FAQS
Your Questions Answered
What is an appraisal?
Mortgage appraisals help determine the fair market value of a property by comparing it to nearby homes that have sold recently.
What is an Adjustable-Rate Mortgage (ARM)?
An "ARM" is a mortgage where the interest rate 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.
What is an Annual Percentage Rate (APR)?
An "APR" is a rate that reflects the total cost of borrowing money, including the interest rate and other costs built into the loan amount. The interest rate and APR are typically different, and homebuyers should look at both when comparing 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.
What is an Automated Underwriting System (AUS)?
An "AUS" is a computer system used by mortgage lenders 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 homebuyers move through the loan process faster and with more flexible requirements.
What is a Buyer's Agent?
A buyer's agent is the real estate agent who represents the homebuyer.
What is a Cash-Out Refinance?
A cash-out refinance is a type of loan that allows qualified homeowners to refinance and take out cash from the equity in their home. Borrowers can typically look to refinance up to 80 percent of their home's value. Underwriting guidelines for a cash-out refinance can vary by lender and the borrower's individual circumstances.
What are Closing Costs?
Closing costs are fees associated with obtaining a home loan to purchase real estate. Closing costs may range from 2-4% of the loan amount. Sells can pay off of a buyers loan-related costs and up to 4% in concessions in some cases, which can cover things like prepaid property taxes and homeowners insurance; paying off collections and judgments at closing; and more.
What are Comparable Sales?
Comparable sales, better known as "comps", 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 lenders.
What are Compensating Factors?
Compensating factors 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.
What is a Conditional Approval?
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.
What is a Conditional Approval?
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.
What is a Conforming Loan Limit?
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.
What is a Construction-to-Permanent Refinance Loan
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.
What is a Conventional Loan?
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.
What is a Credit Score?
A credit score reflects 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.
What is a Closing Disclosure?
A closing disclosure is a 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.
What is Debt-to-Income Ratio (DTI)?
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.
What is a Deed-in-Lieu of Foreclosure?
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.
What are Discount Points?
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.
What is Earnest Money?
Earnest money is a good-faith deposit that 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.
What is a FICO Score?
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.
What is a Fixed-Rate Mortgage?
​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.
What is a Float?
Once homebuyer is under contract, they need to decide whether to lock their interest rate in place or float, meaning they will wait to see if 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.
What is a Foreclosure?
A foreclosure is when 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.
What is Homeowners Insurance?
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.
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Buyers can shop around for homeowners insurance.
What is a Hybrid Adjustable-Rate Mortgage (ARM)?
A Hybrid ARM 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.
What is a Home Inspection?
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.
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What is an Interest Rate?
An interest rate 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. You might also hear this referred to as the "note rate," which helps differentiate it from the loan's Annual Percentage Rate (APR).
What is an Interest Rate Reduction Refinance Loan (IRRRL)?
An IRRRL 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.
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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.
What is a Jumbo Loan?
Generally, these are loans above what's known as the conforming loan limit. Jumbo VA loans typically feature tighter requirements than a traditional VA loan, but they still offer some tremendous benefits compared to conventional jumbo loans.
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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.
What is a Listing Agent?
A listing agent is the real estate agent representing a home seller.
What is a Loan Estimate?
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.
What is Manual Underwriting?
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 homebuyer 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.
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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.
What is a Multiple Listing Service (MLS)?
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.
What is a Note Rate?
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.
What is a Notice of Value?
The "NOV" is a confirmed assessment of the property's fair market value based on a VA appraisal. The appraised value of a home comes from an independent appraiser's comparison of the home with respect to recent comparable home sales in the area. If the home's appraised value comes in below the purchase price, the buyer will need to renegotiate with the seller or withdraw from the deal. Renegotiating a purchase price is common, but if the seller doesn't agree to a lower price, the Veteran can withdraw from the agreement and get their earnest money back, thanks to the VA Amendment to Contract, which will protect the buyer in such a scenario.
What is an Origination Fee?
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. Some lenders waive the origination fee for VA loans.
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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.
What is a Permanent Buydown?
Homebuyers 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. Regulators allow borrowers to pay reasonable points to buy down their rate, typically not to exceed 2 points.
What is PITI?
The acronym stands for Principal, Interest, Taxes and Insurance. These are the four pillars of a homebuyer'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.
What is a Preapproval?
The Preapproval is a more serious step than prequalification and involves a lender verifying key information about your debts and income. A 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 home purchasing process.
What is a Prequalification?
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.
What is Private Mortgage Insurance (PMI)?
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.
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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.
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What is a Rate Lock?
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.
What is a Realtor?
A realtor is a real estate agent who is a member of the National Association of Realtors.
What is a Refinance?
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.
What are Reserves?
Some borrowers might need a set amount of cash reserves in the bank to close on their home 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.
What is RESPA?
​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.
What are Seller Concessions?
Sellers may 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 buyer, but every purchase and negotiation is different.
What is the Secondary Mortgage Market?
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.
What is a Short Sale?
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. Some lenders will have a waiting period before you can get a loan following a short sale.
What is Subprime?
Subprime essentially means borrowers or loans below an accepted credit standard, typically around 620. Subprime borrowers carry greater risks and now have trouble securing financing.
What is Title Insurance?
Title insurance is a form of insurance that 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.
What is an Underwriter?
Underwriters are trained experts who 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.
What is a VA Certificate of Eligibility (COE)?
What is Verification of Employment?
A COE is a form that is generated by the Dept of VA that guarantees a qualified Veteran's eligibility for the VA home loan benefit with $0 money down. See here for more details...
This is an important document that lenders send to a borrower's employer(s). The VOE, as it's known, helps lenders verify employment, tenure, salary and any bonuses or raises.
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Terry Roberts, USMC Veteran | Mortgage Broker NMLS 397987
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