Special VA Loans – VA Lender’s Handbook Chapter 7 Summary
This article is intended to give you a brief summary of the information contained in Chapter 7 of the VA Lender’s Handbook. After reading this article, you should have a good idea whether it’s worth your time to read all of our detailed articles on Chapter 7 or to read the full chapter in the Handbook itself. Chapter 7 is about loans that require special underwriting considerations in the VA loan program. It covers joint loans, construction loans, EEMs, ARMs, GPMs, and GEMs, as well as temporary interest rate buydowns, farm residence loans, loans for manufactured homes, and loans to Native American Veterans on Trust Lands. We’re going to focus most of our time on the ones that come up most often: EEM’s, ARM’s, and construction loans. Information in this article on the other ones will just be quick definitions.
Chapter 7 provides special instructions to the lender on handling construction loans. Here’s the thing, though: there are hardly any lenders out there that are currently willing to guarantee construction loans because it’s so risky right now. If the market changes, that might change as well, but for the time being a construction loan is simply not likely to be an option for you. If you are able to find a lender willing to do a construction loan for you, they will walk you through any steps of the process that you aren’t familiar with yet. If you are interested in learning this information on your own, feel free to read the handbook or check out our articles on Chapter 7.
ARM stands for an adjustable-rate mortgage. ARM loans require special underwriting because they amortize differently than a fixed-rate. In fact, because ARM loans re-amortize every year after the fixed period, your monthly payment can actually go down over time, even if your interest rate rises, in some cases. When underwriting an ARM loan, a lot has to be considered. Here are just a few: the starting interest rate, the length of the initial fixed term, the maximum rate the loan might eventually have, the ability of the borrower to pay that maximum rate, the chances of the borrower’s income increasing over time, and many other things. An ARM loan can be more complicated for the loan officer, processor, and underwriter, but they are usually the options that save you the most money as well, so it’s worth the trouble.
EEM stands for energy-efficiency mortgage. An EEM is actually just an add-on to another loan. You can add an EEM to a new purchase, cash-out refinance, or even a streamline refinance and get money to make energy-efficient improvements to your home to save money on your utility bills. EEMs can only be used to lower your utility bills, and the acceptability of an EEM is determined by how quickly the cost of an EEM will be recouped by the savings on monthly utility bills. These require special underwriting because the homework has to be done on how expensive the improvements will be to make and how much money they will save the borrower each month. The loan officer will do some of this, but some of it will also fall on the shoulders of the borrower to figure out. EEMs can be great, but they generally max out at $6,000. For more than that, you need special approval from the VA to do.
Other Loans Mentioned in Chapter 7
C In this type of amortization schedule, your starting payments are less-than-fully amortizing, which means your loan balance is actually going up from month to month until your payments increase. A GEM is a growing-equity mortgage. In a GEM, you start out making a fully amortizing payment, but your monthly payments gradually go up to pay off more and more extra principal so you pay off your home much faster. Chapter 7 also talks about the considerations a lender has when financing a farm residence or a manufactured home classified as real estate. If you are wanting to learn about getting a loan for one of those types of properties, Chapter 7 is probably worth a read.