A
Adjustable-Rate Mortgage (ARM)
An adjustable rate mortgage, variable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.
Annual Percentage Rate (APR)
This rate reflects the total cost of borrowing money, including the interest rate and other costs built into the loan amount. The interest rate and the APR are typically different, and veterans should look at both when comparing VA lenders. Two loans can have similar interest rates, but the one with a higher APR will cost more.
Appraisal
Mortgage appraisals help determine the fair market value of a property by comparing it to nearby homes that have sold recently. In the case of a VA loan, the appraisal also aims to protect homebuyers from buying a home for more than it’s worth. The VA requires that any home purchased with a VA guaranteed loan meets certain minimum property requirements, so a VA appraiser will also note any health and safety concerns. A home inspection is also recommended, as it can provide a more thorough look at a property’s structural integrity and major systems.
Automated Underwriting System (AUS)
This computer system utilized by select VA-approved lenders allows for an automatic approval on a borrower’s loan application. Loan officers can tweak loan amounts in the AUS to help secure approval.
B
Basic Allowance for Housing
A service member’s BAH can be included as monthly income. Housing allowances can help defray or entirely cover monthly mortgage payments.
Buyer’s Agent
This is the real estate agent who represents the homebuyer. Also sometimes referred to as the selling agent.
C
Cash-Out Refinance
This refinance loan allows veterans to refinance to a lower interest rate and tap into their equity. Borrowers can obtain a cash-out refinance for up to 90 percent of the home’s appraised value, plus the VA Funding Fee and any costs from energy efficiency improvements.
Certificate of Eligibility
This is a formal VA document that delineates what entitlement, if any, a prospective borrower has available. It is the only acceptable method to document entitlement.
Clear to Close
This means that any loan conditions have been satisfied to the underwriter’s satisfaction and the borrower is ready to formally close on the home purchase.
Closing Costs
These are charges and fees associated with finalizing a loan. The VA limits what veterans can pay in closing costs to a 1 percent lender origination fee, reasonable discount points and other reasonable and standard fees and charges.
Closing Disclosure (CD)
A five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). It must be provided at least 3 days before closing.
Comparable Sales
They’re better known as “comps.” These are recently sold properties that are similar in size, location and other key facets to a home being purchased.
Compensating Factors
These are strengths on a loan application that can help offset lender concerns about a borrower’s credit or financial weaknesses. Low debt, great credit history and liquidity are all examples. Compensating factors must go above and beyond what would be considered a normal program requirement.
Conditional Approval
A loan with conditional approval will be issued as long as the veteran meets the requirements and stipulations — the conditions — spelled out by the underwriter.
Conforming Loan Limit
Fannie Mae and Freddie Mac can only purchase mortgages below what’s known as the conforming loan limit. This limit, is subject to change every year. Historically, VA has followed suit with the conforming loan limits. See our VA Loan Limits page for current loan limits.
Construction-to-Permanent Refinance Loan
This allows qualified borrowers to refinance a construction loan into a VA loan. Requirements and underwriting are nearly identical to other VA refinance options.
Conventional Loan
These loans feature no government guarantees but adhere to the standards and requirements of government-sponsored enterprises Fannie Mae and Freddie Mac.
Credit Score
A numeric value assigned to an individual that assesses the amount of risk to lend that person money. Credit scores are affected by a variety of factors, including debt, past payment history and income.
D
DD-214
This is an official VA document that explains a veteran’s discharge information. Reservists and National Guard members, who don’t have a single discharge certificate like the DD-214, should procure their latest annual retirement points summary along with evidence of their honorable service.
Debt-to-Income Ratio (DTI)
This is the ratio of your total monthly debt payments to your gross monthly income. VA-approved lenders use 41 percent as a benchmark. Your DTI can change depending on the loan amount you seek.
Deed-in-Lieu of Foreclosure
An alternative to straightforward foreclosure. The borrower basically returns the house to the bank. A deed-in-lieu will negatively affect your credit score.
Default
When a borrower fails to make loan payments, the loan may be considered to be in “default.”
Department of Veterans Affairs
A branch of the federal government that oversees issues affecting veterans, including the VA health system, cemeteries and benefits such as the VA Loan.
Discount Points
A point is equal to 1 percent of the loan amount. Borrowers can pay points to buy down their interest rate. Paying points is relatively infrequent among most VA borrowers.
E
Earnest Money
Borrowers put this into an escrow account when the time comes to purchase a home. These good faith funds can be put toward closing costs or refunded to the borrower. The amount depends on several factors, including geography and the property.
Energy Efficient Mortgage (EEM)
This specialized mortgage allows veterans to make energy-efficient improvements to a home they’re purchasing or refinancing. Veterans can add up to $6,000 to the loan amount provided they can verify the cost of improvements or prove the efficiencies will result in savings.
Entitlement
The VA uses the word to mean the amount of money it will guarantee on a given loan. The primary entitlement is $36,000, with a secondary entitlement of $68,250.
F
FICO Score
FICO stands for Fair Issac Corp., a California-based company that created the first-ever credit score. This is the lending industry’s preferred credit score. FICO scores run from 300 to 850.
Fixed-Rate Mortgage
Interest rates cannot fluctuate on a fixed-rate mortgage. The most common fixed-rate terms are 15 years and 30 years.
Float
Borrowers can either float or lock when it comes to an interest rate. Float is the default setting until a purchase agreement is in place.
Foreclosure
This basically means the lender takes back its house because you failed to keep up with mortgage payments. There are restrictions on foreclosures against active duty service members through the Servicemembers Civil Relief Act.
Funding Fee
A mandatory fee charged by the Department of Veterans Affairs to help cover the VA Loan program’s costs. This funding fee can be financed as part of the home loan. It’s important to note the money from the Funding Fee goes to VA. Lenders don’t retain any of the fee. Borrowers with a service-connected disability are exempt from paying the Funding Fee.
G
Good Faith Estimate (GFE)
A disclosure that was required on loans prior to RESPA reform in late 2015. This document gave borrowers an estimate of their closing costs and settlement fees. This form was replaced by the Loan Estimate.
Government-Sponsored Enterprises (GSEs)
These are federal financial services corporations, with Fannie Mae and Freddie Mac being the most familiar. Fannie Mae securitizes mortgages in the secondary market. Freddie Mac purchases, pools and sells mortgages to investors.
Graduated Payment Mortgage (GPM)
A fixed-rate mortgage where borrowers start with a low monthly payment that rises 7.5 percent each year for the first five years of the loan before leveling off. GPMs are aimed at borrowers who anticipate income gains as the loan term progresses. These also require veterans to come up with a down payment and generate negative amortization.
Growing Equity Mortgage (GEM)
Another fixed-rate mortgage where borrowers have higher monthly payments over time. There is no negative amortization with a GEM. As the payments increase, borrowers begin to pay off the principal directly, shaving interest and years off the loan term.
Guaranty
A promise made by the federal government to lenders that it will repay a portion of the loan should a borrower default. Loans backed by guaranties are generally considered lower risk.
H
Homeowners Insurance
Lenders require borrowers to secure a home insurance policy to cover at least the value of their mortgage. Homeowner’s insurance isn’t included in the mortgage.
Hybrid Adjustable-Rate Mortgage (ARM)
Borrowers with a hybrid ARM have a fixed interest rate for the first three or five years of the loan term. After that, rates are capped annually as well as over the life of the loan.
HUD-1 Settlement Statement
A document that was used prior to 2015 and was issued just before closing and breaks down final closing and settlement costs for borrowers, who also get to see what the seller makes on the sale. This from was replaced by the Closing Disclosure in 2015.
I
Inspection
While home inspections generally aren’t required as a part of your home purchase, homebuyers should treat them as such. A home inspection is your best chance to identify any issues with a home before you sign on the dotted line. Inspectors are professionally trained to assess a home’s structure, plumbing, electric, and heating/cooling systems. For homebuyers with an inspection contingency in their purchase contract, the home inspection acts as an important negotiating tool in the event a home needs repairs.
Interest Rate
The rate that determines how much a lender charges a borrower in exchange for lending money. Interest rates are expressed as percentages of the total loan. Interest rates can vary widely depending on market conditions, size of the loan and a borrower’s credit score.
Interest Rate Reduction Refinance Loan (IRRRL)
This is also known as a VA Streamline. This is a no-frills refinance designed to get veterans into a lower-rate mortgage. Borrowers cannot take cash out with an IRRRL.
J
Jumbo Loan
A loan for an amount over the limit set by the VA for a specific region. Jumbo loans can be complex and have special requirements. Contact a VA Loan specialist for details.
L
Lender Appraisal Processing Program (LAPP)
This computer system allows authorized lenders to directly order and process VA appraisals, which are conducted by independent VA-approved appraisers.
Leave and Earnings Statement
This is basically the Verification of Employment document for active duty service members. Prospective borrowers can obtain their LES online by using the MyPay portal at http://mypay.dfas.mil/mypay.aspx.
Loan Estimate
A three-page form that you receive after applying for a mortgage. The Loan Estimate tells you important details about the loan you have requested. … The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan.
Loan Officer
On a lender’s front lines, loan officers help veterans get qualified for a loan and navigate the entire process.
Loan Processor
This person pulls together outstanding documents and information once a borrower has signed a purchase contact. Their job is to piece together loan applications for an underwriter.
Loan-to-Value Adjustment
A mark-up on conventional loan rates based on a borrower’s credit score and down payment.
Lock Fee
Some lenders charge borrowers for rate locks, depending on the time period, the rate and other factors. Veterans should lenders about lock fees when comparison shopping.
Listing Agent
This is the real estate agent representing a home seller.
M
Manual Underwriting
This occurs when a borrower cannot get AUS approval. Underwriters evaluate the loan file manually and make a determination without the computer automation. Veterans who can’t secure AUS approval tend to need great credit in order to get manual approval.
Minimum Property Requirements
These are basic health and safety conditions that a property must meet to satisfy the VA. They’re also the conditions that make the home sellable. The VA in most cases requires homes to be “move-in ready.”
Multiple Listing Service (MLS)
Real estate databases and software that allow agents and brokers to look at transactions, home listings and a suite of other information tools. These are private systems unavailable to the general public.
N
Negative Amortization
This is essentially unpaid interest that gets added to the loan balance. Negative amortization occurs on a Graduated Payment Mortgage, where the initial monthly payments are so low that they don’t cover the accrued interest.
Negative Compensating Factor
Compensating factors are strengths on a loan application that can help borrowers secure a loan. Negative compensating factors can do the opposite. Bankruptcies, foreclosures, late payments can all be considered negative compensating factors.
Note Rate
This is your interest rate.
Notice of Value (NOV)
This is the VA appraisal, which spells out the independent expert’s assessment of the property’s value. Ultimately, it’s up to a lender’s staff appraisal reviewer to issue the final notice of value.
O
Origination Fee
The VA allows lenders to charge borrowers a flat fee of up to 1 percent of the loan amount to cover in-house costs and services.
P
Permanent Buydown
Veterans can pay reasonable discount points to buy down their interest rate. A discount point is 1 percent of the loan amount. Borrowers have to pay this cost up front.
PITI
The acronym stands for Principal, Interest, Taxes and Insurance. These are the four pillars of a veteran’s monthly mortgage payment.
Power of Attorney
A surrogate with power of attorney can sign contracts and other documents on behalf of an absent service member. Many lenders require a unique power of attorney document.
Preapproval
This is a more serious step than prequalification. Real estate agents and sellers put significant stock into loan preapproval. But this is not a guarantee from a lender or any kind of binding document for the borrower.
Prequalification
This introductory step involves an unverified, cursory discussion about a borrower’s finances. Prequalification helps veterans get a sense of what they can afford but it means little to sellers and real estate agents, who are looking for preapproval letters.
Prime
This essentially means borrowers or loans at or above an accepted credit standard, typically around 620. Some loans and borrowers beneath that are considered greater risks and classified as subprime.
Private Mortgage Insurance (PMI)
On most mortgages, borrowers who can’t put down 20 percent of the loan amount are required to pay insurance. It protects lenders against borrowers who default and also helps borrowers who can’t muster a large down payment. There is no PMI on a VA loan.
R
Rate Lock
A binding commitment that locks a borrower to a specific interest rate. Borrowers can typically lock their interest rate as soon as they sign a purchase agreement and up to five days before the loan closing. Rate locks are good for specific blocks of time. The most common lock periods are for 15 days, 30 days, 45 days and 60 days.
Realtor
A real estate agent who is a member of the National Association of Realtors.
Rate Cap
Some lenders include a rate cap with their rate locks. These caps give lenders the ability to give borrowers a slightly higher interest rate if rates rise considerably before closing.
Refinance
A loan that replaces an existing mortgage to finance at a lower interest rate and/or take out cash. The most common reason for refinancing is to take advantage of interest rates lower than when the loan was originally made.
Reserves
This is cash set aside to cover costs and expenses. Having additional money set aside can help strengthen a loan application.
Retail Rate
This is a flat, non-negotiable mortgage rate offered by banks, credit unions and other lending institutions. The retail institution must be VA-approved in order to offer VA purchase loans.
Residual Income
This is a lending standard unique to VA loans. Residual income is the amount of money a borrower retains each month after covering all monthly debts and obligations. Veterans must hit a minimum level of residual income (depending on geography and family size) in order to satisfy VA requirements.
RESPA
This stands for Real Estate Settlement and Procedures Act, a 1974 law that increased transparency and disclosures involving the home-buying process. The loan application paperwork is sometimes lumped together as RESPA documents or RESPA packets. Lenders have three days to send you the paperwork once they’ve pulled your credit.
S
Seller Concessions
Sellers can pay a range of costs and charges for VA borrowers, including closing costs, property taxes, the VA Funding Fee and other items. But the VA caps seller concessions and closing costs at 6 percent of the loan amount.
Selling Agent
The real estate agent representing the buyer. Also referred to as the Buyer’s agent.
Staff Appraisal Reviewer (SAR)
A lender’s staff appraisal reviewer, or SAR, examines a property’s independent VA appraisal and issues the final Notice of Value.
Second-Tier Entitlement
This additional entitlement helps boost the VA guaranty on qualified loans. Borrowers can secure a loan solely with their second-tier entitlement, as long as the loan amount is at least $144,000.
Secondary Mortgage Market
Lenders sell mortgages, often packaged into mortgage-backed securities, in this marketplace. Private investors and government-sponsored enterprises like Fannie Mae and Freddie Mac buy loans in the secondary market.
Short Sale
An alternative to straightforward foreclosure. This is when the bank agrees to let you sell your home for less than it’s worth. A short sale will negatively affect your credit score.
Special Adapted Housing (SAH)
This VA program provides grants for veterans with service-connected disabilities retrofit properties to meet their needs.
Streamline
A VA Streamline is another name for the Interest Rate Reduction Refinance Loan (IRRRL).
Subprime
This essentially means borrowers or loans below an accepted credit standard, typically around 620. Subprime borrowers carry greater risks and now have trouble securing financing.
T
Temporary Buydown
Borrowers can pay discount points to buy down their rate for a limited time instead of permanently. On a 3-2-1 buydown, the borrower’s interest rate drops 3 percent below the note rate for the first year, 2 percent for the second year and 1 percent for the third year. The start of the fourth year marks the first year the borrower pays at the regular, full note rate.
Title Insurance
This is mandatory insurance that protects borrowers, sellers and lenders against previous ownership claims on a property. Title insurance must be paid at closing. Buyers can shop around for the best price.
U
Underwriter
These trained experts review a borrower’s loan file and give an ultimate thumbs-up or down. They act as the lender’s gatekeeper.
Uniform Residential Loan Application
This is the five-page loan application for almost all home mortgages.
V
Variable Rate Mortgage
An adjustable rate mortgage, variable-rate mortgage, or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.
Verification of Employment
This is an important document that lenders send to a veteran’s employer(s). The VOE, as it’s known, helps lenders verify employment, tenure, salary and any bonuses or raises.
Y
Yield Spread Premium
Wholesale lenders pay this rebate to mortgage brokers and loan officers for higher-rate loans.
Z
Zero Money Down
A type of loan where the borrower isn’t required to pay a down payment. The VA Loan is one of the two remaining loans that offer the advantage of no money down. Other loans require borrowers to put down 10 or 20 percent down, or more.