Index and Margin: The interest rate is linked to various financial indices, and the margin is the fixed spread between the index and the interest rate.
• Promotional Rates: To attract borrowers, adjustable loans may have low initial rates that increase in later periods.

Personalized Mortgage Loans

Partially Amortized with Additional Payments (Balloon Payment)

• Regular payments do not completely reduce the loan balance, resulting in a large balloon payment.

Interest-Only Loans

• Payments consist of interest only, and the principal balance is paid in full at maturity in one lump sum payment.

Biweekly Mortgage

• Payments are made every two weeks, which reduces the total interest paid and shortens the risk period for the lender.

Package Mortgage

• Includes personal property financing along with the mortgage loan.

Equity Loans (Home Equity Loans)

• Funds are taken using home equity as collateral, and can be used for any purpose.

Purchase Money Mortgage

• A seller finances part of the purchase price of the property using the property as collateral. It usually accompanies a primary mortgage.

Reverse Annuity Mortgage

• The homeowner offers the equity in the home to a lender in exchange for periodic payments. The debt balance increases over time.

FHA Loans

The FHA loans They are secured loans made by approved lenders to qualified borrowers. Here are some key aspects:

• Loan Term: It can be 15 or 30 years.
• Qualification Ratios: Borrowers must meet 31% income and 43% debt ratios.
• Minimum Down Payment: Requires an initial payment of 3.5%.
• Mortgage Insurance: Borrowers must pay monthly mortgage insurance and a down payment, which can be financed.
• Buyer Eligibility: Borrowers must meet certain income and credit requirements, and the property must meet minimum safety and habitability standards.

VA Loans

The VA loans They are available to eligible veterans and active duty members. Some important aspects are:

• No Down Payment Required: VA loans do not require a down payment.
• Loan Term: The terms are usually 15 or 30 years.
• Government Guarantee: The government guarantees a portion of the loan to help lenders offer favorable terms.
• Certificate of Eligibility: Borrowers must obtain a Certificate of Eligibility (VA COE) to prove your eligibility.
• Closing Financing: Closing costs can be financed into the loan.

Closing of a Mortgage Transaction

Closing process

Closing a mortgage transaction involves a series of steps:

1. Document Preparation: The necessary documents are prepared, including the promissory note, the mortgage and other agreements.
2. Document Review: Documents are reviewed and signed by the borrower and the lender.
3. Closing Funds: The necessary funds are provided to cover the down payment and closing costs.
4. Document Registration: Mortgage and property documents are recorded in the registry of deeds.
5. Delivery of Property: The title of the property is transferred to the borrower, and he or she is given the keys to the property.
6. Payment to the Real Estate Agent: The real estate agents involved in the transaction receive their commissions.
7. Payment to Other Intermediaries: Payments are made to lenders, mortgage brokers and other intermediaries.

Closing Costs

Closing costs may include:

• Origination Expenses: Lender fees for loan origination.
• Title Expenses: Fees related to the search and issuance of the property title.
• Insurance: Title insurance premium and mortgage insurance, if necessary.
• Taxes and Government Fees: Transfer taxes and other government charges.
• Real Estate Agent Fees: Commissions paid to real estate agents.
• Other Costs: Inspections, appraisals and other property-related costs.

Recision (Right of Rescission)

He right of termination allows the borrower to cancel certain types of real estate transactions within three business days of closing.

Mortgage Foreclosure

If the borrower fails to comply with the terms of the loan, the lender can foreclose and take possession of the property. This is done through a legal process known as foreclosure.

Insolvency (Foreclosure)

The insolvency is the legal process by which the lender takes possession of the borrower's property due to default on payments.

Short Sale

In a Short sale, the homeowner sells the property for less than what is owed on the loan, and the lender accepts this as full or partial payment of the loan.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is an agreement in which the borrower voluntarily transfers property to the lender rather than face bankruptcy.

Insolvency Process

The bankruptcy process involves several steps, which can vary by state and local laws:

1. Insolvency Notice: The lender notifies the borrower of the default and gives him the opportunity to catch up on payments.
2. Loss Mitigation: The borrower and lender can work together to find a solution, such as a loan modification or short sale.
3. Judicial Auction or Judicial Sale: If a solution is not found, the property is sold at a judicial auction to recover the debt.
4. Expulsion: If the buyer does not vacate the property after the auction, the lender can initiate eviction proceedings to regain possession.

Loan Modification

A loan modification It is an agreement between the borrower and the lender to change the terms of the loan, usually to reduce monthly payments and avoid default.

Insolvency Advice

Borrowers facing possible bankruptcy can benefit from bankruptcy counseling offered by nonprofit organizations and government agencies.

Tips for Buying a House with a Mortgage

Some important tips for buying a home with a mortgage include:

• Budget: Determine how much you can pay monthly and how much you can pay as a down payment.
• Credit Score: Maintain a good credit score and correct any errors on your credit report.
• Compare Offers: Get offers from multiple lenders and compare interest rates and terms.
• Closing Costs: Be prepared for closing costs, which can be significant.
• Mortgage Insurance: Understand how mortgage insurance works and how it will affect your payments.
• Professional advice: Consider working with a real estate agent and financial advisor.
• Pre approval: Get pre-approved to find out how much you can spend on a home.
• Property Inspection: Conduct a complete inspection of the property before purchasing.
• Termination Rights: Learn your termination rights and how to cancel an agreement if necessary.
• Long Term Planning: Consider your long-term financial situation and how changes in interest rates may affect your payments.

Conclusion

The process of obtaining a mortgage and purchasing a home is a significant step in many people's lives. It is important to understand the key aspects of mortgages, how home loans work, and the rights and responsibilities of both the borrower and the lender. It is also crucial to be financially prepared before purchasing a home and explore all available options to find the mortgage loan that best suits your financial needs and goals. By working with trusted real estate and financial professionals, you can increase your chances of success in the home buying process and maintain a successful long-term real estate investment.