The VA loan offers many amazing benefits to eligible borrowers. However, many borrowers have a lot to learn, not only about the VA loan, but the mortgage process in general. Check out our handy glossary for a brief overview of important terms and definitions.
A
Acceleration Clause
A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance if a series of monthly payments are missed. If you are having difficulty making your mortgage payment and are a veteran or active duty personnel visit the Loan Modification help page.
Adjustable Rate Mortgage (ARM)
A mortgage with and interest rate that fluctuates according to the movements of a predetermined index. There are several types of ARM’s, some change quicker than others, but all have a rate cap. Adjustable rate mortgages are designed to be used by savvy investors. Adjustable rate mortgages are not recommended to be used by a borrower for a residential home loan (primary residence use).
Alternative Financing
Alternative financing is a term used to describe any nontraditional mortgage product (including Conventional , FHA, VA). Alternative financing includes ARM’s, buy down’s and graduated payment mortgages (GPM’s).
Amortization
The gradual repayment of a mortgage by installments. A fully amortized mortgage is the standard loan product insured by the US Department of Veterans Affairs.
Amortization Schedule
A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance of the loan. Most amortization tables will show the date of payment, principal, and balance.
Annual Percentage Rate (APR)
The total cost of your mortgage loan expressed as an annual interest rate. This includes the base interest rate, mortgage insurance, origination fees, and some other related fees.
Appraisal
An opinion by a licensed real estate appraiser regarding the fair market value of a property. VA Appraisals must be chosen from a random pool and not selected by anyone whom has a vested interest in the transaction.
Appreciation
Difference between the increased value of a property and the original cost of the property. Appreciation is the opposite of depreciation.
Assumable Loan
Usually for a small assumption fee (conventional loan use only), a new buyer can take over or assume the loan of the previous homeowner, saving closing cost and loan origination fees. Some are non-qualifying most are through qualification. VA home loans are assumable by qualified borrowers.
B
Balloon Payment
A loan with monthly payments insufficient to pay off the balance in the specified term; the balance must be paid in full when the loan comes due. Balloon payments are not allowed in VA insured home loans.
Broker (Mortgage)
An individual or company that for a fee acts as an intermediary between borrowers and lenders.
Broker (Real Estate)
A person who has a real estate broker’s license, who may not only make real estate transactions for others in exchange for a fee, but also may operate a real estate business and employ salespersons and other brokers.
C
Cap
A provision of an Adjustable Rate Mortgage loan that limits how much the interest rate or mortgage payments may increase or decrease. Note Adjustable Rate mortgages are only recommended for savvy investors and not recommended for consumers.
Cash Reserve
A requirement of some lenders that buyers have sufficient cash remaining after closing.
Clear Marketable Title
A title that is free of liens, encumbrances or legal questions as to ownership of property.
Closing
The meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing cost. The closing is also known as “settlement.” The closing is usually conducted at a settlement attorney’s office or at escrow.
Closing Costs
Expenses (beyond the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called “settlement costs.” Closing costs include the first mortgage payment, property taxes, escrow and closing fees, title insurance, etc.
Community Home Buyer’s Program
An alternative financing option that allows households that earn less than the median income (some restrictions apply) to qualify for mortgages using nontraditional credit histories, 33 percent housing-to-income and 38 percent debt-to-income ratios, and the waiver of cash reserves at closing.
Condominium
A form of property ownership in which the homeowner holds title to an individual dwelling unity plus an interest in common areas (land, grounds, amenities) of a multi-unit project, and sometimes the exclusive use of certain limited common areas.
Contingency
A condition that must be met before a contract is legally binding.
Conventional Mortgage
Any mortgage that is not insured or guaranteed by the federal government.
Cooperative
A type of multiple ownership apartment in which the residents of a multi-unit
housing complex own shares in the corporation that owns the property, giving each
resident the right to occupy a specific apartment or unit. Cooperatives are similar to condominiums. Condominiums are not owned (usually) by shareholders of a corporation.
Covenant
A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure or transfer of title.
Credit Report
A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s credit worthiness. Credit reports usually will reflect payment history, date account was established, contact information of the creditor.
D
Debt-to-Income Ratio
Formula used to qualify borrowers. The ratio expresses, as a percent, the amount of monthly debt payments in relation to the amount of monthly income of a borrower(s). VA home loans do not use a strict debt to income ratio. Instead the VA loan program uses residual income as a means of qualification.
Deed
The legal document conveying title to a property.
Deed of Trust
The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower. The Trustee has the power of sale thus bypassing a judicial foreclosure process. The states that are not Deed of Trust states are called mortgage states.
Default
The failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage. The default is the first condition of a foreclosure process.
Delinquency
A loan in which a payment is overdue but not yet in default. Delinquency usually carries a late penalty.
Depreciation
A decline in the value of a property; the opposite of “appreciation.” Depreciation can also refer to a tax basis term.
Disclosure
Document which is required by law to inform the consumer. Disclosures describe all conditions of mortgage loan including terms, some laws or processes, and interest rates.
Discount Points
A one time charge by the lender to increase the yield of the loan. A point is one percent of the amount of the mortgage. In most VA loans, the discount points are paid for by the seller.
Down Payment
The part of the purchase price which the buyer pays in cash and does not finance with a mortgage. VA home loans do not require a down payment.
Due-on-Sale Clause
A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage without an assumption approved by the investor.
E
Earnest Money
A deposit made by the potential home buyer. Earnest money deposit are called consideration. All contracts require consideration of some form to be legally binding.
Equal Credit Opportunity Act (ECOA)
A federal law that prohibits lenders from denying mortgages on the basis of the borrower’s race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
Equity
A homeowner’s financial interest in a property. Equity is the difference between the fair market value of a property and the outstanding amount owed on the mortgage.
Equity Loan
A loan based on the borrower’s equity in his or her property. Usually this type of loan is a line of credit secured by real estate.
Escrow
The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance. Escrow accounts are required on VA home Loans.
Exclusive Agency Listing
A listing contract in which the agent has the sole right to sell the home, though the sellers are not bound to pay the commission if they produce the buyer.
Exclusive Right-to-Sell Contract
A listing contract in which the seller gives the real estate broker the sole right to sell; the person receives a commission, regardless of who produces the buyer.
F
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer/credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit record.
FHA Mortgage
A government mortgage product that is insured by the Federal Housing Administration. FHA mortgage loan program requires a 3.5% down payment. Private mortgage insurance is required. There are FHA home loan programs where less down payment funds are required.
First Mortgage
A mortgage that has first claim in the event of default.
Fixed Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the loan. VA Home loans are fixed rate mortgages.
Flood Insurance
Insurance that compensates for physical property damages resulting from flooding. It is required for properties located in federally designated flood areas.
Forbearance
The lender’s postponement of foreclosure to give the borrower time to catch up on overdue payments.
Foreclosure
The legal process by which a mortgaged property may be sold when a mortgage is in default.
G
Graduated Payment Mortgage (GPM)
A mortgage that starts with low monthly payments that increase at a predetermined rate. The initial monthly payments are set at an amount lower than that required for full amortization of the debt. Currently there is no VA Home Loan product with a GPM.
H
Hazard Insurance
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards. Some condos require a partial hazard insurance policy. The association will have its own insurance but it may not cover possessions and internal loss. The partial policy covers this. That policy is called a “walls in” policy.
Home Inspection
A home inspection is not a requirement of sale but is strongly advised. The VA appraiser will not inspect minutiae. The home inspection will give the buyer full knowledge of apparent defects. In some instances proof of a home inspection may be required before an insurance claim is proffered.
Homeowner’s Insurance
An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.
Homeowner’s Warranty (HOW)
A type of insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller of the sale. Most home owners warranty coverage will require a preexisting condition exempt. Because of this, a home inspection performed by a home inspector is strongly advised.
I
Impound
The portion of a borrower’s monthly payments held by the lender to pay taxes, hazard insurance and mortgage insurance. Impounds are held in an escrow account, and are required for the VA home loan and other government insured loan products.
Index
The interest rate to which changes in an adjustable-rate-mortgage are based. Indexes are volatile and difficult to be financially prepared for. It is for this reason that Adjustable Rate Mortgages are designed for a savvy investor and not an unsophisticated buyer.
Interest Rate
The fee charged for borrowing money.
J
Judicial Foreclosure
A court procedure used by lenders to secure clear title to a property under a defaulted real estate loan.
Jumbo Loan
A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
L
Late Charge
The penalty a borrower must pay when a payment is made after the due date.
Lien
A legal claim against a property that must be paid off when the property is sold.
Lifetime Cap
A provision of an ARM that limits the highest rate that can occur over the life of the loan.
Listing Contract
A contract with a broker or firm the sellers hire to represent them in the sale of their home, according to the terms of sale that they specify. In exchange for producing a ready-willing-and-able buyer, the agent is paid a commission.
Loan Application Fee
A lender’s fee, usually ranging from $75 to $800, which the buyer must pay when applying for a mortgage. VA Home Loan Centers does not charge an application fee.
Loan Commitment
A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.
Loan Origination Fee
A fee charged by the lender / investor for processing and originating a mortgage.
Loan Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Loan-to-Value Ratio (LTV)
The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property.
Lock-In
A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
M
Margin
The set percentage the lender adds to the index rate to determine the current interest rate of an ARM.
Market Rate
The average rate charged by lenders for conventional, fixed-rate loans.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary market.
Mortgage Broker
An individual or company that for a fee acts as an intermediary between borrowers and lenders.
Mortgage Insurance
(Also known as Private Mortgage Insurance (PMI)) Insurance provided by nongovernmental insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) ratios greater than 80 percent.
Mortgage Insurance Premium (MIP)
The fee paid by a borrower to FHA or a private insurer for mortgage insurance.
Mortgage Note
A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the mortgage note is secured by a mortgage.
Mortgagee
The lender in a mortgage agreement.
Mortgagor
The borrower in a mortgage agreement.
Multiple Listing Service (MLS)
A networking system, frequently on computer, in which a number of real estate firms share information about their client’s homes that are for sale.
N
Negative Amortization
A gradual increase in the mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the unpaid principal balance to create “negative” amortization.
Notice of Default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
O
Offer to Purchase and Acceptance
An offer of purchase that has been signed by both buyer and seller. A firm contract that outlines all details of the property transaction. Also known as a contract of sale or sales contract.
Offer to Purchase or Purchase Offer
A document that list the price, conditions, and terms under which the buyer is willing to purchase a property. Also known as an earnest money agreement, contract of purchase or deposit receipt.
Open Listing
A listing contract in which sellers hire more than one firm or person to sell their home, and only the one who produces the buyer is entitled to the commission,
Origination Fee
A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount.
P
Payment Cap
A provision of some ARM’s limiting the amount by which a borrower’s payments may increase regardless of any interest rate increase; may result in negative amortization.
PITI
Acronym for principal, interest, taxes, and insurance
the components of a monthly mortgage payment.
Points
A one time charge by the lender to increase the yield of the loan; a point is 1 percent of the amount of the mortgage.
Pre-approval
The process of determining that a borrower is credit approved up to a predetermined amount. The borrower is credit approved pending the locating of a home that meets the predetermined loan criteria.
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due. VA Home Loans do not include or charge a prepayment penalty.
Pre-qualification
The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.
Principal
The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.
Private Mortgage Insurance (PMI)
Insurance provided by nongovernmental insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80 percent. The VA funding fee replaces PMI for VA loans. The VA funding fee is a onetime fee. MI Mortgage insurance replaces OMI for FHA home loans.
Purchase and Sale Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Q
Qualifying Ratios
Guidelines applied by the lenders to determine how large a loan to grant a home buyer.
R
Radon
A radioactive gas found in some homes that in sufficient concentrations can cause health problems.
Rate Lock
A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing. Also known as Lock-in.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Realtor
A collective membership mark that may be used only by real estate professionals who are members of the National Association of Realtors and subscribe to its strict code of ethics.
Refinancing
The process of paying off one loan with the proceeds from a new loan using the same property as security.
Residual Income
A set income requirement based on size of family and geographic location (among other things). Residual income is surplus income after all debts and expenses are paid.
Reverse Mortgage
Also called “equity conversion mortgage,” these loans permit senior citizens to convert the equity in their homes to income. The lender makes monthly cash payments to the homeowner, and repayment is deferred for a set period or until the homeowner dies and the house is sold.
S
Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secondary Market
The buying and selling of existing mortgages.
Seller Take-Back
An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.
Settlement
The meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing cost. Also known as “Closing.”
Settlement Sheet
The computation of costs payable at closing that determines the seller’s net proceeds and the buyer’s net payment.
Survey
A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.
T
Tenancy by Entirety
A type of joint ownership of property that provides right of survivorship and is available only to a husband and wife.
Tenancy in Common
A type of joint ownership in a property without right of survivorship.
Title
A legal document evidencing a person’s right to or ownership of a property.
Title Company
A company that specializes in examining an insuring titles to real estate.
Title Insurance
Insurance to protect the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of property.
Title Search
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
Treasury Securities
Treasury securities and T-Bills are common indexes for adjustable rate mortgages (ARMS).
Truth-in-Lending Act (TILA)
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage including the “annual percentage rate (APR)” and other charges.
U
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower’s credit worthiness and the quality of the property itself.
V
VA Loan
A loan that is guaranteed by the Department of Veterans Affairs. Also referred to as a “government subsidized” mortgage.
VA HLC
VA Home Loan Centers. Online VA loan Origination Portal and source of VA home loan info.
Vested
One has a right to use a portion of a fund, such as an individual’s retirement fund.
Z
Zero Percent Financing
A loan with no interest in the contract. The IRS imputes 10 percent for both borrower and lender.
Zoning
The right of a community, under its police power, to dictate the use of property within its boundaries.
How Do I Apply For A VA Loan?
VA Home Loan Centers is here to walk you through every step of your mortgage transaction. Complete the VA home loan application located here or call 888-573-4496 to speak with our knowledgeable representatives today.
