VA A to Z Index

A Glossary of Common VA Mortgage Terms

• 1003: Uniform Residential Loan Application.

• Abstract Title: A written history of the ownership of a parcel of land.

• Acceleration Clause: Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should your default on you loan.

• Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index.

• Adjustment Interval: On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the loan terms.

• Amortization: Refers to the principal portion of the loan payment and the portion going to interest for each payment. In the beginning of a mortgage loan, more of the monthly payment goes toward interest than principal. Towards the end of the loan, the opposite is true. A fully amortized loan will be completely paid off at the end of the loan term.

• Annual Percentage Rate (APR): An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage because it takes into account points and other closing costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.

• Appraisal: An estimate of the value of real property made by a qualified professional called an appraiser. An appraisal will be needed to determine the value of real property in order to reassure the lender there is sufficient collateral to recoup their loss if the borrower defaults.

• Assumption: An agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. This must be approved by the lender and be allowed by the note, which was originally signed by the seller.

• Back-End Ratio: This refers to the debt-to-income ratio calculated using principal, interest, taxes, insurance and consumer credit obligations divided by gross monthly income. It is expressed as a percentage.

• Balloon: Usually a short-term fixed-rate loan, which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract. It typically has a conditional right to refinance.

• Beneficiary: The entity funding the loan. This is the entity to which the loan is owed.

• Buy Down: When the borrower pays a fee (included in the loan amount) to temporary lower the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the interest rate increases. A buy down is used in situations when the borrowers reasonably expect their income to increase from their present situation.

• Cap: The highest rate that an adjustable rate mortgage may reach. It can be expressed as the actual rate or as the amount of change allowed above the start rate. For example, a 7.5 % start rate with a 6% rate change cap would have a maximum interest rate cap of 13.5%.

• Cash Out: Any funds disbursed directly to the borrower.

• Certificate of Occupancy: A certificate issued by local city government to a builder, stating that the building is in proper condition to be occupied.

• Certified Copy: A true copy, attested to be true by the officer holding the original. It should have an authorized stamp and signature stating that it is a true copy.

• Closing: The meeting between the buyer, seller and lender or their agents, where the property and funds legally change hands. Also called a settlement.

• Closing Costs: Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the total mortgage amount.

• Commission: An agent�s or broker�s fee for bringing the principals together and helping to negotiate a real estate transaction, a percentage of the sales price or flat fee.

• Commitment: An agreement in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

• Comp / Comparable: A property with the same basic characteristics as the property someone is attempting to find the value of (usually a real estate appraiser.) It should have been sold recently and be as similar as possible.

• Condominium: A property owned as a group, with rights to occupy specific units of the structure. An overseeing board, often referred to as a Homeowners Association, governs the property.

• Construction Loan: A short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

• Consumer Credit: Credit owed by an individual, not secured by real estate.

• Contingency: A condition that must be met for a contract or a commitment to remain binding.

• Conventional Loan: A mortgage not insured by VA or guaranteed by the VA or Farmers Home Administration (FMHA).

• Conversion Clause: A provision in some ARMs, (Adjustable Rate Mortgages) that allow borrowers to change the ARM to a fixed-rate loan at some point during the loan term.

• Credit Ratio: The ratio, expressed as a percentage, which results when a borrower�s monthly payment obligation on long-term debts is divided by their net effective income  or gross monthly income (Conventional loans).

• Credit Report: A documented history of a buyers past credit performance.

• Credit Score: The score given to an individual to determine their credit worthiness. These scores come from Experian, Equifax and TransUnion. The range is 350 to 850.

• Debt Ratio: The customer�s monthly obligations divided by their monthly gross income. See also Back End Ratio.

• Deed: The legal document which conveys the title to a property.

• Deed of Trust: A document which pledges real property to secure a debt. In some cases a deed of trust can replace a mortgage.

• Default: Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

• Delinquency: Failure to make agreed to monthly payments on time.

• Department of Veterans Affairs: An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans. (VA)

• Derog Letter: A letter written by the borrower giving an explanation for any derogatory credit.

• Derog: This is short for derogatory and refers to negative credit items.

• Discharge: Following a completed bankruptcy proceeding, discharged debts are no longer owed or collectable. Lenders require copies of the discharge papers on any prior bankruptcy filings.

• Discount Points: Pre-paid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).

• Dismissal: If a bankruptcy is dropped without being completed, a Bankruptcy Dismissal document will be needed to proceed with the loan. Either the court or the debtor can prompt the dismissal.

• Down Payment: Money paid to make up the difference between the purchase price and mortgage amount.

• Due-On-Sale Clause: A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

• Earnest Money: Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment. It is typically held in a trust account and credited toward the purchase price at closing.

• Easements: An interest in property, owned by another that entitles the holder to a specific limited use or privilege, such as the right to cross or to build adjoining structures on the property. Utility companies may have easements on a property for access or to allow the placements of wires or equipment.

• Encroachment: A fixture of a piece of property that intrudes on another�s property.

• Equal Credit Opportunity Act (ECOA): A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

• Equity: The difference between the fair market value and current indebtedness, also referred to as the owner�s interest.

• Escrow Instructions: Instructions to the escrow agent from the lendergiving the parameters and contingencies involved in the transaction and agreed upon by both parties.

• Escrow Waiver: The request for a borrower to pay their own taxes and insurance separate from their mortgage paymen

• Escrow: Refers to a neutral third-party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or �closing.� Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.

• Fannie Mae: See Federal National Mortgage Association.

• Farmers Home Administration (FMHA): Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

• Federal Home Loan Mortgage Corporation (FHLMC): Also called Freddie Mac, is an agency wholly owned by the United States government that purchases pools of conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

• Veterans Administration (FHA): A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. VA also sets standards for underwriting the mortgages they are willing to insure.

• Federal National Mortgage Association (FNMA): Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by VA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

• FHA: See Veterans Administration.

• VA Loan: A loan insured by the Veterans Administration open to all qualified home purchasers. While there are limits to the size of VA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.

• VA Mortgage Insurance: An upfront premium which can be included in the loan amount along with a monthly premium that guarantees the loan with the FHA.

• FHLMC (FREDDIE-MAC): Federal Home Loan Mortgage Corporation.

• Fixed-Rate Mortgage: A mortgage on which the interest rate is set for the term of the loan.

• Flood Insurance: A mandatory insurance for some borrowers whose property is built in a designated flood zone.

• FNMA (FANNIE-MAE): Federal National Mortgage Association.

• Foreclosure: A legal procedure in which property securing debt is sold by the lender to pay a defaulting borrower�s debt.

• Free and Clear: This means the property is completely paid for and has no liens attached.

• GFE: Good Faith Estimateof borrowers loan costs.

• Ginnie Mae: See Government National Mortgage Association.

• Government National Mortgage Association (GNMA): Also known as Ginnie Mae, provides sources of funds for residential mortgages insured or guaranteed by the VA or VA.

• Graduated Payment Mortgage (GPM): A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

• Gross Monthly Income: The total amount the borrower earns per month, before any expenses like taxes and social security are deducted.

• Guarantee: A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

• Hazard Insurance: A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. It would not cover earthquake, riot or flood damage.

• Homestead: The dwelling (house and contiguous land) of the head of the family. Some states grant statutory exemptions, protecting homestead property (usually to a set maximum amount) against the rights of the creditors. Property tax exemptions are also available in some states.

• Housing Expenses-to-Income Ratio: The ratio, expressed as a percentage, which results when a borrower�s housing expenses are divided by their net effective income

• HUD-1 Form: See Real Estate Settlement Statement.

• Impound: That portion of a borrower�s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, or other items as they become due. Also known as reserves.

• Index: A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

• Interest: A charge paid for the use of money.

• Investor: Institutions that buy pools of mortgages for investment purposes.

• Income Property: Real estate that is owned for investment purposes and not used as the owner�s residence.

• 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.

• Leasehold Estate: A kind of real estate ownership where the homeowner does not hold title to the land but has use of the property subject to the terms of the lease.

• Legal Description: A method of geographically locating a piece or parcel of land, which is acceptable in a court of law.

• LIBOR: London InterBank Offered Rate. LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market.

• Lien: A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

• Loan Committee: Generally the underwriting process.

• Loan Risk: The rate category assigned to the loan, which estimates the probable risk of delinquency or loss in the future.

• Loan-To-Value Ratio (LTV): The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

• Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

• Market Value: The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

• Mortgage Escrow Accounts: The account established by the lender to pay taxes and insurance on behalf of the borrower.

• Mortgage: A contract in which a borrower�s property is pledged as security for a loan that is to be repaid on an installment basis.

• Mortgage Insurance: Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance or VA Mortgage Insurance.

• Mortgage Note: A written promise to pay a debt at a stated interest rate during a specified term. The agreement is secured by real property.

• Mortgagee: The lender in a mortgage contract.

• Mortgagor: The borrower in a mortgage contract.
  Negative Amortization: Amortization is the schedule established to pay an installment loan within a fixed amount of time. The payment consists of principal and interest. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn�t covered is added to the unpaid principal balance. This means that even after making many payments, a borrower may owe more than was owed at the beginning of the loan.

• Net Effective Income: The borrower�s gross income minus federal income tax.

• Non-Assumption Clause: Statements in the mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

• Non-Owner Occupied: A property not used as a residence by the owner of the property.

• Notary Public: A person, designated by the state, who can certify the identity of a person when signing various documents.

• Note: Short for promissory note. This document gives the parameters of the loan and legally obligates the borrower to pay back the debt.

• Obligations: Any debt or recurring payment the borrower is obligated to pay, including mortgage payments.

• Origination Fee: The fee charged by a lender to generate a mortgage loan, usually computed as a percentage of face value of the loan. This fee can sometimes be waived by agreeing to take a higher interest rate.

• Owner Financing: A purchase in which the seller provides all or part of the financing.

• Owner Occupied: Designation given to property used as the owner�s primary residence.

• Owners Policy: A policy of the title insurance that protects the buyer against problems with the title.

• P & I (Principal and Interest): This refers to the principal and interest portions of the monthly mortgage payment.

• P & L / Profit and Loss: A statement of a business�s gross income, cost of goods, operating costs and net profit or loss.

• P.I.T.I.: Principal, interest, taxes and insurance. The complete monthly cost associated with financing a property. It can also be referred to as PITIM, which includes mortgage insurance as well.

• P.U.D.: Planned Unit Development. Property owned as a group, where individuals own the specific piece of land and structure they occupy, but also have a divided interest in a common area. A board, often referred to as a Homeowners Association, will govern the development.

• Piggy Back Loan: Financing obtained, subordinate to the first mortgage, to facilitate closing the first mortgage. Also known as secondary financing.

• PMI (Private Mortgage Insurance): A way for lenders and the borrowers to insure their exposure on the loan to no less than 20% equity in a property.

• Points: A point is equal to one percent of the of the loan amount.

• Power of Attorney: An authority by which one person enables another to act on his or her behalf. Power of attorney can be limited to specific areas or be general in some cases.

• Pre-Approval: The buyer has actually begun the application process and an underwriter has approved their income, funds and credit. The pre-approval is contingent upon the material statements of the application being accurate when the loan is actually underwritten. The lender will state any other conditions in the pre-approval.

• Preliminary Title Report: The title report generated at the beginning of the application process. It tells the mortgage company what liens are on the property and gives advice as to what will need to be done to gain clear title prior to recording the trust deed.

• Prepaid Interest Charge: The portion of interest, collected at loan closing, which covers the time period between funding and the beginning of the first 30-day period covered by the first payment. For example, if the loan closed on 2/15, the first payment due on 4/1 would pay interest from 3/1 to 4/1. The prepaid interest would cover the period from 2/15 to 2/28.

• Prepaids: Expenses necessary to create an escrow account or to adjust the seller�s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

• Prepayment Penalty: A fee charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.

• Prepayment: A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

• Pre-Qualified: Buyer has discussed their financial situation with a loan professional. No attempt has been made to verify the validity of any of the borrower�s information. Pre-qualification is only an indication of what the buyer should qualify for.

• Principal: The amount of debt, not counting interest, left on a loan.

• Private Mortgage Insurance (PMI): Insurance carried on a mortgage when less than a 20% down payment is presented. PMI refers to loans purchased by Fannie Mae or Freddie Mac. VA loans have a different type of mortgage insurance.

• Purchase Agreement: The agreement made between the buyer and seller of a property, containing the purchase price, terms and contingencies of the sale.

• Quit Claim: A deed operating as a release; intended to pass any title, interest or claim, which the grantor may have in the property, but not containing any warranty of a valid interest or title to the grantor.

• Rate Float: An unlocked loan subject to rate fluctuations caused by the market.

• Rate Lock: A commitment by the lender to fund a loan at a particular interest rate that stays

• Ratios: How a buyer�s housing expense and debt picture relates to their income.

• Real Estate Settlement Procedures Act (RESPA): RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only.

• Real Estate Settlement Statement: Final settlement statement often referred to as the HUD-1 form, used to itemize buyer, seller, broker and lender charges and credits at closing.

• Realtor� : A real estate broker or sales associate holding active membership in a local real estate board affiliated with the National Association of Realtors�.

• Rescission: The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

• Reconveyance: A release of lien filed with the county recorder by the trustee.

• Recording Fees: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

• Refi: Slang for refinance, or a new mortgage on a property that does not change ownership.

• Request for Reconveyance: Verification given by the beneficiary to the trustee that the conditions of the lien have been fulfilled and request that the lien be canceled.

• Reverse Annuity Mortgage (RAM): A form of mortgage in which the lender makes periodic payments to the borrower using the borrower�s equity in the home as security. Also called a reverse mortgage and is overseen by the FHA.

• S.I. / Statement of Information: The form a borrower fills out for the title company giving further identification of the customer. This allows the title company to eliminate debts and liens owed by people with similar names.

• Second Mortgage: A mortgage which is entered after the primary loan. It�s called a second due to it being recorded in the second lien position to the first mortgage. See also Secondary Financing.

• Secondary Financing: Financing obtained, subordinate to the first mortgage, to facilitate closing the first mortgage. Also known as a �piggyback� loan for purchases. Secondary financing can be obtained to extract home equity.

• Servicing: All the steps and operations performed to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

• Settlement Costs: See Closing Costs.

• Settlement: See Closing.

• Submission: This refers to a complete loan application package submitted for approval to the underwriting department.

• Subordination Agreement: The agreement detailing the contingencies of subordination, filed with the county recorder. If a primary loan is refinanced without paying off a second lien loan, the second lien loan must agree to return to secondary standing.

• Survey: A measurement of land prepared by a registered land surveyor showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

• Suspended: The underwriter cannot yet approve or deny the loan. More information is required.

• Term Mortgage: See Balloon Payment Mortgage.

• Title: A document that gives evidence of an individual�s ownership of property.

• Title Insurance: The insurance policy insuring the lender and the borrower there are no deficiencies in the title report. Any claim arising from a lien other than that disclosed is payable by the title insurance company.

• Title Search: An examination of municipal records to determine the legal ownership of property. Usually performed by a title company.

• Trust Deed: The Trust Deed attaches the note as a lien on the property. This is the document that conveys the ability to collect from the proceeds of the property.

• Truth-in-Lending (TIL): A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

• Underwriting: The process of evaluating a loan application to determine the risk involved for the lender (based on credit, employment, assets and other factors decided by the lender).

• VA: Veterans Administration.

• VA Loan: A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

• VA Mortgage Funding Fee: A premium of up to 2 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.

• Variable Rate Mortgage (VRM): See Adjustable Rate Mortgage.

• Verification of Deposit (VOD): A document signed by the borrower�s financial institution verifying the status and balance of their financial accounts.

• Verification of Employment (VOE): A document signed by the borrower�s employer verifying their position and salary.

• Zoning: The division of a city or county by legislative regulations into areas (zones) specifying the uses allowable for the real property in these areas.