Glossary of the Mortgage Market

May 01, 2017

Good communication is key to the success of any real estate transaction. That’s why we share a glossary with the most used terms in the mortgage world. This is an excellent tool that will help you explain the terms of the real estate field to your clients.

Most used terms:

Amortization: Completion of a debt, in regular periods, during a certain time.

Principal Balance: Calculation of the obligation, excluding interest or other charges. It is not a cancellation balance.

Buydown: Payment to the bank, by an individual (usually the developer or seller), with the purpose of reducing the interest rate of the mortgage for a defined term.

Origination fee: Amount established by the bank and paid by the applicant for the evaluation and processing of the loan application.

Gift letter: A document certifying that the funds come from a gift or donation and do not require payment or return.

Property tax statement: Document that issues the office of the Municipal Revenue Collection Center (CRIM) and indicates whether or not the property has property taxes debt.

Tax assessment value: Document that issues the CRIM and indicates the value of the structure and the land for tax purposes; does not represent the value of the property in the market.

Certificate of eligibility: Certification issued by the Department of Veterans Affairs (VA) that confirms the creditor’s eligibility to obtain a loan guaranteed by the Agency.

Co-borrower: additional responsible for the debt; a person who has or will have ownership interest in the property and responsibility for payment on the mortgage. His income, assets and debts will be used to determine the repayment capacity, together with those of the principal debtor.

Co-signer: Individual who agrees to guarantee the debt in a personal level, in case the debtor does not comply with the payment. He/she does not have ownership of the property under guarantee. Their income and debts can be considered when determining the repayment capacity to reinforce the principal debtor’s credit, or it can be used as a compensating factor.

Sales agreement: Agreement between a seller and a buyer where the terms and conditions (sale price, time, etc.) are stipulated in relation to the sale and transfer of the property.

Escrow account: It is the portion of the monthly payment corresponding to the payment of property taxes and insurance maintained by the mortgage administrator. This account is also known as a reserve account. The loan administrator periodically analyzes the account to verify if the balance is sufficient to cover projected taxes and insurance payments. If a deficiency is identified in the account, the monthly payment will be adjusted to the amount required to cover the payments.

Initial deposit (earnest money): Also known as option to purchase. It is money given as a sample of the acceptance of the terms and conditions indicated in the sales contract. At the close of the loan, this amount is credited to the purchase price.

Depreciation: Amount that presumes to present a loss in the value of a structure or other type of asset. It can originate by the age, physical deterioration, economic or functional condition of the property.

  • Functional – Loss of value in the building for not keeping up with the style changes of the construction, internal distribution or equipment, according to what prevails in the market.
  • Physical – Loss in value on the property because it has not been kept in good condition.
  • Exterior – Loss of property value due to economic, environmental or location factors.

Legal description: Detailed explanation that includes the characteristics, proximity, boundaries, and easements of a property, as registered in the Property Registry.

Mortgage discount (discount point): Points paid by the applicant on the amount of the mortgage loan in order to reduce the interest rate.

Simple domain (simple fee): Full right on the property that allows disposing of it without limitations.

Emancipation: Be independent of the guardianship of parents. The Puerto Rico Law recognizes four types:

  • By grant of the father or mother
  • By marriage
  • By judicial concession
  • By age of majority (21 years)

Attachment: Restriction to the use or disposition of goods. It originates by a court’s consent or by the inherent power of a government (for example, the Department of Treasury).

Equity: The difference between the market value of a property and the debts that it guarantees.

Sales deed: Public document in which a seller transfers the title of a property to a buyer. This document is regitered in the Property Register office.

Mortgage deed: Public document that is constituted to guarantee the fulfillment of a principal obligation and established by a promissory note that is registered in the Property Registry office.

Deed of marriage (prenuptial agreement): Public document, granted before marriage, which stipulates the conditions of the conjugal partnership regarding present and future assets. It is important that any alteration to the agreement is made before marriage.

Title search: Report on the legal status and circumstances of a property as stated in the Property Registry. It provides information about the description of the property and its registry holder, as well as the charges and liens that affect it and any other documentation pending in the Registry.

Closing costs: Costs related to the granting of the loan. They include charges paid to third parties, such as legal fees, plot plan, appraisal, title policy, and prepaid expenses, among others.

Prepaid costs: Costs that are paid in advance at the time of closing (for example: mortgage insurance premium, origination and discount points, and interest).

Lien: Any obligation, mortgage debt or limitation of the property. Examples: easement, leases, mortgages, usufruct, attachment, etc.

Mortgage: Lien on real property that provides a debtor to a creditor as additional protection for the payment of the obligation. It originates through the granting of a public deed and must be registered at the Property Registry.

Interest (interest): Cost of using money. In mortgage loans, interests are paid of the past month.

Primary market: Division where mortgages are originated.

Secondary market: Where existing mortgages are bought and sold, or instruments guaranteed by them.

Delinquency (default): Failure to comply with the payment terms and conditions established in the promissory note. The loan is classified as delinquent when there are two monthly payments past due.

Mortgage note: Written promise of payment of a sum of money where the payment of a debt’s terms and conditions are established; such as the penalty in case of prepayment. In conventional loans the penalty percentage is regulated by the Office of the Commissioner of Financial Institutions under Regulation 5722.

Power of attorney: Public deed in which the grantor provides a proxy to a representative to compromise, alienate (sell), mortgage or execute an action on his behalf, in respect to the property. For mortgage transactions the power must be specific.

Insured loan: Money loaned with mortgage insurance from FHA, VA, or a private mortgage insurance company.

FHA Loan: Mortgage financing insured by the Federal Housing Administration (FHA). It secures payment in case of default of the debtor.

VA Loan or VA Loan: Mortgage financing guaranteed by the Department of Veterans Affairs in case of default of the debtor.

Principal and interest: portion of the monthly payment intended to pay back the obligation and cover the interests accumulated for the term.

Processing: Processing of a credit application during which the requisition, obtaining and analysis of the documents necessary for the evaluation of the case is carried out.

Bankruptcy: A legal process by which a person, whether natural or legal, is relieved from making payments on some or all of their debts after transferring their assets to a liquidator appointed by the Court for the protection of creditors. In some cases, once the debtor is relieved of the payments, he may be required to make partial payments with a payment plan to his creditors through the trustee.

Loan to value ratio (LTV): The percentage of the obligation in a mortgage transaction in relation to the appraised value of the property or the selling price, whichever is lower.

Property Registry: Government office responsible for publishing transactions related to real estate, such as: house, land, farm, or building. The purpose of this office is to keep records in the books about the description of the goods, who they belong to, the conditions in which they are in terms of charges or liens and other terms, with the purpose that the information can be of the general public’s knowledge.

Refinance: A transaction by which an obligation is canceled and replaced by a new obligation.

Private mortgage insurance: Mortgage insurance placed with a private company that normally guarantees 20% of the total debt owed on a mortgage loan. Applies to conventional loans. Flood insurance: Insurance obtained through a Federal program that covers damage to the structure in the event of a flood. Hazard insurance: Property insurance required by financial institutions against the risk of fire, earthquake and hurricane. Title insurance: Insurance that protects the mortgagee for any loss caused by defects in the title of the property received as collateral of the mortgage obligation (such as cancellation of previous assessments and contributive debts, among others). Amortization schedule: Indicates the payment schedule of the loan and breaks down the distribution of monthly payments between principal and interest. In addition, it includes the balance of principal after the corresponding payment has been made. Annual percentage rate (APR): Cost of credit expressed as an annual rate. It is the actual measure of the cost of customer credit. It may be higher than the interest rate reflected in the promissory note because it includes certain financing charges. The error tolerance in the APR disclosure should not exceed 1/8%. Up front mortgage premium (MIP): HUD-FHA premium to insure mortgage loan. VA funding fee: Fee imposed by VA to the veteran to obtain the Agency’s guarantee on a mortgage loan.

Remember that the mortgage experts from Conexión Popular are here to guide your clients.  For more information, please contact:

Metro – 787.707.1720

North – 787.879.9081

South – 787.812.7730

West – 787.806.1170

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