Handbook Sparknotes Chapter 9

Legal Instruments & Escrows – VA Lender’s Handbook Chapter 9 Summary

 

Chapter 9 of the Handbook covers a lot of important information. It’s all about legal instrumentsChapter Nine VA Lenders Handbook that are acceptable to use on the loan, limitations on the title, land sale contracts, encumbrances, liens, escrows, insurance, and taxes. There’s a lot of stuff in there, and we’re only going to cover the portions that are

 

Title Limitations

This is the first thing we’ll talk about. The VA has some restrictions and requirements when it comes to the title of the home that is being purchased. The VA does not require either the borrower or the lender to obtain title insurance but does allow lenders to require it if they wish. For the most part, the title is not allowed to come with any restrictions on the purchase or resale of the property. There are only two exceptions that fall under specific government regulations. If the title to your home falls under one of these exceptions, the lender is required to obtain VA approval and fully inform you and get your consent on the restrictions when you are applying for the loan. There will never be a situation where your title is under this restriction and you don’t know about it.

 

Other Loans Secured by the Property

This can happen in two ways: secondary borrowing, or the purchase of a property with encumbrances. The VA does not prohibit secondary borrowing but does have some requirements in order for it to be approved. Secondary borrowing is acceptable as long as the veteran is not placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA, and their list of requirements are met. The notable requirements are that the VA loan must maintain the first lien on the home, the new loan must be documented properly, no cash back can be given to the borrower, and a grace period must be in place. For the most part, any properties with existing liens on it must be paid off before the VA loan can take place. Otherwise, they must be subordinated to it.

 

TUnderstanding Taxes on your VA Loanaxes and Insurance

The VA does require that the borrower obtain hazard insurance (also known as homeowners’ insurance). This insurance needs to be maintained throughout the life of the loan, and whatever policy coverage that is generally appropriate in the locality is approved by the VA. The payment of this insurance is usually done through escrow. The VA also requires that the borrower purchase flood insurance if the property is located in a special flood hazard area. In case of an HOA or condo project maintaining their own insurance policy for all of the homes in the association, the lender must look at the policy to make sure it satisfies the VA’s minimum coverage requirements. If it does not, additional coverage must be purchased. Taxes and insurance are usually paid through escrow, but the VA does not require it be done this way. If you are paying into an escrow, it is the loan holder’s responsibility to make sure that these are paid on time.

 

The Handbook also talks about Homebuyer Assistance Programs, which can help veterans with lower income purchase homes. These programs (HAPs) are usually offered by the state, county, or municipal governments, but can also be offered by private entities. Most HAPs are given blanket approval by the VA, but they are only allowed to do so much. For example, the borrower must still meet credit standards, the property must meet the VA’s MPRs, and the borrower must acknowledge that they understand if the HAP imposes a minimum amount of time they must occupy the property. If you want more detail on these programs, you can check out our articles on Chapter 9 or look at the last section of Chapter 9 in the Handbook. Feel free to reach out to us with any questions via our website or give us a call. Our loan officers are happy to help answer any of your questions.

 

Getting a Proposed-Construction Sales Contract Approved

 

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.

VA Home Construction Loan

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

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. Omission of a description sufficient to identify accurately the property sold.
  6. 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.
  7. 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.
  8. 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.

 

Liens Covering Community-Type Services and Facilities

 

Deciphering the VA Lender’s Handbook Chapter 9 Part 5

 

The great majority of the time, the VA loan on a property must have the first lien on the home, with any other liens subordinate to the VA loan. The only things that supersede the VA loan lien on the home are taxes, special assessments, and ground rents (all of which are government functions). The only cases where the VA will approve a private entity having a lien superior to the VA’s own are when such a lien is legally or practically necessary, and when the lien doesn’t result in a prejudice to veterans or to the government. In other words, the lien must either be required by law or living conditions, and must be present on the home irrespective of whether the home is financed with a VA loan. Important note: what we’re talking about in this article is different from liens held by mandatory membership home associations in planned unit developments. That will be covered in a future article.

VA Community Loans

In cases where a private entity requires a first lien on the home, it becomes primarily the lender’s responsibility (with the borrower’s help), to show the following:

  • it is not legal or practical to subordinate the superior lien to the VA  mortgage
  • there is a viable rationale for not subordinating the superior lien
  • the superior lien will not prejudice veterans or the Government, and
  • if periodic charges or assessments are involved, the amounts are reasonable and limits on the amounts have been established.

 

In no cases where a private entity is requiring to have the first lien on the home can the lien be recorded without prior approval from the VA. What this means for you as the borrower is that you can expect a lien conflict like this to cause your VA loan to take longer to be approved. Chances are, though, at this point, you’re still not 100% clear on what cases a private entity might require a first lien on the home. That is exactly why the VA Lender’s Handbook provides a list of several common examples to paint the picture a little bit more clearly. Here is the list from the Handbook that details the most common scenarios that require a first lien on the home superior to that of the VA loan:

 

  • Liens for taxes, assessments, and ground rents.
  • Liens by private entities to secure assessments or charges for municipal-type services and facilities which:
    • are clearly governmental in nature
    • a municipality could support out of public tax revenue if it provided the service, but
    • the municipality does not provide them.
  • Liens to implement or augment a service or facility if the government’s provision of such service or facility is inadequate.
  • Liens for services or facilities in locations where the services or facilities are adequately supplied by local government generally will not be approved by VA.
  • Liens created by recorded covenants in favor of private entities to secure the homeowner’s share of the costs of the management, operation, maintenance, services or programs for the benefit of a development.
  • Liens (on existing properties) previously retained by trustees, improvement associations or other nongovernmental entities for community-type services and facilities in a given area or subdivision, such as maintenance of streets, parkways, playgrounds, water systems, sewage systems, police and fire protection, or street lighting.

 

Essentially, the only scenarios where a private entity might have a superior lien on the home is when a utility service that is normally provided by a government body is only available from a private company. There are other situations detailed in the examples above, but the best bet is to consult with your lender if you think you may have a situation where there will be a superior lien on the home. In most cases this lien issue doesn’t come up and all is well, but there are occasional circumstances that cause problems, and it’s a problem you want to be aware of and have resolved early on so it doesn’t cause a lot more grief later on in the process. Your lender should be aware of what the VA needs to see in order to make a decision on whether the lien can be approved, and any help he or she needs from you will be made clear.

 

VA Loan Secondary Borrowing

 

Deciphering the VA Lender’s Handbook Chapter 9 Part 5

 

Chances are, if you are reading this article, you already know what secondary borrowing is. However, you may also be a veteran looking into using your VA loan benefits and doing your best to learn everything you can about it before you do. Either way, you’re in the right place. Coincidentally, also either way, it’s good to define exactly what we mean by secondary borrowing since the definition varies slightly depending on who you’re talking to. In the VA Lender’s Handbook, and consequently in this article, when we say ‘secondary borrowing’, we’re referring to a veteran that obtains “…a second mortgage simultaneously with a VA-guaranteed first mortgage, both secured by the same property.” You may have had the same knee-jerk reaction I did when I first read that: “why would anyone want to do that?”

Questioning a Second Mortgage

To be truthful, in the case of the VA loan program, there aren’t a whole lot of reasons why secondary borrowing makes sense. The Handbook specifically mentions two purposes that a borrower could get a second mortgage at the same time as the first: to pay closing costs on the first or to make a downpayment on the first mortgage in order to meet secondary market requirements imposed by the lender. Both of those are legitimate reasons, but beyond those two, there really aren’t very many reasons to justify secondary borrowing – especially when the first loan is a VA loan. The VA’s official policy is that secondary borrowing is allowed as long as the veteran isn’t put in a “substantially worse position” than if the entire loan amount was covered with a VA loan, and the requirements detailed in the table below are met.

 

 

The second mortgage must meet the following requirements, according to the VA Lender’s Handbook:

Factor Requirement
Documentation The lender must submit documentation disclosing the source, amount, and repayment terms of the second mortgage and agreement to such terms by the veteran and any co-obligors.
Lien Position The second mortgage must be subordinated to the VA-guaranteed loan, that is, the second mortgage must be in a junior lien position relative to the VA loan.
Allowable Purposes Proceeds of the second mortgage may be used for a variety of purposes, including but not limited to:

  • closing costs, or
  • a downpayment to meet secondary market requirements of the lender.

But may not be used to cover any portion of a downpayment required by VA to cover the excess of the purchase price over VA’s reasonable value.

Cash back There can be no cash back to the veteran from the VA first mortgage or a second mortgage obtained simultaneously.
Underwriting The veteran must qualify for the second mortgage which is underwritten as an additional recurring monthly obligation.
Interest Rate The rate on the second mortgage may exceed the rate on the VA-guaranteed first, however, it may not exceed industry standards for second mortgages.
Assumability The second mortgage should not restrict the veteran’s ability to sell the property any more than the VA first mortgage. That is, it should be assumable by creditworthy purchasers.
Grace Period There should be a reasonable grace period before:

  • a late charge comes due, or
  • commencement of foreclosure proceedings in the event of default.

 

Many second mortgages come with unusual terms, and can be offered by government agencies, non-profit organizations, private individuals, a builder, or the seller of the property. If the person or entity offering you a second mortgage has terms that don’t address the above requirements, your VA lender will need to consult with the VA and possibly work with the second lender to make sure that the terms on the second mortgage comply with these requirements. There are some cases where the VA might make an exception to these rules, so if you’re planning on secondary borrowing but the entity you’re going through doesn’t meet one of these requirements, it may still be worth checking with your VA lender to see if it might be possible to work out.

 

Secondary borrowing can be appealing on some levels, but remember that borrowing at all leaves you with less money than paying upfront; borrowing can make an impossible purchase possible, but it never makes an expensive purchase less expensive.

 

Land Sales, Options, and Properties with Encumbrances

 

Deciphering the VA Lender’s Handbook Chapter 9 Part 4

 

Chapter 9 of the VA Lender’s Handbook is all about legal instruments, liens, escrows, and related issues. In fact, that’s the name of the chapter. In this article, we’re going to talk about how the VA works with land sale contracts and options contracts, as well as purchasing a property with Encumbrance(s). An encumbrance is an existing mortgage, charge, or lien on the property that will still be in place after the borrower purchases the home. The VA has pretty clear-cut rules on these types of purchases, and we’ll cover what you need to know here in this article.

VA Land Sell Contracts

If you’re interested in purchasing land with your VA loan, you’re in luck – the VA will guarantee a loan that is secured by nothing but grass and dirt. Day-to-day, a land purchase contract won’t operate much differently from a mortgage, but the process of getting one is very different. The contract must contain the same mandatory clauses as a mortgage, and the contract must be recorded. To understand the VA’s policies on land sales contracts, you need to understand the difference between a land sale contract and a mortgage. A mortgage is an arrangement where the borrower purchases a property and legally owns it, but also gives the lender a lien on the home, which allows the lender to sell the home if the borrower does not pay back the loan amount. in a land sale contract, the buyer does not own the home until the full amount is paid back.

 

A land sale contract usually works as follows: an initial period of fixed monthly payments, much like a mortgage, followed by a balloon payment that covers the remaining balance. Typically, the buyer gets a mortgage from a lender to make the remaining balloon payment, thus converting the contract into a mortgage, and acquiring ownership of the property. If you want to learn more about land sale contracts, I would recommend typing “mortgage vs. land contract” into google because discussing the respective benefits and disadvantages is beyond the scope of this article. However, now that we’ve covered the basics of land sale contracts and mortgages, the following statements in the VA Lender’s Handbook will make more sense:

 

VA may also guarantee a loan to refinance the unpaid balance under a land sale contract for the purchase of improved residential property, provided:

  • the veteran will obtain title to the property described in the contract upon closing of the loan, and
  • the obligation to be guaranteed is in the form of a note or bond secured by a mortgage or other acceptable form of security instrument other than the existing land sale contract.

 

If you have any more questions about land sale contracts, feel free to give us a call here at Low VA Rates and we’ll do our best to answer them. The other type of contract addressed at this point in the Handbook is an Option contract. Options are fairly easy to understand; normally, when you buy a house, the product you are paying for is the house and the lot it is on, yes? Much like when you go to the store to buy a bag of apples: the product is the bag of apples. In an option, the product you are buying is time. You are buying time to decide whether you want to buy the property. Think of Wal-Mart’s layaway program. If Wal-Mart charged for its layaway service, it would be exactly like a very small scale option. Buying an option on a property is essentially the same as putting the home on layaway; no one else is allowed to buy it unless you have not bought it before the amount of time you paid for has expired. Clear as mud? Good.

 

Now, when it comes to purchasing a property with encumbrances, the VA has a fairly clear rule: the VA loan must be secured by the first lien on the property. Other liens are allowed on the home, but must be subordinate to the VA loan. If this is not a possibility, then the VA will not guarantee the home loan. Also, the amount of indebtedness to pay off the liens, plus the lien that the VA loan will have on the home, cannot exceed the VA’s reasonable value of the property.

 

VA Loan Title Limitations

 

Deciphering the VA Lender’s Handbook Chapter 9 Part 3

 

In this article, we’re going to talk about the title to the home being purchased in a VA loan. The VA has some parameters that dictate the required estate outline in the title. Essentially what we’re talking about here is how much control and/or ownership the borrower is going to have on the property. If you are interested in reading all the parameters the VA sets on the estate and are at least conversational in legalese, you can read all of the parameters from Cornell University Law School. However, generally speaking, the VA defers to what is acceptable to the buyer, title companies, and attorneys in the area that property is being purchased. There are situations where you might not have full control or ownership of the home. This includes purchasing a condo or a home that is part of a Homeowners’ Association.

VA Loan Approval

Interestingly enough, the VA does not require the borrower to obtain title insurance for the VA loan. Granted, this is unlikely to be relevant since just about every lender in existence will require the borrower to get title insurance, but it is curious just the same. The only requirement the VA has in regards to the title is that the title meet the standards described above and some more particular ones described in the rest of this article. We’re going to cover in-depth about how the VA feels about restrictions on the purchase or resale of the property, what restrictions are approved and what restrictions require the VA’s approval before the  loan can be closed.

 

Generally speaking, restrictions on the purchase or resale of the property are not OK with the VA. There are a few exceptions, some of which must still be approved by the VA on a case-by-case basis, and some that are alright regardless. As a borrower, it’s smart to know what restrictions are allowed, and what those restrictions mean. Here’s what you can expect from your lender:

  • He or she will make sure that any restrictions fall within the VA exceptions,
  • consult with the VA where doubt exists,
  • obtain VA approval where appropriate,
  • and fully explain all the restrictions to you and make sure you understand and agree to all of the restrictions in writing at the time of loan application.

 

There are some restrictions on the resale of property that must be submitted to the VA for approval but can be approved. The first example the Handbook lists is if the VA guaranteed a loan made through a state or local program that is designed to assist low-income veterans, there may be some resale and price restrictions on the purchasers (to protect the integrity and purpose of the program). Under such a program, there may also be restrictions concerning to whom the property may be sold depending on how soon the property is sold. With approval from the VA, a property with age restrictions on the resale can also be approved, as well as a prohibition against the permanent occupancy of the dwelling by children. Many communities and condos have rules that only allow permanent occupants over a certain age, and such a community offers a lifestyle that may be attractive to many veteran borrowers.

 

Exceptions to the title restriction rules that do not include VA approval are generally restrictions dealing with water, timber, or subsurface rights or encroachments, easements, and servitudes. While these do not usually require VA approval, they do need to be taken into consideration when calculating the reasonable value of the home. If the livability of the home is affected by the restrictions, then VA approval is required. Any restrictions on the title must be shown on the Notice of Value from the VA appraisal and considered as part of the reasonable value. If such a restriction is only discovered after the appraisal has taken place, the borrower and lender are required to alert the VA appraiser to incorporate the restrictions into the reasonable value of the property. The Handbook also outlines the following:

 

If the lender discovers, prior to loan closing, title conditions or limitations not shown on the NOV, the lender must have VA review the conditions and determine whether the value assigned to the property is materially affected. Without such a determination by VA, the lender risks a later finding that the condition or limitation affects the reasonable value of the property to the extent that:

  • the loan will be ineligible for guaranty,
  • or  a claim on the guaranty will be subject to reduction under 38 CFR 36.4325.

VA Loan Security Instruments – Four Necessary Clauses

 

Deciphering the VA Lender’s Handbook Chapter 9 Part 2

 

In the last article we covered the Assumption Approval Clause and the Escape Clause. In this article we’re going to cover the Acceleration Clause, the Funding Fee Clause, the Processing Charge Clause, and the Indemnity Liability Assumption Clause. These four clauses have something in common: they all have something to do with a VA loan assumption. The ability to assume or allow someone else to assume your VA loan is one of the really awesome and convenient things about the VA loan program, but it’s also one of the most misunderstood and consequently misused thing about the VA loan program. Understanding how a VA loan assumption is supposed to work will be a powerful tool in your arsenal if you are wanting to conduct one. These four clauses must be in the mortgage or deed of trust at minimum, and may also be required to be included in the note, depending on state laws where you live.

 

1The first clause is the Acceleration clause. This clause provides a really strong motivator to do an assumption the right way, including getting VA approval. Why? Because the Acceleration clause stipulates that if you let someone else take over your loan without getting VA approval on the assumption then the loan can be declared immediately due upon transfer – so when it discovered, you could get a six-figure bill with 30 days to pay it off. Here’s the actual text of the clause: “This loan may be declared immediately due and payable upon transfer of the property securing such loan to any transferee, unless the acceptability of the assumption of the loan is established pursuant to Section 3714 of Chapter 37, Title 38, United States Code.”

 

 

2

Now that we’re done with all that cheerfulness, let’s talk about the Funding Fee Clause. The Funding Fee Clause
simply explains that the person assuming the loan is responsible to pay a 0.5% funding fee as part of the assumption, unless the assumer is an exempt veteran. Here is the full text of the clause: “A fee equal to one-half of 1 percent of the balance of this loan as of the date of transfer of the property shall be payable at the time of transfer to the loan holder or its authorized agent, as trustee for the Department of Veterans Affairs. If the assumer fails to pay this fee at the time of transfer, the fee shall constitute an additional debt to that already secured by this instrument, shall bear interest at the rate herein provided, and at the option of the payee of the indebtedness hereby secured or any transferee thereof, shall be immediately due and payable. This fee is automatically waived if the assumer is exempt under the provisions of 38 U.S.C. 3729(c).”

 

3The next Clause we’re going to cover is the Processing Charge Clause. This seems like a minor clause, but is important enough to be included in this list. It is also yet another reason why an assumption must be conducted through the proper channels. The Processing Charge Clause simply stipulates that there will be an application fee
charged when the application for assumption approval is submitted. Here is the text: “Upon application for approval to allow assumption of this loan, a processing fee may be charged by the loan holder or its authorized agent for determining the creditworthiness of the assumer and subsequently revising the holder’s ownership records when an
approved transfer is completed. The amount of this charge shall not exceed the maximum established by the Department of Veterans Affairs for a loan to which Section 3714 of Chapter 37, Title 38, United States Code applies.”

4

Lastly, the Indemnity Liability Assumption Clause is the only clause of the four to be unequivocal good news for the borrower letting someone else assume the loan. This clause stipulates that the assumer of the loan assumes all liability and obligation at the time of assumption and that the veteran that allowed the assumption is no longer liable in any way. Here’s the text of the ILA Clause: “If this obligation is assumed, then the assumer hereby agrees to assume all of the obligations of the veteran under the terms of the instruments creating and securing the loan. The assumer further agrees to indemnify the Department of Veterans Affairs to the extent of any claim payment arising from the guaranty or insurance of the indebtedness created by this instrument.”

VA Loan Security Instruments – the Escape Clause and Assumption Clause

 

Deciphering the VA Lender’s Handbook Chapter 9 Part 1

 

When it comes to the treatment of VA borrowers and the safety and security of our veterans’ finances, the VA doesn’t mess around; the VA holds its approved lenders on a tight leash as to the security instruments they use to document the mortgage. A ‘security instrument’ is simply a document that outlines something that either the borrower or the lender agree to as part of the mortgage. Therefore, when the Lender’s Handbook refers to ‘security instruments’, they’re not referring to padlocks, safes, and home-defense firearms. They’re referring to all the documents the lender has you sign before and at closing.

 

The very first thing the Handbook has in Chapter 9 is the following paragraph:

 

Lenders may use any note and mortgage forms they wish for VA loans. VA regulations at 38 CFR 36.4337 provide that security instruments used by a lender which are inconsistent with VA regulations in effect on the date the loan is closed will be considered amended and supplemented to conform to the regulations.

VA Loan Security Instruments

In other words, the VA is saying that the lender can use whatever forms and notes that they want, but if they differ with the VA regulations in any way then they’re meaningless. That provides a huge amount of security to the borrower since they can know that even if the lender has slipped a clause in about giving up your first-born child that the VA will not uphold the agreement. Lenders are required to make sure their documentation established the required lien on the home (first lien), complies with the VA laws and regulations, complies with state laws, and contains a number of VA-specific clauses. These clauses are as follows: the Assumption Approval clause, the Acceleration clause, the Funding Fee clause, the Processing Charge clause, the Indemnity Liability Assumption clause, and the Escape clause. These clauses detail things that the borrower must agree to as part of getting a VA loan. It’s essentially the VA clarifying their expectations going into the future.

 

In this article, we’re only going to cover the Assumption Approval clause and the Escape clause, and in the next article we’ll cover the other four clauses mentioned. The Assumption Approval clause is in place to keep veteran borrowers from conducting loan assumptions without the VA’s approval. The VA requires that the following clause (or something with the same meaning) be included conspicuously on at least one of the security instruments (documents) on the loan: “THIS LOAN IS NOT ASSUMABLE WITHOUT THE APPROVAL OF THE DEPARTMENT OF VETERANS AFFAIRS OR ITS AUTHORIZED AGENT.” In other words, you can’t let someone else assume your VA loan without getting approval from the VA. If you’re working through a VA-approved lender to get your loan assumed, then you shouldn’t have to worry about the VA’s approval since your lender should take care of that for you.

 

The VA Loan Escape ClauseThe Escape Clause is a bit different from the Assumption Approval clause in that it’s one of those things that ruffles feathers. In fact, the Escape clause singlehandedly prevents some sellers from being willing to sell their home to a borrower intending to use a VA loan. Why? Because the Escape clause allows the borrower to back out of the loan with no penalty of the VA appraisal determines that the property’s reasonable value is less than the contract purchase price. Here is the actual clause:

 

“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs. (Authority: 38 U.S.C. 501, 3703(c)(1))”

 

This clause is an essential part of the VA loan program since the VA will not guarantee a loan for more than the reasonable value of the property. To prevent a veteran borrower from getting forced into a home purchase that they cannot afford if they have to make a down payment to get the loan amount down enough for the VA to cover the full loan amount, the VA must have something in place to protect such a scenario. However, many sellers are unwilling to sign a sales contract that allows the borrower to walk penalty-free if the VA appraiser determines that the reasonable value is less than the contract purchase price.

 

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