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.
This is essentially a form of insurance that the VA provides to lenders. The VA loan program promises to repay lenders a portion of the loan if a borrower defaults. The VA guaranty helps give lenders the confidence to make these $0 down loans along with a host of other big-time benefits.
Lenders require borrowers to secure a homeowners insurance policy to cover at least the value of their mortgage. You might also hear this called "hazard insurance." You'll typically need to pay your first year's homeowners insurance premium at closing. Buyers will usually pay a portion of their annual premiums each month as part of their overall mortgage payment, with the lender or servicer escrowing the funds and paying the bill on your behalf.
Buyers can shop around for homeowners insurance.
This combines elements of both fixed- and adjustable-rate mortgages, which is why it's called a "hybrid." A hybrid ARM will start with a fixed interest rate for a set number of years, often three or five, before reverting to an adjustable-rate loan for the remainder of the term. From there, the interest rate can increase up to 1 percentage point per year, with a lifetime cap of 5 percentage points.
Buying a home can feature multiple types of inspections. Home inspections are the most common. These aren't required for a VA loan, but they're your best chance to identify any issues with a home before you sign on the dotted line. The VA appraisal includes a broad look at a property conditions, but it is not a substitute for a home inspection. 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.
Some properties may need additional inspections, including ones for drinking water supplies, septic systems, pests and more.
This is the cost of of borrowing money. The interest rate on your loan is expressed as a percentage, and rates can vary widely depending on market conditions, the size of the loan, credit score and more. The VA does not set an interest rate, which means lenders are free to set their own rates. You might also hear this referred to as the "note rate," which helps differentiate it from the loan's Annual Percentage Rate (APR).
VA loans continue to have the lowest average fixed interest rate on the market.
This is also known as a VA Streamline refinance. This is a no-frills refinance designed to get veterans into a lower-rate mortgage or out of an adjustable-rate loan. The IRRRL is open only to veterans who currently have VA loans. Borrowers cannot take cash out with an IRRRL.
Some lenders may not need an appraisal or even require a minimum credit score requirement. Guidelines and policies can vary. Unlike other VA loans, this requires only previous occupancy, meaning the veteran doesn't need to intend to occupy the home that's being refinanced.
Generally, these are loans above what's known as the conforming loan limit, which is currently $453,100 in most parts of the country. That limit can be higher in costlier housing markets. Jumbo VA loans typically feature tighter requirements than a traditional VA loan, but they still offer some tremendous benefits compared to conventional jumbo loans.
Some jumbo VA loans can be had without a down payment, while others will require one -- every buyer's situation is different. But even buyers who need to put money down often need smaller down payments for jumbo VA loans compared to their conventional counterparts.
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 special part of Veterans United helps veterans boost their credit score and work toward loan preapproval. Lighthouse credit experts work one on one with veterans and military families to develop a personalized plan to tackle their credit report and strengthen their financial profile.
They work with clients for three weeks, three months or three years -- whatever it takes to get them on the path to homeownership. This complimentary service has helped more than 30,000 veterans go on to become homeowners.
This is the real estate agent representing a home seller.
Within three business days of receiving a complete loan application, lenders are required to send you this three-page form that contains key initial information about your new loan, including the interest rate, your monthly mortgage payment, and costs and fees to close. Borrowers can compare this to the Closing Disclosure they receive as they near their loan closing. Unlike the Closing Disclosure, the Loan Estimate features estimated costs.
On a lender's front lines, loan officers help veterans get qualified for a loan and navigate the entire process. With some mortgage companies, you might interact with the loan officer at the outset before transitioning to a loan processor or some other production department employee. At Veterans United, our loan officers work with borrowers from start to finish -- from that initial conversation to closing day and beyond.
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.
Some lenders charge borrowers to lock their interest rate, depending on the time period, the rate and other factors. Veterans should lenders about lock fees when comparison shopping. Generally, you won't be able to lock in your interest rate until you're under contract on a home.
Lenders will typically input a prospective borrower's information into an automated underwriting system that can generate an immediate green light, indicating there are no major red flags and the veteran can proceed to the next step. In some cases, loan files do not meet this initial underwriting approval, at which point they might be subject to what's known as manual underwriting.
Manual underwrites usually mean tougher lending requirements and a closer look from underwriters earlier in the process. But they're also not uncommon, and plenty of borrowers who encounter manual underwriting go on to close on their loan.
These are broad health and safety conditions that a property must meet to satisfy the VA. Independent VA appraisers will assess the property in light of the Minimum Property Requirements during their time at the home. Any repair issues noted by the appraiser will often need to be addressed before the loan can close. Home sellers and even VA buyers can pay for repairs to keep the loan moving forward.
Generally, the VA wants veterans purchasing homes that are move-in ready, but an appraisal that turns up MPR issues does not mean your purchase is automatically in jeopardy. Repairs are often negotiated with sellers, but every situation is different.
Real estate databases and software that allow agents and brokers to look at transactions, post home listings and access a suite of other property information and tools. There are dozens of MLS databases spread across the country. Home sellers typically need to work through a real state agent to get their home posted to an MLS.
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 another term for your interest rate, and it's separate from your Annual Percentage Rate (APR), which includes additional costs related to your transaction. The note rate reflects the cost of borrowing money from the mortgage lender. The VA doesn't set these rates, and lenders are free to set their own.
This is the final determination of a property's fair market value based on the VA appraisal. The appraised value of the home comes from an independent appraiser's comparison of the home to recent comparable home sales. If the home's appraised value comes in below the purchase price, buyers will need to renegotiate with the seller or walk away from the deal. Renegotiation is common, but veterans who walk away will get their earnest money back because of what's known as the VA Amendment to Contract, which protects buyers in the event of a low appraisal.
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, such as originating, processing and underwriting the loan. A 1 percent fee on a $250,000 loan is $2,500. Lenders also have the option to skip the flat fee and charge an array of fees to cover overhead, so long as their total cost doesn't exceed 1 percent of the loan amount.
VA buyers can ask sellers to pay all of their loan-related closing costs (including the origination fee) and up to 4 percent in concessions, which can cover things like prepaid taxes and insurance and much more.
Veterans can pay money upfront to essentially purchase a lower interest rate for the life of the loan. You'll pay in the form of what are called points, where 1 point is equal to 1 percent of the loan amount. The VA allows veterans to pay reasonable points to buy down their rate, typically not to exceed 2 points.
The acronym stands for Principal, Interest, Taxes and Insurance. These are the four pillars of a veteran's monthly mortgage payment. The principal and interest portions of your payment will not changed on a fixed-rate loan. Lenders have no control over your property taxes and homeowners insurance, and those costs can change every year.
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. Talk with lenders about their guidelines given your specific situation.
This is a more serious step than prequalification and involves a lender verifying key information about your debts and income. VA loan preapproval gives you a clear sense of your buying power, and it shows real estate agents and home sellers you're a strong and serious homebuying candidate. Getting preapproved doesn't obligate you to any particular lender or to purchasing a home, and it is not a guarantee of financing. But it is the first big milestone of the VA purchasing process.
This introductory step is often mostly just a conversation with a loan specialist about your service history, your employment and finances, and your homebuying goals that ends with a look at your mortgage credit scores. Benchmarks can vary by lender, loan type and other factors, but borrowers will usually need to meet a minimum credit score requirement to move on to getting preapproved for a loan, which is more involved and important milestone.
VA loan prequalification doesn't usually involve much verification of information beyond your credit score, and so it holds little weight with home sellers and real estate agents, who are looking for buyers with loan preapproval.
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 conventional mortgages, borrowers who can't put down 20 percent of the loan amount are required to pay this form of insurance. PMI protects lenders against borrowers who default and also helps borrowers who can't muster a large down payment. PMI typically ends once the homeowner's loan-to-value ratio reaches about 80 percent.
There is no PMI on a VA loan, which can boost your buying power and save veterans tens of thousands over the life of the 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.
Some lenders may charge a fee to lock a rate.
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.
Rate caps also come into play with VA adjustable-rate mortgages (ARMs). These caps limit how often and how much the rate can change on an ARM over time.
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. The VA has two primary refinance options.
One is the Interest Rate Reduction Refinance Loan (IRRRL), which is available only to current VA loan holders. Veterans can use this to refinance into a lower-rate mortgage or out of an adjustable-rate loan. The other is the VA Cash-Out Refinance. This allows qualified homeowners to refinance and extract cash from their equity, regardless of whether their current loan is backed by the VA.
Some borrowers might need a set amount of cash reserves in the bank to close on their VA loan. Reserves are often expressed in terms of a certain number of months' worth of mortgage payments. Cash reserves aren't a common requirement for VA loans, but they can also be a compensating factor that strengthens your loan file.
This is a lending standard unique to VA loans. Residual income is the amount of money a borrower has left over each month after covering all their major monthly debts and obligations. The VA wants to see veterans have a minimum amount residual income, which can vary depending on the size of your family and where in the country you're buying.
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.
The VA allows sellers to pay all of a buyer's loan-related closing costs and up to 4 percent in what are known as seller concessions. Concessions can cover a wide range of expenses and fees, including paying the portion of a buyer's property taxes and homeowners insurance due at closing; paying off a buyer's collections and judgments; and more. Home sellers are not required to anything on behalf of a VA buyer, but every purchase and negotiation is different.
A lender's staff appraisal reviewer, or SAR, examines a property's independent VA appraisal and issues the final Notice of Value.
Eligible veterans have two layers of VA loan entitlement, which reflects the government's guaranty on the loan. Veterans have a basic entitlement valued at $36,000, and a second-tier of entitlement that helps boost their zero-down buying power. The amount of this second layer of entitlement can vary depending on where in the country you're buying and your previous history with the VA loan program.
Second-tier entitlement is how veterans can have multiple VA loans at the same time or purchase again after losing one to default. Buyers using their second-tier entitlement will need to borrow at least $144,001 to make things work.
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. Veterans who lose a home to short sale will lose whatever VA loan entitlement they utilized on the property, but they might have little trouble purchasing again using second-tier entitlement. Some lenders will have a waiting period before you can get a loan following a short sale. Veterans United doesn't currently in most cases.
The VA has a few specialized housing grant programs for veterans with disabilities. These grants help qualified veterans to purchase or build an adapted home or to make modifications to an existing home. The two primary programs are the Specially Adapted Housing (SAH) grant and the Special Housing Adaptation (SHA) grant, and maximum funding for these can change every year. Talk with your loan officer if this is something you're interested in exploring.
A VA Streamline is another name for the Interest Rate Reduction Refinance Loan (IRRRL). The nickname comes because these are designed as a swift, low-paperwork way to get qualified veterans into lower-cost loans or out of adjustable-rate mortgages.
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.
This form of insurance protects borrowers, sellers and lenders against previous ownership claims on a property and other possible issues related to the property's chain of ownership. There are two types of title insurance, one for lenders and the other for buyers. Lenders will require a lender's policy, and buyers typically obtain their own, too. 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. Prospective buyers should expect to have some questions from underwriters once they're under contract. It's incredibly uncommon for loans to just sail through without them. Generally, the faster you respond to questions and requests for additional information, the faster you move toward closing day.
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.
A type of loan where the borrower isn't required to pay a down payment. The VA Loan is one of the two remaining major loan programs that offer the advantage of no money down. Conventional loans typically require a 5 percent down payment, with FHA loans requiring a minimum 3.5 percent.
Despite the zero-down benefit, VA loans have had the lowest foreclosure rate on the market for most of the last decade. That's a testament to the program's sound underwriting guidelines and its commitment to helping veterans purchase and keep their homes.