The home financing process involves a lot of new terminology. Let's break down some common words and phrases.
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.
Mortgage appraisals help determine the fair market value of a property by comparing it to nearby homes that have sold recently. The VA appraisal also aims to help ensure veterans are purchasing homes that are safe, structurally sound and sanitary. To that end, VA appraisers also look at a broad range of property condition guidelines, known as the Minimum Property Requirements. Lenders can also have their own property condition guidelines.
The VA appraisal is not as in-depth as a home inspection and should not be considered a substitute for one. A home inspection is also recommended, as it can provide a more thorough look at a property’s structural integrity and major systems.
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. Buyers should also understand that lenders can calculate this figure differently.
Mortgage lenders often use a computer system to help immediately assess a borrower's suitability for a home loan. These automated underwriting systems evaluate a borrower's credit, finances and more. Getting approval from one of these systems can help veterans move through the loan process faster and with more flexible requirements. Unlike the USDA loan program, the VA loan program does not currently have its own automated underwriting system.
Basic Allowance for Housing (BAH) is a monthly allowance to help qualified active duty service members cover housing expenses. Mortgage lenders can count BAH as effective income toward qualifying for a mortgage. 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 qualified veterans to refinance and take out cash from the equity in their home. Borrowers may be able to refinance up to 100 percent of their home's value, plus the VA Funding Fee and any costs from energy efficiency improvements. Underwriting for a VA Cash-Out refinance is similar to that for a VA purchase loan, meaning borrowers will need to meet credit and debt guidelines.
This is a formal VA document that says whether a prospective borrower is eligible for a VA home loan. Many potential buyers can obtain their Certificate of Eligibility online through the VA's eBenefits portal. You do not need to have your COE in hand to start the loan process. In fact, lenders can often get it for you once you've kick-started your homebuying journey. But borrowers will need a COE before they can close on their loan.
This stage of the loan process means that most major loan conditions have been satisfied and the borrower is ready to close on the home purchase. Buyers will typically still have conditions on the loan that need to be satisfied after getting their clear to close, but these are typically more basic and procedural. Borrowers should continue to maintain healthy financial habits and avoid taking on new debt after receiving a clear to close.
These are costs and fees associated with obtaining a home loan to purchase real estate. Closing costs typically range from 3 to 5 percent of the loan amount. The VA limits what lenders can charge veterans. Sellers can pay all of a VA buyers loan-related closing costs and up to 4 percent in concessions, which can cover things like prepaid property taxes and homeowners insurance; paying off collections and judgments at closing; and more.
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. Appraisers will evaluate the fair market value of a property using recent comparable home sales. Unique properties that lack at least one good comp might not be workable for VA lenders.
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.
There are multiple stages of the underwriting process, and getting a conditional approval on your file is a common initial outcome. This typically means underwriters don't see immediate red flags, but they will need additional documents or information before being able to green light the loan file for closing. Those requests for additional information are known as conditions.
Fannie Mae and Freddie Mac can only purchase or guarantee mortgages below what's known as the conforming loan limit. This limit can change every year and is higher in more expensive housing markets. Fannie and Freddie do not purchase or guarantee VA loans, but the VA loan program currently uses the one-unit conforming loan limit for VA's loan limits.
This allows qualified borrowers to refinance a construction loan into a VA loan. Guidelines and requirements for this type of loan can vary by lender and other factors.
These loans feature no government guarantees but adhere to the standards and requirements of government-sponsored enterprises Fannie Mae and Freddie Mac. There's an array of conventional loan products out there, all requiring different down payments, credit scores, mortgage insurance and more.
These reflect a consumer's ability and willingness to repay debt. Credit scores are affected by a variety of factors, including current debt load, past payment history and more. There are dozens and dozens of credit scoring formulas, some of which are unique to the credit bureau and the type of credit being issued. VA does not require a minimum credit score, but lenders typically will.
This five-page form shows buyers the final details of their home purchase, including costs and fees. Buyers should receive the Closing Disclosure at least three business days before their loan closing. You can compare it to the Loan Estimate you received earlier in the mortgage process to see how costs and fees might have changed. Talk with your loan officer if you have any questions about your Closing Disclosure.
This Defense Department document is also known as the Certificate of Release or Discharge from Active Duty. The DD-214 typically allows Regular Military veterans to verify their service history for benefits and helps qualified borrowers obtain their Certificate of Eligibility. Reservists and National Guard members don't have a single discharge certificate like the DD-214. They'll often need to provide their latest annual retirement points summary along with evidence of their honorable service to establish eligibility for VA loan benefits.
This is a ratio of your major monthly debt payments to your gross monthly income. Lenders look at debt-to-income ratio as a way to help assess your purchasing power and what you can afford. There are two types of DTI ratio calculations in mortgage lending, a front-end ratio that looks at the new mortgage payment in relation to gross monthly income; and a back-end ratio that considers all major monthly debts, including the new payment. VA lending considers only the back-end ratio.
Caps on DTI ratio can vary by lender and other factors. VA buyers whose DTI ratio exceeds 41 percent need to meet a higher threshold for residual income.
An alternative to straightforward foreclosure. With a deed-in-lieu of foreclosure, the borrower basically returns the house to the bank without the need for court proceedings or a formal foreclosure process. A deed-in-lieu will negatively affect your credit score.
Borrowers pay these to essentially buy a lower interest rate. A point is equal to 1 percent of the loan amount. Lenders might quote interest rates with and without points, so be sure to double check rates and points when comparing offers from multiple lenders. Paying points is relatively infrequent among most VA borrowers.
This good-faith deposit is typically made as a buyer gets under contract and shows sellers they're serious about completing the purchase. There's no set amount for an earnest money deposit, and real estate agents are a good guide for what's common in a given market and price range. These funds are often held by a real estate brokerage or title company and can be put toward a down payment or closing costs.
The purchase contract will stipulate how the earnest money can be forfeited or refunded. VA buyers have an additional protection known as the VA Amendment to Contract, which allows buyers to keep their earnest money if they walk away from a deal because of a low appraisal.
This specialized mortgage allows qualified veterans to borrow additional money to make energy-efficient improvements to a home they're purchasing or refinancing. With a VA Energy Efficient Mortgage, veterans can typically 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.
These improvements typically need to be considered permanent to the property, and items like Energy Star appliances, air conditioning units and new roofs are not acceptable. Guidelines and policies regarding EEMs can vary by lender.
The VA uses the word to mean the amount of money it will guarantee on a given loan. VA loan entitlement helps buyers determine how much of a down payment will be necessary, if any. There are two layers of entitlement: A basic level of $36,000, with a secondary or second tier that varies depending on the current VA loan limits.
Borrowers with their full VA loan entitlement can purchase up to their county's loan limit before needing to make a down payment. But veterans with active VA loans and even those who've lost a VA loan to foreclosure can often look to purchase again using that second tier of entitlement. Entitlement isn't clearly reflected or explained on the Certificate of Eligibility, and a trusted lender can help you assess your entitlement situation and what might be possible.
FICO stands for Fair Issac Corp., a California-based company that created the first-ever credit score. FICO scores continue to be the most common among mortgage lenders and run from 300 to 850. There are dozens upon dozens of different scoring models, and they vary in part by the type of credit you're seeking. That's one reason why the educational scores consumers might see from credit monitoring services are often different than the mortgage credit scores lenders see when they pull your credit.
VA lenders are often looking for a minimum 620 FICO score. Policies and guidelines can vary based the lender, the loan size and other factors.
Your interest rate cannot fluctuate on a fixed-rate mortgage. Borrowers with this type of loan will have the same principal and interest payments for the life of the loan. The most common fixed-rate terms are 15 years and 30 years, but there are other options available depending on the lender and their offerings.
Once VA buyers get under contract, they need to decide whether to lock their interest rate in place or float, meaning they will wait to see if VA mortgage rates go down as their loan closing nears. Prospective buyers can't typically lock their rate until they're under contract to purchase a home. Your loan officer can help you evaluate the pros and cons of locking. Every buyer's situation is different, and some have more tolerance for risk than others.
This basically means the lender takes back the home because you failed to keep up with mortgage payments. Some states require foreclosures to go through the court system, while others do not. There are multiple forms and offshoots of foreclosure, including a deed-in-lieu of foreclosure and a short sale. There are restrictions on foreclosures against active duty service members through the Servicemembers Civil Relief Act (SCRA).
Foreclosure can hurt your credit score, and you'll typically need to be two years removed from a foreclosure claim in order to secure a VA loan.
The VA Funding Fee is charged by the Department of Veterans Affairs to help keep the VA loan program running for future generations of military homebuyers. This is the only closing cost on a VA purchase that can be financed on top of the loan. The fee varies based on a borrower's service history and down payment, but it's typically 2.15 percent for most first-time buyers. Borrowers who receive compensation for a service-connected disability are exempt from paying this fee.
This fee goes directly to the VA, not to mortgage lenders.
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. Fannie and Freddie don't purchase VA mortgages.
But VA loan limits are currently tied to the conforming loan limit, which is a cap above which Fannie and Freddie cannot purchase mortgages. These limits can change annually, and they're higher in more expensive parts of the country.
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.
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.
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.
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.
This computer system allows authorized lenders to directly order and process VA appraisals, which are conducted by independent VA-approved appraisers.
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.
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."
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.
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.
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.
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.
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.
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.
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.
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.
This is the five-page loan application for almost all home mortgages.
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.
Wholesale lenders pay this rebate to mortgage brokers and loan officers for higher-rate loans.
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.