Something most borrowers learn as they explore their options in regards to their VA loan benefits is that the VA will not allow a veteran to use their VA loan benefits to get a loan that restricts the borrower’s ability to sell or otherwise ‘dispose of’ the property. This can present problems particularly with condos, duplexes, or any other kind of community-property agreement, as many of those types of living arrangements have clauses in their agreements that outline how, when, and why an owner can sell their home. Any restriction on a title that prevents a VA borrower from selling their home as they see fit will prevent the VA from guaranteeing the loan. The borrower, is of course, welcome to get a conventional loan for the purchase if they have their heart set on a property that the VA will not guarantee.
That the borrower must have no restriction barring him or her from letting someone assume the loan is a strict requirement for VA loans, and this also goes for the borrower’s overall ability to sell the home. In this way, there are no title restrictions that can be allowed under the VA loan program. However, there are other restrictions that might be considered to be a ‘title restriction’ that do not interfere with the VA borrower’s ability to sell the home. While condo association agreements that include the right of first refusal are not permitted to be bought with a VA loan, there are restrictions that can be included that do not interfere with VA eligibility.
The VA Pamphlet 26-7, also known as the VA Lender’s Handbook, states that there could be a restriction on the sale of the property by the borrower that’s based on the age of the person purchasing the home, and that the permanent residence of children can be prohibited, as long as the restriction is in compliance with federal laws. From the Handbook: “VA may guarantee a loan on which a title restriction limits the sale, lease, or occupancy of the dwelling to persons based on age, including a prohibition against the permanent occupancy of the dwelling by children, provided such restriction complies with applicable Federal law.”
In addition, the VA reserves the right to refuse to guaranty a loan with an age restriction if it increases the risk of unnecessary hardship for the veteran or the chances of loan default. From the Handbook: “VA may refuse to approve a property with an age restriction if its operation would work an undue hardship upon the owner in the case of sudden, unforeseen events or be likely to result in an increased risk of loan default.” The pamphlet also goes into detail about restrictions that can be allowed without even seeking VA approval beforehand. It states that restrictions that have to do with encroachments, easements, servitudes, water, timber, and subsurface rights don’t usually need VA approval, but should be considered during the VA appraisal. The Pamphlet says: “Title to property involving reasonable encroachments, easements, servitudes, and reservations for water, timber, or subsurface rights, generally do not require VA approval. However, they must be taken into consideration in determining reasonable value.”
If the appraisal determines that a restriction in regards to any of the above effects the basic livability of the property, then VA approval to proceed with the purchase is required. Any title restrictions such as the above must be listed on the NOV after the appraisal and be considered into the final estimation of the sale value of the property. “Title conditions or limitations must be shown on the NOV and considered by the appraiser in determining the reasonable value of the property. If the lender discovers, prior to loan closing, title conditions or limitations not shown on the NOV, the lender must have VA review the conditions and determine whether the value assigned to the property is materially affected.”
Take any questions regarding allowable and non-allowable title restrictions either directly to the VA or consult with a VA-approved lender.