Handbook Sparknotes Chapter 7

Special VA Loans – VA Lender’s Handbook Chapter 7 Summary


VA Lenders Handbook Chapter 7This 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.


Construction Loans

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 Loans

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 Loans

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.Types of VA Home Loans


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.


VA Lender’s Handbook Ch7 P20 (Manufactured homes)

Loans for Manufactured Homes Classified as Real Estate


Many may already be familiar with the fact that the VA will not approve the purchase of a manufactured home unless it is permanently fixed on a foundation and is part of a lot. To further clarify, the manufactured home must be affixed to a lot and considered real estate under state law of the state in which the home resides. While there are some exceptions for manufactured homes that are not permanently affixed to foundations, those are handled differently than manufactured homes classified as real estate. This article only covers how loans for manufactured homes classified as real estate are handled. If you are interested in buying a manufactured home that does not have a permanent foundation, speak directly with a VA-approved lender, and they should be able to work with you.Loans for Manufactured Homes


The tricky thing about manufactured homes is that there are several different scenarios that a borrower may want to purchase one in. The borrower may already own a lot and just want to drop a manufactured home on it, they may want to buy a home and a lot to put it on, they may be refinancing an existing manufactured home and putting it on a lot, or they may be refinancing an existing manufactured home that’s already on a lot. The VA Lender’s Handbook provides a convenient table that shows the different scenarios and the maximum loan amount that the borrower can receive in that scenario.

Allowable Loan Purpose Maximum LoanThe loan amount is limited to:
To purchase a manufactured home to be affixed to a lot already owned by the veteran. The lesser of:

  • the sum of the purchase price plus the cost of all other real property improvements, or
  • the total reasonable value of the unit, lot, and real property improvements, plus
  • the VA funding fee
To purchase a manufactured home and a lot to which it will be affixed. The lesser of:

  • the total purchase price of the manufactured home unit and the lot plus the cost of all other real property improvements, or
  • the purchase price of the manufactured home unit plus the cost of all other real property improvements plus the balance owed by the veteran on a deferred purchase money mortgage or contract given for the purchase of the lot, or
  • the total reasonable value of the unit, lot, and property improvements, plus
  • the VA funding fee.
To refinance an existing loan on a manufactured home and purchase the lot to which the home will be affixed. The lesser of:

  • the sum of the balance of the loan being refinanced plus the purchase price of the lot, not to exceed its reasonable value plus the costs of the necessary site preparation as determined by VA plus a reasonable discount on that portion of the loan used to refinance the existing loan on the manufactured home plus authorized closing costs, or
  • the total reasonable value of the unit, lot, and real property improvements, plus
  • the VA funding fee.
An IRRRL to refinance an existing VA loan on a permanently affixed manufactured home and lot. The sum of:

  • the balance of the VA loan being refinanced, plus
  • allowable closing costs, plus
  • up to two discount points, plus
  • the VA funding fee

Note: This is the only type of permanently affixed manufactured home loan that does not require full underwriting and an appraisal. The provisions applicable to IRRRLs apply (see the articles on chapter 6) except the term of the loan may be as long as 30 years and 32 days.


So if you’re hoping to purchase a manufactured home and get it on a lot, you’re in good shape. Manufactured homes can be a very attractive option for veteran borrowers looking either for a starter home or a place to quietly retire because they are so much more affordable than building a custom home. Granted, there isn’t as much customization available on manufactured homes, but for a fraction of the cost, customization isn’t too big of a thing to sacrifice for most people. The real trouble with getting a manufactured home is that you also generally need to purchase an empty lot, and empty lots are nearly as expensive (sometimes more expensive) than lots that already have homes on them.


Farm Residence Loans – Everything You Need to Know

Deciphering the VA Lender’s Handbook Chapter 7 Part 19


Just like any other type of residence, farms have their fair share of interested borrowers who may want to take advantage of their VA loan benefits to purchase them. The VA allows borrowers to use their VA loan benefits to purchase a farm so long as the borrower intends to live on the farm. From the VA Lender’s Handbook: “A loan for the purchase, construction, repair, alteration, or improvement of a farm residence which is occupied or will be occupied by the veteran as a home is eligible for guaranty.” This eligibility, however, is extremely specific. The VA is very particular in not allowing the loan to cover the nonresidential value of the farm land (in excess of the homesite), nor the barn, silo, or other outbuildings, even those necessary to the operation of the farm, nor any of the farm equipment or livestock.

Farm Residence Loans

There’s a (sort of) exception to this specific eligibility, however. If the borrower has already purchased the land, and is making payments on it, the VA loan for the construction of the farm residence can also be used to pay off the lien on the land so long as the reasonable value of the land is at least equal to the cost of the lien. Clarification from the VA: “A portion of the proceeds of a loan to construct a farm residence on encumbered land owned by the veteran may be used to pay off the lien or liens on the land only if the reasonable value of the land is at least equal to the amount of the lien(s).” Buying and beginning a new farm operation is an extremely expensive proposition, and while the VA can help make a portion of it more affordable, there’s going to be a lot that the veteran will need to figure out how to take care of on their own.


When a lender underwrites a loan for a residential farm homesite, one of the first questions he or she needs to be answered is this: Is the income the veteran is using to qualify for the loan going to come from the farming operations? The answer to this question greatly determines how the lender handles the loan. If the borrower is planning on using income from the farm as their qualifying income, they will be treated very similar to a borrower using “self-employment income” (which we covered in Chapter 4 of this series). The requirements for those who are self-employed can generally be applied to those hoping to use farm income for their mortgage. However, in many cases the borrower is going to be a new farmer or opening up a new farm operation. If that is the case, the loan must be handled differently from an experienced farmer.


If the farmer is a new farmer, or the farm operation is a new operation, the lender will need to get the veteran’s proposed plan for the farm. This plan needs to include the number of acres dedicated to each crop, the amount of livestock they’ll have, and other things needed to estimate both the income and expenses of the farm. The new farmer will also have to provide a written statement that they either already own or are planning to purchase the necessary equipment to operate the farm. If the borrower needs to purchase them, more details on cost and repayment will be needed. Additionally, a VA-appointed farm appraiser or another expert is required to estimate the income and expenses of the farm. Last, the new farmer will need to provide a copy of a commitment from a lender for an operating line of credit to cover operating expenses of the farm.


For an experienced farmer that is continuing the same farm operation, the VA provides the following: “If the veteran finances operations out of an operating line of credit, obtain

records of advances from, payments to, and carryover balances on the operating line of credit for the last 3 years (or additional periods if needed to demonstrate the stability of veteran’s operation). Analyze the reasons for any build-up of operating debt.”

VA Lender’s Handbook Ch7 P17 (GEMs)

Growing Equity Mortgages (GEMs)

How to build equity

Deciphering the VA Lender’s Handbook Chapter 7 Part 17


The last three articles have covered Graduated-Payment Mortgages, which are similar in some respects to Growing Equity Mortgages, but different in other, very important respects. The main difference between a graduated payment mortgage and a growing equity mortgage (GPM vs. GEM), is that the first payments on a GEM are fully-amortizing, while those on a GPM are not. Fully-amortizing means that you’re paying off as much interest as you owe for that month, and as much principal as you need to in order to pay off the loan on time. GPMs are a way for borrowers who don’t have as much income right now to get a home they wouldn’t otherwise be able to get, while a GEM is a way for a borrower to pay off his or her home much  more quickly than they otherwise could.


The VA allows borrowers to get a GEM if the lender is willing to offer it. In a GEM, the monthly payments gradually increase, with all of the increase going towards paying off the principal. Paying off a GEM goes much faster than paying off a standard amortization schedule, and the borrower accrues equity much faster as well (hence the name). There are two different ways a GEM can be done, and it has to do with whether the increases in the monthly payment happen based off of a fixed schedule or are tied to an index. In either case, the initial monthly payments are always fully-amortizing and are usually based on what the monthly payment would be for a 30-year mortgage based on a standard amortization plan. It’s important to remember that the classification of a GEM, GPM, or standard amortization is wholly separate from that of fixed-rate or adjustable-rate. While most GEMs are fixed-rate mortgages, theoretically a GEM could also be an ARM or a hybrid ARM (that would make for some immensely complicated amortization schedules).


If payments on a GEM are increased based on a fixed schedule, that schedule usually occurs in two phases. The first phase is the growth phase – where the monthly payments gradually increase each year. This phase is usually around 10 years though it can be less or more as desired. The second phase would begin in the 11th year, and is the point where the monthly payments stop increasing and hold steady at their highest level until the loan is paid off. The second way the payments can increase is by following an index. Here is an example from the VA Lender’s Handbook: “The increases in the monthly payments are based on a percentage of a Department of Commerce index that measures per capita, after-tax disposable personal income in the United States.”


As far as underwriting goes, the lender’s main concern is making sure that the borrower’s income is likely to keep up with the increases in the monthly payment. If the lender isn’t confident that the borrower’s income will really increase, they probably won’t sign off on the loan.


So as a borrower, when would you use a GEM? While it certainly sounds like a good thing to do if you can, there are a surprisingly small amount of scenarios where it really is the best thing to do. If you’re planning on staying in your current house until it’s paid off, don’t want to refinance at any point, and have a reasonable expectation that your income is going to go up a lot in the near future, then a GEM is a perfect fit. If your income doesn’t go up the way you expect it to, a GEM could be your worst nightmare, and if you move or refinance in only a few years, you put extra stress on your monthly budget without any noticeable benefits.
If you’re interested in a GEM, check with a VA-approved lender to see if they offer them, and see if they can provide any extra perspective on your specific situation to say whether a GEM is a good fit for you or not. A Growing Equity Mortgage is just one more option in a wide array, and it may just not be a good fit. Many people get standard amortization schedules then make extra principal payments when and how they can, and they find it to be a better fit than a GEM.

Graduated Payment Mortgages (GPMs) Part 3

Deciphering the VA Lender’s Handbook Chapter 7 Part 16


The last two articles have covered a great deal of very important information about GPMs in the VA loan program. If you’re wondering what a GPM is, or how it is different from a How APR is calculatedstandard loan, check out the first article about GPMs. If you’re looking for information on the maximum loan amounts on a GPM and the required down payment, check out the second article on GPMs. In this article we’ll be finishing up GPMs with explaining how the monthly installments are calculated, how the APR is calculated, considerations a lender has for underwriting (which affect you as the borrower), the veteran’s statement required for GPMs, and other requirements for GPMs.


The monthly payments on a GPM change throughout the first five years of the loan, then remain the same for the remaining term. Therefore, the monthly payments are subject to some calculation. The Department of Housing and Urban Development (HUD) offers a table that helps lenders calculate the monthly payments throughout the loan based on the loan amount and the interest rate on the loan. You yourself can actually access the calculator HUD uses to determine the monthly installments here. Using that calculator, you can prepare yourself for meeting with your lender and discussing a GPM. However, do not rely on that calculator or any tools from HUD to calculate the APR on a GPM, because the HUD program requires mortgage insurance premiums, while the VA does not.


The single biggest underwriting consideration facing the lender is whether the borrower’s income will increase enough in the next five years to cover the increasing monthly payments. If the income doesn’t keep pace, both the borrower and the lender will regret closing on the GPM. The lender looks for an indication that the borrower’s income will increase, and if they do, they can underwrite the loan using only the first year’s mortgage payment for qualification. If there are not strong indicators that the borrower’s income will increase, the lender will need to underwrite the loan using the monthly payment that would be used on a standard amortization schedule, and can use the lower initial payments as a compensating factor if appropriate.


The veteran borrower must sign a statement declaring that he or she understands the differing monthly payments that they will be required to pay and when. Below is the statement as provided by the Handbook:


“I fully understand that because of the graduated-payment loan obligation I am undertaking, my mortgage payment excluding taxes and insurance will start at $________ and will increase by 7.5 percent each year for 5 years to a maximum payment of $_________ , and the mortgage balance will increase to no more than $_________ at the end of the _____ year. The maximum total amount by which the deferred interest will increase the principal is $________. Monthly installments will be due according to the following schedule:

• $__________ during the first year of the loan

• $__________ during the second year of the loan

• $__________ during the third year of the loan

• $__________ during the fourth year of the loan

• $__________ during the fifth year of the loan

• $__________ during the sixth year of the loan and every year thereafter.”

Other than that statement and the other requirements already discussed, the property being purchased with the GPM must have a remaining life expectancy of at least 30 years, and a GPM cannot be used to refinance a home. However, a GPM can itself be refinanced by a fixed-rate VA-guaranteed loan. The Handbook states no restriction on when during the loan term a GPM must be refinanced, or when the home can be sold to another borrower. If you are considering getting a GPM, first read all three articles here about the GPM to gain an understanding of what the GPM is and what it is for. Then, sit down with a VA-approved lender with some specific questions about your circumstances, and see if they recommend a GPM. There are not too many cases where a GPM is the best option, but it can definitely be a lifesaver when it is.

Graduated Payment Mortgages (GPMs) Part 2

Deciphering the VA Lender’s Handbook Chapter 7 Part 15


The last article explained what a GPM is, what makes it different from a standard amortization schedule, and what a GPM can be used for. GPMs start out with lower monthly payments which increase steadily over a graduation period, then finish the loan at a maximum amount. This article is going to talk about the maximum loan amount and down payment required on a GPM, and some notes on amortization. If we have a chance, we’ll cover how the monthly payments are calculated in this article. Otherwise, it will be covered in the following one.


As with all other new purchase VA loans, the property being purchased must undergo an official VA appraisal, after which a Notice of Value (NOV) will be issued that states the reasonable value of the property. Also just like all other new purchase VA loans (and refinances, for that matter), the loan cannot be made for more than the reasonable value of the property as shown on the NOV, plus any financed closing costs and EEM. With GPMs, though, it gets a little more complicated. Since during the initial period of the loan, where less is being paid off each month than is being added to the loan in interest, the principal balance of the loan will actually increase – potentially beyond the reasonable value of the home. The VA does not approve of this situation and requires a down payment on GPMs of whatever amount is required to keep the principal balance from ever exceeding the reasonable value of the property on the NOV.GPM Amortization


The maximum initial loan amount (and, by default, the required down payment) is calculated using the Department of Housing and Urban Development’s (HUD) tables for GPMs that show the principal balance and monthly installments for every $1,000 of the original loan proceeds. The equation will also be affected by the interest rate on the loan. The difference between the maximum loan amount and the value of the home is the amount of down payment that is required. The above is how the maximum loan amounts and downpayments are handled for regular loans, but the maximum loan amount and down payment required are different when using a GPM for a construction loan or a brand new home that has not been previously occupied.


In many ways, the max loan amount and down payment required are much simpler when using a GPM on a construction loan or brand new home. The max loan amount cannot “…exceed the lesser of the purchase price or 97.50 percent of the initial reasonable value of the property.” A down payment will be required to make up the difference between the reasonable value and the amount of the loan. In the amortization schedule, the principal owed can never exceed the reasonable value of the property. This puts a limit on how small your monthly payments can get on a GPM but probably won’t cause too many problems on that front.


While it may seem that having to pay a down payment is a major drawback of the GPM, many borrowers actually use it to their advantage – by making a substantial enough down payment, a borrower can actually offset the negative amortization that comes with a GPM. In other words, they can cut the principal down enough that they don’t end up paying more with a GPM than they would with a standard amortization schedule. If you’ve got a decent-sized nest egg (or an extra car to sell), this may be a good way to get a home that your income won’t be big enough for until a few years down the road, with lower monthly payments now and essentially no penalty.
Amortization on GPMs is actually standardized across the VA loan program. Your monthly payment will increase 7.5% each year for the first 5 years. From the 6th year and onward, the payment becomes level at the maximum for the remainder of the loan term. In the next article, we’ll cover how the monthly installments are calculated, how the APR is calculated, special underwriting considerations, the veteran’s statement, and other requirements for GPMs in the VA loan program. We will finish covering GPMs in the next article.

Graduated Payment Mortgages (GPMs) Part 1

Deciphering the VA Lender’s Handbook Chapter 7 Part 14


We’re still powering through chapter 7 of the Handbook, and after covering joint loans, Energy Efficient Mortgages, supplemental loans, and adjustable-rate mortgages, we’re getting started with graduated payment mortgages (GPMs). There’s a fair amount of information in the Handbook about GPMs, presumably because they are commonly asked after and are truly a different beast from other types of mortgages. This is the first of several articles that will cover everything the Handbook has on GPMs.


So what on earth is a GPM? A GPM is a mortgage option with unique amortization features. Where the terms ARM and fixed-rate mortgage refer to the interest rate on a loan, terms including GPM and GEM (will be covered in future articles) refer to the amortization schedule on a loan. On a GPM, the basic idea is to start out the loan by making smaller payments, which are periodically increased over a period of time referred to as the “graduation period”, until they reach a maximum level which is carried through the rest of the loan. This graduated payment plan is very different from a standard amortization schedule. Compared to a standard amortization plan, the initial payments on a GPM are lower, then during the graduation period eventually get higher, and rest at a higher payment for the remainder of the loan after the graduation period.


A GPM is a unique beast because it involves what is called “negative amortization”. Negative amortization is when less is being paid off the loan than is being added to it by interest. In other words, the interest each month is adding more to the balance owed on the loan than you are paying off at the beginning. The unpaid interest gets added to the principal and is paid off as part of the higher monthly payments in the latter part of the loan. This is a distinct disadvantage of a GPM – you end up paying more in interest (sometimes a good deal more) in exchange for the lower monthly payments at the beginning.


So when should a GPM be used? Well, for a person intending to buy and “flip” a house, selling it just one or two years after purchasing it, a GPM allows them to take less out of their pocket to pay the mortgage each month and leave more money for the renovations they are doing, which allows them to sell the house faster, saving them in interest overall. One of the more common use cases is for a veteran whose income at the moment is not sufficient to cover a fully-amortizing monthly payment, but can reasonably expect their income to increase enough to cover them later on (perhaps the veteran is graduating from college in the next couple years). The VA specifically mentions that the GPM should not be used in these cases unless there is a reasonable expectation that the borrower’s income will increase as needed to cover the monthly payments.


There are some special rules about what a GPM can be used for. A GPM can only be used to purchase a single-family unit (no duplexes or quadplexes; too much risk), but can include an energy efficiency mortgage of up to $6,000 on top of it. A GPM can not be used to purchase a manufactured home – even if it has a permanent foundation. GPMs cannot be used to refinance a property, make alterations or repairs, and certainly not for improvements.


There is an inherent risk to a lender (and, therefore, the VA) when they approve a GPM. When the payments get higher, is the borrower going to be able to keep up with them? What if the borrower’s income does not get higher as planned? GPMs can be not only a headache for lenders, but potentially the cause of a substantial loss as well. For borrowers, however, it can be the difference between home-ownership and perpetual renting. If you think a GPM might be for you, ask around to different lenders to see if it’s an option. You may have a hard time finding a lender that offers GPMs, but on the other hand, you may not.


Adjustable Rate Mortgages (ARMs)

Deciphering the VA Lender’s Handbook Chapter 7 Part 13

The last two articles discussed in-depth about supplemental VA loans, how they work, what they can be used for, and how to get one. Chapter 7 of the VA lender’s handbook is dedicated to covering all of the different loan types that require special underwriting considerations in the VA loan program. There is a small section of this chapter that talks about the special considerations when processing a loan application for an ARM. This article will cover everything that the Handbook says about ARMs in this chapter.


Adjustable Rate MortgageAdjustable Rate Mortgages (ARMs) in the VA loan program are actually a very recent development. Only in 2012, as part of the Honoring America’s Veterans and Caring for Camp Lejeune Families Act, did the VA’s authority to guarantee ARMs and Hybrid ARMs become permanent. An ARM is an alternative to a fixed-rate mortgage. ARMs offer lower starting interest rates in exchange for the right to be annually adjusted to keep pace with wherever the market interest rates are at the time. For a traditional ARM, the annual adjustment begins after 1 year, but for Hybrid ARMs, there is an initial fixed-rate period between 3-10 years before the interest rate begins to adjust.


There are some differences in the way the interest rate is adjusted depending on whether you’re using a traditional ARM or a Hybrid ARM. For a traditional VA ARM, the annual interest rate adjustment is limited to one percentage point in either direction (e.g. a 4% interest rate cannot go higher than 5% or lower than 3% in a single year). As a further protection against the future, the rate cannot increase more than five percentage points over the life of the loan (e.g. a rate that starts at 4% can never become higher than 9%). Hybrid ARMs are a bit different.


For a hybrid ARM, the interest rate adjustments depend on how long the initial fixed-rate period is. If the initial fixed-rate period is less than 5 years, then the interest rate can only be adjusted a maximum of one percentage point in either direction for the initial adjustment, and can be adjusted by no more than two percentage points in either direction each year, with a cap of five percentage points over the life of the loan. If the fixed period is 5 years or longer, the initial adjustment, as well as subsequent annual adjustments, are limited to two percentage points, with a lifetime cap of six percentage points instead of five.


ARMs can be very advantageous, or they can end up being a worse deal than a fixed-rate. If interest rates go up during the life of your loan, a fixed-rate would have kept you at that lower rate, but if interest rates go down, then a fixed-rate would have to be refinanced (costing thousands of dollars in closing costs), in order to take advantage of the lower rates. As of the writing of this article, interest rates are still at near-historic lows, so really the only way interest rates can go is up. In a market like this, an ARM may not be the best option. Do not construe the above as investing advice or a professional consultation – consult with a VA-approved lender to make the best decision for you and your situation.
When an ARM is underwritten (and, therefore, approved), it is usually done so using an interest rate that is one percentage point higher than the starting rate. Why? Because over the course of a 30-year mortgage, it’s virtually guaranteed that the rate will get at least that high at some point. Since the interest rate dramatically affects your  monthly payment, especially at the beginning of the loan, the VA requires that due diligence is done in making sure that the borrower is qualified for the higher rates that may come about later in the loan. If a hybrid ARM is being underwritten, it can usually be underwritten at the starting interest rate because it becomes very difficult to predict what interest rates are going to do more than three years out. If you’re interested in applying for an ARM, get with a VA-approved lender.

Supplemental VA Loans Part 2

Deciphering the VA Lender’s Handbook Chapter 7 Part 12

This is the second of two articles that cover everything the VA Lender’s Handbook has to say about supplemental VA loans. In the first article, we covered the definition of a supplemental loan and what it can be used for. We also covered all of the requirements for using a supplemental loan, including maximum loan term and lien requirements. In this article, we’ll be continuing on and talking about when a supplemental loan will need to be submitted to the VA for prior approval, and the procedures for handling a supplemental VA loan depending on how much money the supplemental loan is to be made for. We’ll finish up by talking about some specific points concerning your VA loan entitlement and supplemental VA loans.

Quick and easy submittion process

There are some cases where a supplemental loan must be submitted by the lender to the VA for prior approval before the lender can close on it. If the supplemental loan is being made by a lender other than the one who is currently the holder of the main VA loan, if the supplemental loan is being made by a lender who does not have authority to close loans on an automatic basis, or if one of the obligors on the main loan is going to be released from liability on the loan. If your situation does not fit at least one of those three scenarios, you are probably safe to assume that you won’t have to wait for the VA to approve the loan before you can close with your lender.


There are differing procedures depending on how much the supplemental loan is to be made for. If the loan must be submitted for prior approval by the VA, these procedures must be followed before that. If the loan can be automatically closed, then the information gathered from these procedures are submitted to the VA when the loan is reported by the lender. Regardless of how much money the loan was for, the lender must submit a statement describing what is being done with the funds, as well as the amount still outstanding on the original loan as of closing on the supplemental loan. If the cost of the changes being made with the loan exceed $3,500, a new Notice of Value (NOV) and a compliance inspection are required.


If the loan is being made for less than $3,500, then the NOV and compliance inspection are not required, but a statement of reasonable value is submitted instead. The lender should take care of having that statement written, but you should be aware of the process and may need to provide information to the VA-designated appraiser that the lender nominates to write the statement. The statement will include details on the work to be done, how much the work will cost to get done (labor and materials combined), and a statement that the cost is not greater than the reasonable value of the work. Instead of conducting a compliance inspection on the home, the lender submits a certification with specific wording to the VA. The wording is as follows:


“The undersigned lender certifies to the Department of Veterans Affairs that the property as repaired, altered, or improved has been inspected by a qualified individual designated by the undersigned, and based on the inspection report, the undersigned has determined that the repairs, alterations, or improvements financed with the proceeds of the loan described in the attached VA Form 26-1820, appear to have been completed in substantial conformance with related contracts.”
One little-known aspect of the supplemental VA loan program is that borrowers can get one even if they’ve used up all of their VA loan entitlement on the original loan – as long as the two loans are going to be consolidated. If the supplemental loan is not going to be consolidated with the original loan, then the borrower must have sufficient remaining entitlement in order to qualify for the VA guaranty. This means that there is a good likelihood that you will be able to get a supplemental VA loan if your home is financed through the VA loan program.

Supplemental VA Loans Part 1

Deciphering the VA Lender’s Handbook Chapter 7 Part 11


Chapter 7 in the VA Lender’s Handbook is dedicated to going over all of the specialized loans in the VA loan program. Previously covered in articles on Chapter 7 are joint loans, construction loans, and Energy Efficient Mortgages (EEMs). In this article, we’ll be starting on supplemental loans. We’ll start by explaining what a supplemental loan is, then go in depth on the requirements on supplemental loans. This will be the first of two articles on supplemental loans. This type of loan is fairly simple and straightforward and, therefore, does not require too much documentation.

Requirements for Supplemental Loans

Simply put, a supplemental loan is a loan given to pay for an alteration, improvement, or repair of a residential property. For the VA loan program, a supplemental loan must secure an existing VA-guaranteed loan (the home must have been bought with a VA loan), and the veteran borrower must still own and occupy the home. It is also acceptable if the veteran will reoccupy the property once the alterations, repairs, or improvements are made if they are major. A supplemental loan can only be made for alterations, improvements, and repairs that substantially protect or improve “…the basic livability or utility of the property…” Supplemental loans are primarily restricted to maintaining, replacing, improving, or acquiring real property. For more detail on what that means, consult with your lender on what you’re hoping to do with a supplemental loan, and he or she will be able to tell you if your project qualifies.


Unfortunately, adding new features will often not satisfy the VA’s requirement. The Handbook specifically mentions barbecue pits and swimming pools as not acceptable. No more than 30% of the VA supplemental loan can not be used for things considered “non-fixtures” or “quasi-fixtures”. The examples the Handbook gives are refrigeration, cooking, washing, and heating equipment. Even the 30% must be related to or supplement the main alteration that the borrower is getting the loan for. A good example of this is getting a stainless steel kitchen appliance set to supplement a kitchen renovation.


Unlike with normal VA loans, a supplemental loan does not have to have the first lien on the home (in fact, it never really will). The lender has the flexibility to determine a proper lien for the loan being given. The Handbook lists the following suggestions for lenders to secure the supplemental loan:

  • through an open end provision of the instrument securing the existing loan,
  • through an amendment of the existing loan security instrument,
  • by taking a new lien to cover both the existing and the supplemental loans, or
  • by taking a separate lien immediately junior to the existing lien.


The lender will determine the most appropriate way to secure the supplemental loan for a given situation, but the above suggestions are likely scenarios. Supplemental loans can either be amortized or not amortized, and have different maximum loan terms depending on which they are. If the loan is amortized, the maximum loan term is 30 years, but if not, the maximum is 5 years.


The VA also has other requirements for a supplemental loan to be approved. It is required that the existing loan on the home is current in all its aspects – taxes, insurance, and principal/interest payments. The only exception to that rule is when the supplemental loan is going towards something that will improve the ability of the borrower to continue making payments (such as a borrower who has purchased a multi-unit property and cannot rent out another unit without an improvement).


Good news for you as the borrower is that getting a secondary loan is not permitted to affect your interest rate on your existing loan. This does not mean, however, that the interest rate on your supplemental loan will be the same as on your main loan; the supplemental loan may be written at a higher interest rate than the main one. While the interest rate on your main loan will be a consideration for the lender, there are many other factors for the lender to consider, including the increased level of risk on the supplemental loan. There are plenty of cases where the interest rate on the supplemental loan is lower than the main one; it all depends on the situation and context that the loan is being made in.


Energy Efficient Mortgages (EEMs) Part 3

Deciphering the VA Lender’s Handbook Chapter 7 Part 10


The last two articles have been about the Energy Efficient Mortgage that the VA offers as an add-on to most new purchase and refinance loans in the VA loan program. The first article covered basic information about the EEM that is foundational for understanding the rest of the details. The last article covered the amounts that an EEM can be made for and the different information required for approval at each level. In this article we’ll be briefly covering how an EEM affects the amount of entitlement is used on the loan, how the funding fee is calculated, and then we’ll go into larger detail about how the funds from an EEM can be paid out.


As a borrower, you should be aware that getting an EEM along with your VA loan will affect the amount of guaranty that your lender is eligible to receive in the event that you default on your loan. While this doesn’t affect you directly, it’s always best to know what’s going on on the other side of the desk. What is also good for you to know is how an EEM affects the amount of entitlement that you are using for your VA loan. Luckily, the answer is quite simple: it doesn’t. The amount of entitlement used on your VA loan stays the same even if you get an EEM. Consider the following example the Handbook provides:

Full Entitled Veteran

“If a veteran has full entitlement and applies for a loan of

$80,000, plus $6,000 in energy efficiency improvements, VA will guarantee

40 percent of the full loan amount of $86,000. Thus, the dollar amount of

the guaranty will be $34,400, even though the charge to the veteran’s

entitlement is only $32,000.”


Even though the addition of the EEM does not affect your entitlement, it does affect the amount you are charged for the VA funding fee. The amount of the EEM is added to the total loan amount to calculate the funding fee due at closing.


So, with those covered, we can move on to how the money from an EEM is paid out. In many cases, the improvements are made after the loan has been approved but before loan closing. If this is the case, usually the borrower initially pays out of his or her pocket and is reimbursed at closing. To be reimbursed through an EEM, the borrower needs to have done the improvements no more than 90 days before the closing date (they need to be fairly recent). If the improvements are not finished prior to closing, the lender can either establish an escrow or earmark an account with the funds and close the loan. You should be aware that a formal escrow is not required and that only the amount needed to complete the improvements can be withheld. Your lender will explain the particulars to you if you find yourself in this situation.


The VA has a loose requirement that the improvements be completed within 6 months of closing the loan. There are exceptions to the 6-month rule, but additional reporting must be done to the VA. Your lender will fill you in on this if you get in this situation. You will need to keep your lender notified of the progress of the improvements because he or she is required to notify the VA when the improvements are completed, and will also be instrumental in making sure the EEM funds are properly applied to the cost of improvements.
Also, your lender has the power to determine that the improvements are not going to be completed and apply the unused balance to pay off the principal in your loan. If your lender has not gotten any updates or notifications from you in a long time and is unable to confirm that the improvements are making progress, you may find yourself in a frustrating situation. Your lender will be a very important person to keep in the loop while these improvements are being done. Remember that an EEM can be added to almost any VA loan, including new purchase loans, cash-out refinances, and Interest Rate Reduction Refinance Loans (IRRRLs).

Energy Efficient Mortgages (EEMs) Part 2

Deciphering the VA Lender’s Handbook Chapter 7 Part 9


The last article got us started on learning about like the definition and purpose of EEMs, and the requirements for getting one. This article is going to build off of the last one and rely on the basic information previously presented. In this article, we’ll be going into depth on how the EEM works and all the ins and outs of the program. Since the EEM is a fairly common choice, we may take an additional article beyond this one to cover all of the information.


Many borrowers first hear about the EEM when they receive the Notice of Value (NOV) following the official VA appraisal of the property. The NOV has the following notice to the veteran:


“The buyer may wish to contact a qualified person/firm for a home energyEnergy Efficient Mortgages  basics

audit to identify needed energy efficiency improvements to the property. In

some localities, the utility company may perform this service. The

mortgage amount may be increased as a result of making energy efficiency improvements such as:

Solar or conventional heating/cooling systems,

water heaters, insulation, weather-stripping/caulking, and storm

windows/doors. Other energy-related improvements may also be



The VA strongly encourages all borrowers to look into energy-efficiency improvements to their home and even have a home energy audit conducted on their home. Having energy efficiency improvements made to your home can literally save you thousands of dollars in utility expenses. The VA has some requirements as to how much money can be spent on an EEM and under what circumstances. Up to $3,000 can be spent based on nothing but the documented costs of the improvements. The rationale here is that just about any improvements you can do that would cost $3,000 will save you at least $100 per year for the next 30 years. However, if you want to spend more than $3,000, it is required that the estimated monthly utility savings be compared to the increase in the monthly mortgage payment and be found to be equal or higher. The normal limit on an EEM is $6,000, though in special cases, approved by the VA, more can be used.


Your lender will treat your EEM differently depending on how much money the EEM is for. If the EEM is for $3,000 or less, they will not require anything beyond the basic information about the improvements as explained in the following article. For EEMs that are for more than $3,000 but less than $6,000, the lender will need to take whatever steps necessary to determine that the increase in your monthly mortgage payments due to the $6,000 is not larger than the monthly utilities cost savings. Usually, the lender can rely on information and estimates provided by utility companies or local or state agencies to make a determination.


In the event that a borrower has improvements exceeding $6,000, the lender will need to be thorough and meticulous in determining two things: that the cost savings of the improvements will be enough to at least offset (preferably exceed) the addition to the monthly mortgage payment due to the extra loan amount, and that the veteran’s income is sufficient to cover the higher loan payment. When you get beyond $6,000, it becomes a significant addition to the loan, and can even bump the loan out of the affordability range for the veteran borrower. The lender will need to get approval from the VA before clearing the higher amount.


In conjunction with the considerations the lender has different loan amounts, different documentation is required depending on the amount of the EEM. For improvements up to $3,000, the VA only needs to see evidence that the improvements will cost the amount that the borrower is taking. Getting your lender a copy of bids you’ve received for the work in question will usually suffice. For loans up to $6,000 and more than $3,000, you still need only supply the evidence of the cost of the improvements, and the lender gets whatever documentation is needed to compare the utility savings with the extra monthly payment. For improvements over $6,000, your lender will explain what is needed in your case.


Energy Efficient Mortgages (EEMs) Part 1

Deciphering the VA Lender’s Handbook Chapter 7 Part 8


EEMThe past two articles were dedicated to explaining VA construction loans in most of their aspects. While many VA-approved lenders do not offer construction loans, for the dedicated borrower insistent on getting one, there is usually a way. This article is going to get started on energy efficient mortgages (EEMs). We’ll be covering what an EEM is, what it can be used for, and the requirements for getting one. EEMs have been mentioned in many previous articles but have not been referred to by that name. I’ll explain why throughout the article.


An EEM is a loan that covers the cost of making energy efficiency improvements to a dwelling. A borrower does not make an EEM by itself; rather, it is made as an add-on to a VA loan for a new purchase or a VA refinance. The EEM is considered part of the main loan and is allowable on most new purchase loans, interest rate reduction refinances loans, and cash-out refinances. There are some restrictions on what the EEM can be used for, but the Handbook offers a good list of things that can be approved for an EEM. Acceptable uses are not limited by the things on this list; if you have an improvement to your home that you’d like to do, but it does not appear on this list, consult with a VA-approved lender. Here is the list:


  • solar heating systems, including solar systems for heating water for domestic use,
  • solar heating and cooling systems,
  • caulking and weather-stripping,
  • furnace efficiency modifications limited to replacement burners, boilers, or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system, and electrical or mechanical furnace ignition systems which replace standing gas pilot lights,
  • clock thermostats,
  • new or additional ceiling, attic, wall, and floor insulation,
  • water heater insulation,
  • storm windows and/or doors, including thermal windows and/or doors,
  • heat pumps, and
  • vapor barriers.


As you can see, nearly any improvement, big or small, to your house that will save you money on your utilities can qualify for an EEM. Feel free to ask a VA-approved lender if you have an improvement you’d like to make and are hoping it can be covered with an EEM.


As mentioned before, an EEM is considered part of the main loan, and as such is secured by a first lien on the home. For you first-time home buyers out there, a lien is essentially the right to use your home as collateral to secure the loan you got to purchase the property. You legally own the home, but the holder of your lien can take the home from you (foreclosure) if you default on your loan. There may be more than one lien on your home, depending on if you have a second mortgage or another loan in which they took a lien on your home. If there is more than one lien on your home, they are referred to as “first”, “second” and so on in the order of the claim they have on the home in the event that you default on your obligations to more than one of the lien holders. The VA loan program requires that all VA loans be secured by a first lien on the property, and that includes the funds that are provided as an EEM.


Another thing to keep in mind is that if the borrower is planning on performing the labor by him or herself, only the amount necessary to pay for materials will be loaned. The limit on EEMs is $6,000, which is usually enough for one or two large improvements, or up to dozens of small ones. If you have a lot of improvements you’d like done to the home, and you’re handy enough to do many of them yourself, you can get a lot of value out of that $6k. The lender is responsible for determining that the proposed improvements are reasonable and viable for both the property and the requested loan amount.


Construction/Permanent VA Home Loans Part 2

Deciphering the VA Lender’s Handbook Chapter 7 Part 7


In the previous article we went over some important information about construction loans, including amortization, the fees the borrower is allowed to pay, and the difficulty a borrower might have in finding a lender willing to offer a VA construction loan. In this article, we’ll be wrapping up the rest of the details about construction loans. We’ll be covering interest rate considerations in a construction loan, the VA funding fee in regards to construction loans, when to expect the LGC, and what happens when loan proceeds are not fully disbursed by the end of construction.


Though you may not think about it immediately, there are special considerations in regards to the interest rate on construction loans due to the period of construction in between loan closing and when payments on the loan start. The first thing to remember is that the permanent interest rate is established at closing. However, a lender may offer the borrower a “ceiling-floor” option that allows the veteran to float the interest rate throughout the construction period. The VA requires that a maximum interest rate be set by the lender and agreed to by the borrower and that the borrower can lock-in at a lower rate based on market fluctuations. Obviously, the set maximum rate must not bump the mortgage above what the borrower is qualified for.


In light of the special considerations for interest rates on construction loans, and also the difference in timing of the first mortgage payment on a construction loan, one might assume that the VA funding fee would also be due at a different time than normal. In fact, the funding fee must be paid to the VA within 15 days of loan closing. Paying the funding fee is not tied in any way to the beginning or completion of construction. Though the funding fee must be paid within 15 days of closing, the loan need not be reported to the VA until within 60 days of when the final compliance inspection report comes back. Since the lender takes care of loan reporting, you as the borrower shouldn’t need to worry too much about that.


On a normal VA loan, the Loan Guaranty Certificate (LGC) is issued at closing. On a construction loan, the process is a bit different. Even though the loan is considered guaranteed at closing, the LGC will not actually be issued until a clear final compliance inspection report has been received by the VA. The LGC is typically issued before the loan is reported to the VA. As a borrower, you should have a copy of the LGC for your loan. Likely you will never need it, but better safe than sorry.Understanding VA Construction Loans


The reason most VA-approved lenders are currently not offering construction loans is because they carry a fairly high risk with them. Especially in today’s market, the possibility that construction may have to be halted and not fully completed is high enough that most lenders have decided not to risk it. Since the VA cannot compel lenders to offer certain types of loans, this means that getting a construction loan may be very difficult for VA-eligible borrowers. In the event that you are able to get a construction loan, but the worst should happen and you are not able to complete the home, the lender is in a position to try and pick up the pieces.


In the event that construction on the home is not completed and the proceeds from the loan have not been fully paid out, the lender must calculate the amount of guaranty that they will be able to receive from the VA. Since this is directly related to the borrower’s entitlement amount available, this is good information for you to know. The lender takes the amount of the loan proceeds that has been disbursed, adds the value of any other payments made to the builder on behalf of the veteran, then takes the lesser of that amount or 80% of the value of the portion of construction actually completed and adds any amounts paid for the purchase of the land.
If you are interested in getting a VA construction loan, start looking for VA-approved lenders in your area and see if any of them offer construction loans.

Construction/Permanent VA Home Loans Part 1

Deciphering the VA Lender’s Handbook Chapter 7 Part 6


The previous articles on Chapter 7 of the VA Lender’s Handbook covered joint VA loans in entirety. Since joint VA loans are not only fairly common but also a good deal different from normal VA loans, there is a great deal to discuss and clarify about them. This article will begin to cover construction loans through the VA loan program. As of the writing of this article, there are very few VA-approved lenders that are willing to offer construction loans even though the VA permits them. As the market changes, this could change as well, and if you’re looking at getting a construction loan, this article will have a great deal of valuable information.


Construction and Permanent VA Home LoansThe VA will guarantee a construction loan just as they will guarantee the purchase or refinance of an existing house. The construction loan must be closed before construction begins, and immediately covers the cost of the land, with the remaining balance (for the actual building of the house) put into escrow. The money in escrow is paid out as needed throughout the construction process. As the borrower, you will be required to provide written approval to the lender before the lender can draw money from the escrow to pay the builder. Loans to purchase a residence that the borrower built from his or her own resources are not considered construction loans.


Amortization on a construction loan can be tricky. The veteran is not permitted to begin making payments on the loan until construction is complete on the house, but the full term from the date of closing is still not allowed to be longer than 30 years and 32 days. Therefore, the loan must be amortized in a way to achieve full repayment within the remaining term. In other words, a 30-year mortgage that takes 1 year to complete construction on the home will need to be amortized to be fully paid off within 29 years. The lender can do this in one of two ways: a balloon payment or an adjusted amortization schedule. A balloon payment is where the lender requires a significantly larger final payment than has been paid each month throughout the rest of the term. In other words, the borrower makes up the amount that was not paid during the construction period at the end of the loan.


The other option is for the lender to adjust the amortization schedule so that the loan fully amortizes in the amount of time remaining instead of the full term. In the above example, the lender would recalculate the monthly payments for the loan to be paid off evenly over 29 years instead of 30. In essence, this is turning a 30-year mortgage into a 29-year mortgage. For most borrowers, this is preferable to a balloon payment at the end of the mortgage that could be up to 5% of the original loan amount.


With construction loans, one of the concerns is determining who pays what. First, we must establish the parties involved in a construction loan. There are the borrower, the lender, and the builder (the VA is also involved, of course, but they don’t pay for anything). The builder is required to pay the interest payments during the construction period, and all the fees that a builder would normally pay when they obtain an interim construction loan, including (but not limited to) inspection fees, commitment fees, title update fees, and hazard insurance during construction. The builder is not allowed to bill the lender or the borrower or these items; they are considered a cost of doing business for the builder.
Fees that are payable by the borrower and lender are not different from any other type of VA loans, and will be covered more in depth in Chapter 8 of the Handbook. If you’re looking for more specific information about your situation, and what fees you can be required to pay, it’s best to speak with a VA-approved lender and give them all of the relevant details. In the following article, we’ll discuss construction loan interest rates, funding fees, the LGC, and what is done with remaining funds in escrow after construction is complete.

Joint VA Loans Answers and Details

Deciphering the VA Lender’s Handbook Chapter 7 Part 5


In the previous articles, we’ve covered a great deal of information about joint VA loans, and if you don’t find the information you’re looking for in this article, you’ll certainly find it in one of those. This article will cover four different topics, all of them pertinent to you as the borrower. We’ll be covering the Certificate of Commitment in relation to joint VA loans, the Loan Guaranty Certificate as it relates to joint loans, considerations that a lender will have due to the Equal Credit Opportunity Act, and calculating the VA funding fee in the case of a joint VA loan. Since joint loans can either be veteran/nonveteran or two veterans, we’ll cover each of the two situations for each topic.VA Loans Questions and Answers


The first topic to cover is the Certificate of Commitment (COC). The VA issues a COC to the lender as evidence that the loan is under guaranty by the VA. In the event the lender needs to file a claim, the COC is their bread and butter. For joint loans that involve at least one nonveteran, the loan amount shown on the COC is just the veteran’s portion of the loan, and the percent guaranty shown is based on the ratio of the amount of entitlement the veteran has available to the veteran’s portion of the loan. It’s important to remember that the COC and the guaranty only apply to the veteran’s portion of the loan, so don’t expect the guaranty to extend over the portion of the loan covered by a non-VA-eligible borrower. You should also note that in the event of foreclosure, the holder of the loan sustains the loss of the portion of the loan attributable to the nonveteran.


The Loan Guaranty Certificate (LGC) is much like the COC. The “Amount of Loan” shown on the LGC reflects only the veteran’s portion of the loan. If more than one veteran is using their entitlement on the loan, however, the loan amount will reflect the total of all the veterans’ portions of the loan. If the LGC is being issued on a veteran/nonveteran joint loan, it will contain a statement that the guaranty amount is limited to the veterans’ portion of the loan. The LGC and COC both outline the VA’s obligation to the loan holder in the event of a default, nothing else. As the lender is evaluating whether to approve the loan, they will consider whether the loan is marketable to investors with only a partial guaranty.


For those familiar with the Equal Credit Opportunity Act, they may see a potential violation when a lender refuses to accept a loan application for a veteran/nonveteran joint loan (a couple living together but not married), but lenders can refuse an application in this situation without violating ECOA. As the VA loan program is a special purpose credit program, an exemption has been made that protects lenders from making loans that they cannot sell to investors.


Joint VA loans also present a particular difficulty in regards to the VA funding fee. Whether there are multiple veterans or at least one nonveteran involved in the joint loan, the lender must make some calculations in order to determine how much the funding fee will be for the loan. The lender takes the percentage funding fee that is to be charged (how the lender calculates that percentage has been addressed in a previous article), and applies it to the amount of the loan allocable to the VA-eligible borrower(s). Since the funding fee percentage can vary depending on what type of veteran (reserve/guard, full-time), and whether a veteran has used their VA loan entitlement before, the amount is calculated one VA-eligible borrower at a time. Whose pockets the total funding fee comes out of is not of great concern to the VA or the lender.
The funding fee is not assessed on any portion of the loan allocable to a nonveteran or a veteran not using his or her entitlement. As the percentage of the funding fee can also change based on the amount of downpayment made, it’s commonly wondered if the veteran who fronted the cash for the downpayment will get a lower percentage while the other veterans’ percentages are unaffected. This is not the case. Regardless of which borrowers contributed to the down payment, it is calculated as an overall percentage of the total loan. In other words, if a downpayment of $5,000 was made on a $100,000 home, the remaining $95,000 is what would be distributed equally among all the borrowers.

How Guaranty and Entitlement use are Calculated on two veteran Joint Loans

Deciphering the VA Lender’s Handbook Chapter 7 Part 4

In the last article, we went into depth on how guaranty and entitlement are calculated on a veteran/nonveteran joint loan. A veteran/nonveteran situation presents some unique difficulties in calculating guaranty because the nonveteran is not entitled to any guaranty, so only a portion of the loan is eligible for the VA guarantee. In fact, it is technically a portion of a portion since the VA only guarantees a certain percentage of the portion that the VA-eligible borrower is accountable for. Calculating the guaranty on a two veteran joint loan is far simpler, and is, in fact, just an extension of how the guaranty on a standard VA loan is calculated. As a reminder, a two veteran joint loan is defined as any joint loan that has two or more veterans signed on it and no nonveterans. If a nonveteran is signing on the loan, the guaranty is calculated according to the previous article.


In a two veteran joint loan, the potential maximum guaranty is calculated based off of the total loan amount (since all signers on the loan are VA-eligible. The Handbook provides a short table that shows the steps that a lender is to take when calculating the guaranty. The steps are fairly simple and straightforward. Below is the table:3 Steps to calculating Guaranty

Step Action
1 Calculate the maximum potential guaranty on the total loan amount.
Use the maximum guaranty table in chapter 3.
2 VA will guarantee the lesser of:

  • the maximum potential guaranty amount arrived at in Step 1, or
  • the combined available entitlement of all veteran-borrowers.

If the loan amount is greater than $144,000, additional entitlement may be added to each veteran’s entitlement.
If possible, VA will use this additional entitlement to arrive at equal entitlement charges for the veterans involved

3 VA will make charges to the veterans’ available entitlement which total the maximum guaranty arrived at in Step 1, or the total of their available entitlement if less than the maximum potential guaranty.
VA will divide the entitlement charges equally between the veterans if possible, or, if only unequal entitlement is available, unequal charges may be made with the veteran’s written agreement.
Exception: VA will make the entitlement charge for husband and wife veterans according to their preference.


As you can read in step 2, if the borrowers do not have enough entitlement to cover the maximum potential guaranty on the loan amount, the VA will only guaranty up to the amount of combined entitlement that the borrowers have. For loans greater than 144,000, additional entitlement may be added to allow the veterans to qualify for the loan. As with veteran/nonveteran joint loans, the Handbook provides a table of examples to show how the guaranty might come out in different loan scenarios. The table is below:

Veterans and Available Entitlement Total Loan Amount Maximum Potential Guaranty Total Entitlement Charge Per Vet
Vet 1 $36,000Vet 2 $36,000 $100,000 $36,000 $18,000$18,000
Vet 1 $23,500Vet 2 $ 8,500 $ 80,000 $32,000 $23,500$ 8,500
Vet 1 $36,000Vet 2 $36,000 $300,000 $75,000 $37,500$37,500
Vet 1 $15,000Vet 2 $20,000 $203,000 $50,750 $25,375$25,375
Vet 1 $0Vet 2 $0Vet 3 $ 6,500 $300,000 $75,000 $25,000$25,000$25,000

As you can see from the examples, having more than one VA-eligible borrower use their entitlement on a loan does not necessarily increase the amount of guaranty on the loan, but it will affect the amount of entitlement that is used from each borrower. It’s smart to plan far ahead in advance when you are planning on doing a joint VA loan with other VA-eligible borrowers. That way, you can make sure you don’t get an unpleasant surprise when the terms you are offered are not nearly as favorable as you were hoping for. By keeping up-to-date on current interest rates, how much guaranty you would be eligible for, and any changes to the VA loan program, you can mitigate the risk of trying for a loan that you will not get approved for.

How Guaranty and Entitlement use are Calculated on Veteran/Nonveteran Joint Loans

Deciphering the VA Lender’s Handbook Chapter 7 Part 3


Joint VA loans are among some of the most complicated loans to underwrite in the VA loan program. The complications largely arise from the fact that only VA-eligible veterans are able entitled to a certain amount of VA guaranty (obviously). In a joint VA loan, one or more of the borrowers may not be a VA-eligible borrower; this makes for some extra steps in the underwriting process. In the last article, we covered some common questions about the VA loan program including how many units the property is permitted to have, which joint VA loans require prior approval and some special underwriting considerations for joint VA loans. In this article, we’re going to be going in depth about how guaranty and entitlement use is calculated on a veteran/nonveteran joint loan.

Simplifying Joint VA Loans

The first thing to remember is that the VA guaranty is limited to the portion of the loan that the veteran is responsible for. There is no getting around this – only VA-eligible borrowers can take advantage of the VA guaranty. The lender is responsible for making sure that its investor or a secondary market will be satisfied with the limited guaranty. The VA makes no promises that a joint VA loan will be marketable to investors, and this can cause some lenders to determine not to approve the loan even if it satisfies the VA’s requirements. The Handbook provides a handy step-by-step table of how the lender calculates the amount of guaranty on the loan. Below is the table:

Step Action
1 Divide the total loan amount by the number of borrowers.
2 Multiply the result by the number of veteran borrowers who will be using entitlement on the loan.
There is usually only one veteran borrower, in which case the result of this step is the same as the result of step 1.
3 Calculate the maximum potential guaranty of the portion of the loan arrived at in Step 2 (as if that portion was the total loan)
Use the maximum guaranty table in section 4 of chapter 3 of this handbook.
4 VA will guarantee the lesser of:

  • the maximum potential guaranty amount arrived at in Step 3, or
  • the combined available entitlement of all veteran-borrowers
5 VA makes a charge to the veteran borrowers available entitlement in the amount of the guaranty.
If more than one veteran is involved, VA divides the entitlement charge equally between them if possible. If only unequal entitlement is available, unequal charges may be made with the written agreement of the veterans.


So the process is actually fairly straightforward; the lender determines how much of the loan the veteran is accountable for, determines how much of that amount the VA will guarantee, and alerts the VA of such. To further clarify the process, the VA has also provided a table of examples in the Handbook to show how the calculations come together. Below is the table:

Borrowers and Available Entitlement Total Loan Amount Vet’s Portion Maximum Potential Guaranty on Vet’s Portion Entitlement Charge————–


Vet $36,000Nonvet  $0 $100,000 $50,000 $22,500 $22,500
Vet $36,000Nonvet $0 $290,000 $145,000 $36,250 $36,250
Vet $27,500Vet $36,000

Nonvet $0

$108,000 Total for both vets $72,000 Total for both vets $28,800 $14,400$14,400


Vet $25,000Vet $11,000 $201,000 Total for both vets $134,000 $36,000 $25,000$11,000


The last example presented would require written agreement from both veterans that unequal charges would be made to their entitlement. Using the two tables above you should be able to fairly accurately estimate how much of your loan will be guaranteed if you are intending to open a joint VA loan with a nonveteran. In the next article, we’ll be discussing how guaranty is calculated on a two veteran joint loan. While there are similarities, there are enough differences to discuss each separately. If you’re wondering how your guaranty will be calculated if you’re working on a joint VA loan with a fellow VA-eligible borrower, that is the article you’ll want to check out.

Joint VA Loans Part 2

Deciphering the VA Lender’s Handbook Chapter 7 Part 2


In the last article, we began talking about joint VA loans. Joint loans are considered a special type of loan with special underwriting guidelines and other considerations and Joint VA Loanslimitations imposed by the VA. The last article talked in depth about the different terms you’ll hear relating to joint VA loans, as well as the occupancy requirement as it relates to the joint VA loan program. In this article we’ll be answering a few common questions about joint VA loans including how many units the property being purchased can have, which joint loans require prior approval from the VA before the lender can close, and special considerations a lender will have when underwriting a joint VA loan.


In a normal (non-joint) VA loan, the property being financed can have no more than four total residential units (one of which must be occupied by the veteran) and one business unit. The rule for joint VA loans is similar but different enough to take note; if the property is going to be owned by two or more eligible veterans, then the property can have four residential units, one business unit, plus a unit for each veteran participating in the purchase. In other words, if two veterans use their entitlement to purchase a property, the property could have up to six residential units and one commercial unit. The rule is the same for a veteran/nonveteran joint loan – an additional residential unit on top of the normal four for each veteran using his or her entitlement on the loan is permitted. If the unit being applied for has more than the appropriate number of residential or commercial units, it is not eligible for the VA loan program.


Some joint VA loans require prior approval, and some don’t. As a borrower, it’s smart to be prepared for your VA loan by knowing in advance if you’ll need to wait for the VA’s prior approval before your lender can close on your loan. Any joint loan that the veteran holds title to the property along with any person other than the veteran’s spouse will need to be submitted to the VA for prior approval. In other words, going in with an old military buddy on a small apartment building to make some extra cash will need to be approved. On a joint VA loan between a veteran and his or her spouse (to be considered joint in this case, the spouse must also be a veteran and must also be using his or her entitlement on the loan), the loan can be automatically approved without first submitting to the VA.


There are some special underwriting considerations that your lender will need to make while underwriting your joint VA loan. The considerations depend, however, on which type of joint loan you are applying for. On a two veteran joint loan, the lender must combine the income, assets, and credit of all of the parties to be signing on the loan. In the case of income and assets, the strength of the income or assets of one borrower can compensate for the weakness of income or assets of another borrower. As long as the total income and assets are sufficient for the loan, approval should be possible. This is good, but it is important to remember that this does not carry over to the credit of each borrower; outstanding credit of one veteran borrower will not make up for poor credit of one of the other borrowers. All of the borrowers to be signing on the loan must have satisfactory credit.


There are some different considerations that a lender must make when underwriting a veteran/nonveteran joint loan. When outlining these considerations, the VA is really only concerned with the veteran because only the portion of the loan allocable to the veteran is being guaranteed. So, without regards to the nonveteran borrower(s), the underwriter must verify that the veteran’s credit is satisfactory and his or her income is sufficient to repay the portion of the loan allocable to him or her. In some cases, the combined income of the borrowers, both veteran and nonveteran, can be considered when evaluating the ability to repay the loan, but this only works one way – the veteran’s income strength can make up for the nonveteran, but the nonveteran’s strength does not make up for the veteran’s weakness.


Joint VA Loans Part 1

Deciphering the VA Lender’s Handbook Chapter 7 Part 1


Chapter 6 of the VA Lender’s Handbook was dedicated to explaining how the different types of refinances available in the VA loan program work. The Interest Rate Reduction Refinance Loan (IRRRL) was covered in great depth, as was the cash-out refinance. Chapter 7 is dedicated to explaining different loan types and scenarios that will require special considerations in processing and underwriting. In this article, we’ll be specifically talking about joint VA loans. We’ll cover what is considered a joint loan, the terminology you’ll hear when talking about joint loans, and the occupancy requirement for joint VA loans.


First, a joint VA loan typically refers to a loan for which a veteran and another person are liable, and the veteran and the other person own whatever is securing the loan. A loan can be made to the following parties: a veteran and one or more nonveterans that are not the spouse of the veteran, a veteran and one or more other non-spouse veterans that will not be using their entitlement, a veteran and his or her spouse who is also a veteran, and both will use their entitlement, and lastly, a veteran and one or more other non-spouse veterans who will also be using their entitlement. In other words, if a veteran is co-signing on a VA loan with anyone other than a non-veteran spouse, it is considered a joint VA loan. For loans being made to a veteran and his or her spouse, it is not considered a joint loan if the spouse is either not a veteran, or is a veteran but will not be using his or her entitlement on the loan.


Joint VA LoanA borrower may be in a situation where he or she is engaged and is intending to marry before the closing of the loan. In this case, the loan will usually be made as a loan to a veteran and spouse instead of a joint loan, but will be conditional upon their marriage. Should the marriage be postponed, the loan will likely either need to be processed as a joint loan or also postponed. Now that we know what is considered a joint VA loan and what is not, we’ll cover a few terms that you will encounter when applying for a joint VA loan.


Joint VA loans are separated into two different types. There are “veteran/nonveteran joint loans” and “two veteran joint loans”. While the names sound pretty self-explanatory, and indeed they mostly are, there are specific things covered under each that are good to outline. A veteran/nonveteran joint loan typically means a loan with one veteran and nonveteran that is not a spouse. However, this term is also used to cover any joint loan in which there is at least one veteran using his or her entitlement and at least one other person on the loan not using any VA entitlement. This other person can be a veteran or nonveteran, but cannot be a spouse of the veteran using his or her entitlement on the loan. A loan where three veterans are using entitlement and one nonveteran is also on the loan would be considered a veteran/nonveteran joint loan, as well as two veterans but only one of them using their entitlement.


A two veteran joint loan typically means two veterans that are not married to each other and are both using their entitlement. However, this can also mean a loan where the two spouses are both veterans and are both using their entitlement, and multiple veterans who are all using their entitlement. The principle here is that the term “two veterans joint loan” is used to represent any loan involving only veterans who will be using their entitlement. If all the parties are veterans but one or more is not using his or her entitlement on the loan, it is not considered a two veteran joint loan, but a veteran/nonveteran joint loan. If you’re unsure which one your situation would be considered, consult your lender.
The occupancy requirement on a VA loan is quite simple and is just an extension of the occupancy requirement on a normal VA loan. Any person that is using his or her entitlement on the joint loan must certify their intent to personally occupy the property as their home. A nonveteran on a joint loan does not need to certify their intent to occupy.

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