Deciphering the VA Lender’s Handbook Chapter 9 Part 9
Construction loans are an option that the VA offers but that most VA lenders are not willing to offer at this time. That being said, some lenders are, and the more you persistent you are in trying to obtain one, the more likely you are to succeed; just don’t expect to have a buffet of lenders lining up to offer you one. A previous article talked about sales contracts for land purchases and how they work, so if you’re looking for basic information about construction loans or sales contracts, check out some of our previous articles. This article covers section 8 of Chapter 9 of the VA Lender’s Handbook, which specifically talks about the review process that the proposed sales contract will go through as conducted by the lender before the appraisal takes place.
So, before the proposed construction can be appraised, the lender must conduct a review on the sales contract or purchase agreement for the property and make sure it’s up to snuff. The lender has two goals for this review: make sure that the contract, or agreement, is acceptable and make sure it does not contain unfair contractual provisions. We’ll go over a few examples of unfair provisions a little bit later in this article. The lender can request revisions on the contract and refuse to approve the loan if the one of the parties is unwilling to make the revisions. The lender also has a responsibility to report unacceptable contract practices if contract provisions unfairly target veterans or the government, or if the “program participant” (the builder, or owner of the land), uses unfair provisions in their contracts multiple times and/or refuses to alter the unfair provisions.
The Handbook offers a convenient table of several common examples of unfair contract provisions. Here is what is included in the table:
Unfair Contract Provisions or Features
- Provisions allowing the down payment or earnest money of the purchaser to be forfeited or retained as liquidated damages if the purchaser cannot obtain VA financing.
- Inclusion in a lump-sum contract of an “escalator clause” which obligates the purchaser to pay a higher price in the event of increased costs for labor, material, or other items prior to delivery of title unless accompanied by a proviso which gives the purchaser the option of canceling the contract and obtaining a refund of the moneys paid if the increased price is not acceptable to the veteran.
- Provisions which infringe upon the usual or customary freedom or right of an owner to sell a property, except as allowed under 38 CFR 36.4308(e) and 36.4354(b)(5). For example, a provision that the purchaser will give a stated real estate agency an exclusive listing if he or she resells the property within 2 years after acquisition, or will give the seller or another a first option to buy other than in a cooperative housing project or as provided in 38 CFR 36.4354(b)(5).
- A requirement that purchasers waive or release any claim or right for nonperformance by the builder under the contract. This does not prevent a builder from obtaining a statement from the purchaser at closing that he or she has inspected the house and has not observed any unsatisfactory construction, nor does it prevent the builder from obtaining a release from the purchaser in settlement of a bona fide dispute.
- Omission of a description sufficient to identify accurately the property sold.
- Omission of a provision specifying whether the builder or the veteran is to be charged with any special assessments or improvement bonds. This includes those assessments or bonds which are payable in the future, for improvements included in the plans and specifications or commenced or completed at the time of closing, such as streets, sidewalks, curbs, gutters, and sewers.
- Omission of a date for completion of proposed construction or failure to give the veteran the option of canceling the contract and obtaining a refund of the deposit if the dwelling is not completed on a specified date or within a reasonable time afterwards.
- Failure of a contract covering proposed construction to obligate the seller to complete the dwelling in substantial accordance with identified and definite plans and specifications.
The above table represents 8 of the most common provisions that a lender is going to find unacceptable in a sales contract. If appropriate, you may want to make sure the builder or landowner you’re working with is aware that these provisions will not be accepted.