Deciphering the VA Lender’s Handbook Chapter 9 Part 10
This article applies specifically to borrowers who are building a new home and who are wanting to move into the home before work on the house is 100% completed. This article does not apply to borrowers who are getting an energy efficiency mortgage along with their VA loan and will be making improvements after moving into the home. Occasionally, there is a situation where the veteran who has used a VA loan to construct a new home wants to move in but there are certain items of work that have not been completed on the home yet. In some cases, the escrow of funds can allow for the veteran to move into the home before those items are completed. Usually, items that have not been completed due to weather conditions are the cause of such a situation. These can include walkways, driveways, retaining walls, exterior painting, landscaping, or garages. An escrow of funds can be put aside to complete the unfinished work and the loan can still be guaranteed.
The escrow works fairly simply: 1.5 times the dollar amount necessary to complete the postponed items is taken out of the amount owed the seller at closing and set aside. The escrow of funds is held in a secure manner until the remaining work has been finished on the home. At that point, the funds are released to the seller. Obviously there are more details than just that, but that’s the basic process of getting an escrow. There are specific requirements that the VA has in order for an escrow to be established, and there are times when an escrow is not required even though there is unfinished work.
In order to establish an escrow, the VA has some requirements that the situation must satisfy. First, the construction of the dwelling must be complete and the house must be suitable for immediate occupancy. In other words, the livability of the house is not in question. Next, the postponement of the improvements must be beyond the control of the builder/seller. In other words, it is not acceptable for the delay to be the fault of the builder – it needs to have been caused by some outside force that the builder had no control over (like the weather). Third, the duration of the postponement must not be unreasonable (usually 90 to 120 days). The builder has to be able to complete the work in a suitable time frame. Last, the amount held back out of the seller’s proceeds must be 1 and 1/2 times the estimated amount required to complete the work.
As mentioned above, there are times when work must still be completed but an escrow is not required. An escrow does not need to be made when the incomplete work is limited to landscaping features like a lawn or shrubbery, the estimate of the cost to complete the work is not greater than $500, and there is adequate assurance that the work will be completed timely and satisfactorily (usually 90 to 120 days). Usually when such an inconsequential amount of work costing an inconsequential amount of money (compared to the overall cost of the home) is what’s at stake, it’s assumed that it’s not worth it to the builder to stiff the borrower, and that even if the builder does stiff the borrower, it’s not as big a deal as something like putting in a driveway or a sidewalk.
In the next article, we’ll start talking on the general procedures that need to be followed on establishing an escrow for work to be completed after the borrower moves in. Most of this will happen on the lender’s end, so you won’t be too heavily involved, but you will be involved to a degree, and knowing what’s going on with your loan is usually the best practice, even if no action is required on your part. As always, if you have any specific questions or need any help in deciding what to do with your VA loan benefits, give us a call here at Low VA Rates or contact us via our website and we’ll happily answer your questions.