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.
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.