VA Mortgage Terms: Glossary
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Acceleration
The mortgagee's (lender) right is to demand immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower) or by using the right vested in the Due-on-Sale Clause.
Adjustable-rate mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as the re-negotiable rate mortgage, the variable rate mortgage, or the Canadian rollover mortgage.
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, depends on the index.
Amortization
This means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual percentage rate (A.P.R.)
This is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely higher than the stated note rate or advertised rate on the mortgage because it considers point and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost of each loan.
Appraisal
An estimate of the value of the property is made by a qualified professional called an "appraiser".
Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights.
Assumption
This is the agreement between buyer and seller where the buyer takes over the seller's payments on an existing mortgage. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, probably higher, market-rate interest charges will apply.
Balloon (payment) mortgage
Usually, a short-term fixed-rate loan involves small payments for a certain period and one large payment for the remaining principal amount at a time specified in the contract.
Blanket Mortgage
This mortgage covers at least two pieces of real estate as security for the same mortgage.
Borrower (Mortgagor)
This is the individual who applies for and receives a loan in the form of a mortgage with the intention to repay the loan in full.
Broker
This individual assists in arranging funding or negotiating contracts for a client but does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Buy-down
This occurs when the lender and/or home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. The payments are initially low. However, they will increase when the subsidy expires.
Caps (interest)
Consumer safeguards that limit the amount the interest rate on an adjustable-rate mortgage may change per year and/or the life of the loan.
Caps (payment)
Consumer safeguards that limit the number of monthly payments on an adjustable-rate mortgage may change.
Cash Flow
The amount of cash derived over a certain period from an income-producing property. The cash flow should be large enough to pay the expenses of the income-producing property (mortgage payment, maintenance, utilities, etc.).
Certificate of Eligibility
This document is given to qualified veterans, entitling them to VA-guaranteed loans for homes, businesses, and mobile homes. Certificates of eligibility may be obtained by sending DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).
Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing the property’s current market value.
Certificate of veteran status
This document is given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD 214 to the local VA office with form 26-8261a (request for certificate of veteran status). This document enables veterans to get lower down payments on certain FHA-insured loans.
Closing
This is the meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands. It is 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 closing cost is usually about 3 percent to 6 percent of the mortgage amount.
Commitment
A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions. An agreement, often 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.
Construction loan
This is a short-term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he progresses.
Contract sale or deed:
This is a contract between a purchaser and a seller of real estate to convey title after certain conditions are met. It is a form of installment sale.
Conventional loan
This is a mortgage not insured by FHA or guaranteed by the VA.
Credit Report
This report documents the credit history and current status of a borrower's credit standing.
Debt-to-Income Ratio
The ratio is expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by their gross monthly income. See housing expenses-to-income ratio.
Deed of trust
In many states, this document is used in place of a mortgage to secure the payment of a note.
Default
This is a failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
Deferred interest
When a mortgage is written with a monthly payment less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.
Delinquency
This is a failure to make payments on time, which can lead to foreclosure.
Department of Veterans Affairs (VA)
This independent federal government agency guarantees long-term, low, or no down payment mortgages to eligible veterans.
Discount Point
See point.
Down Payment
Money is paid to make up the difference between the purchase price and the mortgage amount.
Due-on-Sale-Clause
This is 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
A buyer gives money to a seller as part of the purchase price to bind a transaction or assure payment.
Entitlement
The VA home loan benefit is called entitlement and is an entitlement for a VA-guaranteed home loan. This is also known as eligibility.
Equal Credit Opportunity Act (ECOA)
This federal law 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 is also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property.
Escrow
This is an account the lender holds into which the home buyer pays money for tax or insurance payments. It is also where earnest deposits are held pending loan closing.
Fannie Mae
See Federal National Mortgage Association.
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who cannot obtain loans elsewhere.
Federal Home Loan Bank Board (FHLBB)
This is the former name for the regulatory and supervisory agency for federally chartered savings institutions. Agency is now called the Office of Thrift Supervision.
Federal Home Loan Mortgage Corporation (FHLMC), also called "Freddie Mac"
This quasi-governmental agency purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
This is a division of the Department of Housing and Urban Development. Its main activity is insuring residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA), also known as "Fannie Mae"
A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages and those insured by FHA or guaranteed by VA. This institution provides funds for one in seven mortgages, making mortgage money more available and affordable.
FHA loan
This loan is insured by the Federal Housing Administration and is open to all qualified home purchasers. While there are limits to the size of FHA loans ($155,250 as of 1/1/96), they are generous enough to handle moderately-priced homes almost anywhere in the country.
FHA mortgage insurance
Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.
FHLMC
The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing conventional loans. Also known as "Freddie Mac."
Firm Commitment
This promise by FHA is to insure a mortgage loan for a specified property and borrower. Also, a promise from a lender to make a mortgage loan.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
FNMA
The Federal National Mortgage Association is a secondary mortgage institution that is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."
Foreclosure
A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the mortgage terms. It is also known as a repossession of property.
Freddie Mac
See Federal Home Loan Mortgage Corporation.
Ginnie Mae
See Government National Mortgage Association.
Government National Mortgage Association (GNMA)
The Government National Mortgage Association (Ginnie Mae) is the primary financing process for mortgage loans that are either government-insured or government-guaranteed. It is owned by a U.S. Government corporation that is part of the Department of Housing and Urban Development.
Graduated Payment Mortgage (GPM)
This is a type of flexible-payment mortgage where the payments increase for a specified period and then level off. This type of mortgage has negative amortization built into it.
Guaranty
This is a promise by one party to pay a debt or perform an obligation contracted by another. This is 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.
Housing Expenses-to-Income Ratio
The ratio is expressed as a percentage, which results when a borrower's housing expenses are divided by their gross monthly income. See debt-to-income ratio.
Impound
The lender or servicer holds a portion of a borrower's monthly payments to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. This is 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.
Interim Financing
This is a construction loan made during a building or project completion. A permanent loan usually replaces this loan after completion.
Investor
A money source for a lender.
Jumbo Loan
This loan is larger (more than $214,600 as of 1/1/97) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because these two agencies cannot fund jumbo loans, they usually carry a higher interest rate.
Lien
This is a claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan-to-Value Ratio
This is the relationship between the mortgage loan amount and the property's appraised value, expressed as a percentage.
Margin
The amount a lender adds to the index on an adjustable-rate mortgage to establish the adjusted interest rate.
Market Value
This is the highest price a buyer would pay and the lowest price a seller would accept on a property. Market value may differ from the price a property could be sold for at a given time.
MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against incurring a loss on account of the borrower’s default.
Mortgage Insurance
This is money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance and FHA mortgage insurance.
Mortgagee
The lender.
Mortgagor
The borrower or homeowner.
Negative Amortization
This occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the outstanding balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.
Net Effective Income
This is the borrower's gross income minus federal income tax.
Non Assumption Clause
A statement in a mortgage contract forbidding the mortgage's assumption without the lender's prior approval. Note: The signed obligation to pay a debt as a mortgage note.
Office of Thrift Supervision (OTS)
This is the regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board.
Origination Fee
The fee that a lender charges to prepare loan documents, make credit checks, inspect and sometimes appraise a property. It is usually computed as a percentage of the face value of the loan.
Permanent Loan
A long-term mortgage, usually ten years or more. Also called an "end loan."
PITI
Principal, Interest, Taxes, and Insurance. Also called monthly housing expense.
Pledged account Mortgage (PAM):
Money is placed in a pledged savings account. This fund, plus earned interest, is gradually used to reduce mortgage payments.
Points (loan discount points)
Prepaid interest is 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).
Power of Attorney
This is a legal document authorizing one person to act on behalf of another.
Prepaid Expenses
Necessary to create an escrow account or adjust the seller's existing one. These can include taxes, hazard insurance, private mortgage insurance, and special assessments.
Prepayment
This privilege in a mortgage permits the borrower to make payments in advance of their due date.
Prepayment Penalty
Money charged for early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.
Primary Mortgage Market
Lenders make mortgage loans directly to borrowers such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc.
Principal
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
If you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 5 percent in some cases. However, with smaller down payment loans, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on you loan's structure.
Realtor
This is a real estate broker or an associate who holds active membership in a local real estate board affiliated with the National Association of Realtors.
Recision
The cancellation of a contract. With respect to mortgage refinancing, the law gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses the equity in the home as security.
Recording Fees
Money is paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Refinance
This is the process of obtaining a new mortgage loan on a property already owned. The purpose is often to replace existing loans on the property.
Renegotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. See adjustable-rate mortgage.
RESPA
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once before or at a settlement. The law requires lenders to furnish the information after application only.
Reverse Annuity Mortgage (RAM)
This is a form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as Satisfaction of Mortgage. This is the document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
Second Mortgage
A mortgage is made after another mortgage and is subordinate to the first one.
Secondary Mortgage Market
This is where primary mortgage lenders sell their mortgages to obtain more funds to originate more new loans. It provides liquidity for the lenders. Security.
Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collecting payments, paying taxes, insurance, property inspections, and the like.
Settlement/Settlement Costs
See closing/closing costs.
Shared Appreciation Mortgage (SAM)
This is a mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the property's value. It may also apply to mortgages where the borrowers share the monthly principal and interest payments with another party in exchange for part of the appreciation.
Simple Interest
This is the interest which is computed only on the principal balance.
Survey
A measurement of land, prepared by a registered land surveyor, shows the land's location with reference to known points, its dimensions, and the location and dimensions of any buildings.
Sweat Equity
Equity created by a purchaser performing work on a property being purchased.
Title
This is a document that gives evidence of an individual's ownership of a property.
Title Insurance
This is a policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is typically a function of the property's value. It is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.
Title Search
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.
Two-Step Mortgage
This is a mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10). They then receive a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes can call the loan due with 30 days' notice at the end of seven or 10 years. Also called "Super Seven" or "Premier" mortgage.
Underwriting
This is the decision to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
USURY
Interest charged in excess of the legal rate established by law.
VA Loan
This is a long-term, low-or-no-down payment loan guaranteed by the Department of Veterans Affairs. It is restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 1-7/8 percent (depending on the down payment size) is paid on a VA-backed loan. On a $75,000 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 his/her financial accounts.
Verification of Employment (VOE)
A document signed by the borrower’s employer verifying his/her position and salary.
Warehouse Fee
Many mortgage firms must borrow funds on a short-term basis to originate loans to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short-term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.
Wraparound mortgage
This results when an existing assumable loan is combined with a new one, resulting in an interest rate between the old and current rates. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.
