The home financing process involves a lot of new terminology.
Let's break down some common words and phrases.
Adjustable-Rate Mortgage (ARM)
These are mortgages where the interest rates can fluctuate based on what's happening in the greater economic landscape. Most ARMs allow for an annual rate change based on the one-year Treasury bill index.
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.
- 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.
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.
- This is the real estate agent who represents the homebuyer.
- 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.
- 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.
- 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.
- 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.
- 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, which is subject to change, is currently $453,100.
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.
- These loans feature no government guarantees but adhere to the standards and requirements of government-sponsored enterprises Fannie Mae and Freddie Mac.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Interest rates cannot fluctuate on a fixed-rate mortgage. The most common fixed-rate terms are 15 years and 30 years.
- 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.
- 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.
- 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 like Veterans United don't retain any of the fee. Borrowers with a service-connected disability are exempt from paying the Funding Fee.
Good Faith Estimate (GFE)
- This recently streamlined document gives borrowers an estimate of their closing costs and settlement fees. Some charges cannot change from the Good Faith Estimate to the final settlement statement. The GFE gives borrowers a good feel for their closing costs, origination fees, points and other charges.
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.
- 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.
- 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
- This recently revamped document comes 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. The HUD-1 also spells out which charges can and cannot change from the Good Faith Estimate.
- 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.
- 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.
- 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.
Lender Appraisal Processing Program
- 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 https://mypay.dfas.mil/mypay.aspx.
- This wing of Veterans United helps veterans boost their credit score and work toward loan prequalification. Trained home loan counselors work one-on-one with prospective borrowers. Learn more at lighthouse.veteransunited.com
- On a lender's front lines, loan officers help veterans get qualified for a loan and navigate the entire process.
- 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.
- A mark-up on conventional loan rates based on a borrower's credit score and down payment.
- 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.
- This is the real estate agent representing a home seller.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- A real estate agent who is a member of the National Association of Realtors.
- 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.
- 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.
- This is cash set aside to cover costs and expenses. Having additional money set aside can help strengthen a loan application.
- 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.
- 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.
- 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.
- 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.
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.
- 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.
- 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.
- A VA Streamline is another name for the Interest Rate Reduction Refinance Loan (IRRRL).
- 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.
- 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.
- 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.
- 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.
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.
Yield Spread Premium
- Wholesale lenders pay this rebate to mortgage brokers and loan officers for higher-rate loans.
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.