VA Loan Glossary: Important Terms Home Buyers Should Know

Marcus Marion, CMA™ 3 weeks ago 0 4

When you apply for a VA home loan for the first time, you will encounter a lot of mortgage terminology and “jargon” you’ve never seen before. With terms like COE, funding fee, and amortization, the mortgage industry has its own unique language.

But it’s important to understand VA loan terminology because it relates to your ability to qualify for financing and your long-term financial success.

With that in mind, we’ve created a VA loan glossary that includes some of the most important terms you will encounter—before, during, and after the mortgage process.

The Most Important Definition of All

With the alphabetical ordering of this glossary, the VA loan itself would have appeared at the end of the list. But it’s actually the most important definition of all. So let’s start with that.

VA Loan: A mortgage loan that’s guaranteed by the Department of Veterans Affairs (VA) and available to eligible veterans, active-duty service members, and certain surviving spouses. VA loans offer benefits such as no down payment requirement, no mortgage insurance, and flexible qualification criteria.

VA Loan Glossary of Mortgage Terms

Here are some of the most important terms and definitions you should know when applying for a VA-guaranteed home loan.

Adjustable-Rate Mortgage (ARM): A type of mortgage loan with an interest rate that can change periodically based on market conditions. They often have lower mortgage rates during the first few years, when compared to a fixed-rate mortgage. VA home loans are available with both fixed and adjustable rate structures.

Amortization: The process of gradually paying off a VA loan through regular payments that include both principal and interest. Amortization schedules show how each payment is applied to reduce the loan balance over the full repayment term.

Annual Percentage Rate (APR): A standardized measure of the total cost of borrowing, expressed as a yearly percentage. The APR includes the interest rate, points, fees, and other charges associated with a VA loan, helping borrowers understand the full cost.

Appraisal: An official evaluation of a property’s fair market value conducted by a licensed appraiser. The VA requires an appraisal to ensure the property’s value meets or exceeds the loan amount.

Certificate of Eligibility (COE): A document issued by the Department of Veterans Affairs (VA) verifying a veteran’s eligibility for a VA home loan. It confirms the applicant’s military service and entitlement to VA loan benefits. Borrowers must obtain this document before they can apply for the program.

Closing Costs: Expenses incurred during the home buying process, typically paid at the closing of the loan. VA loan closing costs can include fees for appraisal, title insurance, mortgage origination fees, attorney services, and prepaid property taxes and insurance.

Closing Disclosure: A document provided by a lender to the borrower at least three business days before the scheduled closing. It outlines the final loan terms, including the interest rate, monthly payments, closing costs, and any additional fees associated with the transaction.

Debt-to-Income Ratio (DTI): A financial metric used by lenders to assess a borrower’s ability to manage monthly payments, based on their income and existing debt obligations. The DTI ratio compares the borrower’s total monthly debt payments to their gross monthly income and is expressed as a percentage.

Discount Points: Optional fees paid at closing to lower the interest rate on a VA loan. Each discount point typically costs 1% of the loan amount and can reduce the interest rate by a certain percentage, potentially saving money over the life of the loan.

Down Payment: The initial payment made by the home buyer toward the purchase price of the property. VA loans do not require a down payment in most cases, though some borrowers choose to make one in order to reduce their monthly payments.

Earnest Money Deposit: A deposit made by the buyer to demonstrate their serious intent to purchase a property. The earnest money deposit is held in escrow and is applied toward the down payment or closing costs at the time of closing.

Entitlement: The amount of VA loan guarantee available to a veteran based on their service history and disability status. Borrowers who are new to the program, and those who have used it before but paid off the loan when selling the home, have full entitlement.

Entitlement: The maximum amount the Department of Veterans Affairs will guarantee for a borrower’s VA mortgage loan. Entitlement is typically expressed as a percentage of the loan amount and represents the VA’s commitment to repay a portion of the loan in the event of default. Borrowers who are new to the program have full entitlement.

Escrow: An arrangement where a neutral third party (like an escrow company) holds funds and important documents on behalf of the home buyer and seller. The escrow process helps ensure a smooth and secure transfer of the property. This term applies to conventional and VA loans alike.

Fixed-Rate Mortgage: A mortgage loan with an interest rate that remains constant throughout the life of the loan. Fixed-rate mortgages offer predictability and stability, as monthly payments remain unchanged, regardless of fluctuations in market interest rates. Again, VA loans are available with both fixed and adjustable rates.

Funding Fee: A one-time fee paid to the Department of Veterans Affairs by VA loan borrowers. The funding fee helps offset the costs of the VA loan program and varies depending on factors such as the borrower’s military service, down payment amount, and whether it’s a first or subsequent use of benefits.

Home Inspection: A thorough examination of a property’s condition conducted by a qualified inspector. Home inspections are optional with a VA loan, but the Department of Veterans Affairs encourages buyers to have a home inspection performed.

Interest Rate: Also referred to as the “mortgage rate,” this is the percentage of the loan amount charged by the lender. The interest rate affects the monthly mortgage payment and the total amount paid over the life of the loan.

Loan-to-Value (LTV) Ratio: A ratio used by lenders to determine the risk of a mortgage loan. It compares the loan amount to the appraised value of the property. For a VA loan, an LTV ratio of up to 100% is allowed. This means the borrower does not have to make a down payment.

Mortgage: A legal agreement that pledges property as collateral for a loan.

Mortgage Insurance: Insurance that protects the lender in case the borrower defaults on the loan. VA loans typically do not require mortgage insurance, while FHA and some conventional loans do require it.

Origination Fee: A fee charged by lenders to cover the administrative costs of processing a mortgage loan application. Origination fees are typically expressed as a percentage of the loan amount and can vary depending on the lender and loan program.

Principal: The original amount of money borrowed in a loan, excluding interest and other fees. The monthly payments on a VA loan usually consist of both principal and interest, with a portion applied to reducing the loan balance.

Rate Lock: An agreement between the borrower and lender that guarantees a specific interest rate and loan terms for a designated period. Rate locks protect borrowers from fluctuations in interest rates during the mortgage application process.

Servicer: The entity responsible for managing and administering a VA loan on behalf of the lender or investor. Mortgage servicers collect monthly payments, handle escrow accounts, and address borrower inquiries and requests throughout the life of the loan.

Underwriting: The process by which lenders evaluate a borrower’s creditworthiness and ability to repay a VA mortgage loan. Underwriters review various financial documents, such as income statements, credit reports, and employment history, to assess risk and determine loan approval.

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