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.”




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.”


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.”

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