## Chapter 7. Loans Requiring Special Underwriting, Guaranty and Other Considerations

#### Overview

+------------+---------------------------------------------------------+
| ##### In   | > This chapter contains information about loans         |
| troduction | > requiring special underwriting, guaranty and other    |
|            | > considerations.                                       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > This chapter contains the following topics.           |
| #### In th |                                                         |
| is Chapter |                                                         |
+------------+---------------------------------------------------------+

  ------- ------------------------------------------------------ --------
  Topic   Topic                                                  See Page

  1       Joint Loans                                            7-2

  2       Construction/Permanent Home Loans                      7-13

  3       Energy Efficient Mortgages (EEMs)                      7-16

  4       Loans for Alteration and Repair                        7-22

  5       Supplemental Loans                                     7-23

  6       Adjustable Rate Mortgages (ARMs)                       7-27

  7       Graduated Payment Mortgages (GPMs)                     7-29

  8       Growing Equity Mortgages (GEMs)                        7-34

  9       Loans Involving Temporary Interest Rate Buydowns       7-35

  10      Farm Residence Loans                                   7-38

  11      Cooperative Home Loans                                 7-40

  12      Loans for Manufactured Homes Classified as Real Estate 7-41

  13      Loans to Native American Veterans on Trust Lands       7-44
  ------- ------------------------------------------------------ --------

#### 1. Joint Loans

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | -   Subsection i has been changed to show the increase  |
|            |     in available entitlement for loans in excess of     |
|            |     \$144,000.                                          |
|            |                                                         |
|            | -   Subsections j, k, l, and m have been changed to     |
|            |     show the percentage available for a joint loan      |
|            |     where the veteran's portion of the loan exceeds     |
|            |     \$144,000.                                          |
|            |                                                         |
|            | -   Subsection q has been changed to reflect the        |
|            |     current funding fee.                                |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > "Joint loan" generally refers to a loan for which:    |
| ## a. What |                                                         |
|  is a VA J | -   a veteran and another person(s) are liable, and     |
| oint Loan? |                                                         |
|            | -   the veteran and the other obligor(s) own the        |
|            |     security.                                           |
|            |                                                         |
|            |     > A joint loan is a loan made to:                   |
|            |                                                         |
|            | -   the veteran and one or more nonveterans (not        |
|            |     spouse)                                             |
|            |                                                         |
|            | -   the veteran and one or more veterans (not spouse)   |
|            |     who will not be using their entitlement             |
|            |                                                         |
|            | -   the veteran and the veteran's spouse who is also a  |
|            |     veteran, and both entitlements will be used, or     |
|            |                                                         |
|            | -   the veteran and one or more other veterans (not     |
|            |     spouse), all of who will use their entitlement.     |
|            |                                                         |
|            |     > A loan involving a veteran and his or her spouse  |
|            |     > will not be treated as a "joint loan" if the      |
|            |     > spouse:                                           |
|            |                                                         |
|            | -   is not a veteran, or                                |
|            |                                                         |
|            | -   is a veteran who will not be using his or her       |
|            |     entitlement on the loan.                            |
|            |                                                         |
|            |     > A loan to a veteran and fiancé who intend to      |
|            |     > marry prior to loan closing and take title as     |
|            |     > veteran and spouse will be treated as a loan to a |
|            |     > veteran and spouse (conditioned upon their        |
|            |     > marriage), and not a joint loan.                  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > The regulations at [38 CFR                            |
| b. VA Regu | > 36.4307](http://ww                                    |
| lations {# | w.warms.vba.va.gov/regs/38cfr/bookh/part36/36_4300.doc) |
| b.-va-regu | > address joint loans.                                  |
| lations .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| ##         | > To avoid confusion, the terms "veteran/nonveteran     |
| ### c. Ter | > joint loan" and "two veteran joint loan" will be used |
| minology U | > throughout this section to include the various types  |
| sed in thi | > of joint loans.                                       |
| s Section  |                                                         |
| {#c.-termi | > ***Veteran/nonveteran joint loan***:                  |
| nology-use |                                                         |
| d-in-this- | > Common meaning: A loan involving one veteran and one  |
| section .u | > nonveteran (not spouse).                              |
| nnumbered} |                                                         |
|            | > For purposes of applying the principles explained in  |
|            | > this section, this term will also be used to          |
|            | > represent **any** other type of joint loan involving  |
|            | > at least one veteran using his or her entitlement and |
|            | > at least one other person **not** using entitlement   |
|            | > (can be a veteran or nonveteran, but not a spouse).   |
|            |                                                         |
|            | > ***Examples***:                                       |
|            |                                                         |
|            | -   Three veterans using entitlement and one            |
|            |     nonveteran.                                         |
|            |                                                         |
|            | -   One veteran using entitlement and four nonveterans. |
|            |                                                         |
|            | -   Two veterans using entitlement and two veterans     |
|            |     **not** using entitlement.                          |
|            |                                                         |
|            |     > ***Two veteran joint loan:***                     |
|            |                                                         |
|            |     > Common meaning: A loan involving two veterans who |
|            |     > are not married to each other, both using their   |
|            |     > entitlement.                                      |
|            |                                                         |
|            |     > For purposes of applying the principles explained |
|            |     > in this section, this term will also be used to   |
|            |     > represent **any** other type of joint loan        |
|            |     > involving only veterans, each of whom uses his or |
|            |     > her entitlement.                                  |
|            |                                                         |
|            |     > It can include loans to:                          |
|            |                                                         |
|            | -   The veteran and the veteran's spouse who is also a  |
|            |     veteran, if **both** entitlements will be used, or  |
|            |                                                         |
|            | -   Three, four, or more veterans, **all** of whom will |
|            |     use their entitlement.                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Any person who uses entitlement on a joint loan must  |
| d. Occupan | > certify intent to personally occupy the property as   |
| cy {#d.-oc | > his or her home.                                      |
| cupancy .u |                                                         |
| nnumbered} | > Any borrower on a joint loan who does not use         |
|            | > entitlement for the loan (such as a nonveteran), does |
|            | > not have to intend to occupy the property.            |
+------------+---------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| #          | > If a property is to be owned by two or more eligible  |
| #### e. Ho | > veterans, it may consist of four family units and one |
| w Many Uni | > business unit, plus one additional unit for each      |
| ts Can the | > veteran participating in the ownership.               |
|  Property  |                                                         |
| Have? {#e. | > Thus, two veterans may purchase or construct          |
| -how-many- | > residential property consisting of up to six family   |
| units-can- | > units (the basic four units plus one unit for each of |
| the-proper | > the two veterans), and one business unit.             |
| ty-have .u |                                                         |
| nnumbered} | > If the property contains more than four family units  |
|            | > plus one family unit for each veteran participating   |
|            | > in the ownership and/or more than one business unit,  |
|            | > the loan is **not** eligible for guaranty.            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### f.   | > Any joint loan for which the veteran will hold title  |
| Which Join | > to the property and any person **other than** the     |
| t Loans Re | > veteran's spouse must be submitted for prior          |
| quire Prio | > approval.                                             |
| r Approval |                                                         |
| ? {#f.-whi | > Any loan for which the veteran and the veteran's      |
| ch-joint-l | > spouse will hold title to the property, whether or    |
| oans-requi | > not the spouse also uses entitlement, may be closed   |
| re-prior-a | > automatically by a lender with automatic authority.   |
| pproval .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### g.   | > The following underwriting considerations apply:      |
|  How to Un |                                                         |
| derwrite a |                                                         |
|  Joint Loa |                                                         |
| n {#g.-how |                                                         |
| -to-underw |                                                         |
| rite-a-joi |                                                         |
| nt-loan .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

  ----------------- -----------------------------------------------------
  Part Type of      Underwriting Considerations Function
  Joint Loan        

  Two veteran joint Consider the credit and combined income and assets of
  loan              both parties. Strengths of one veteran related to
                    income and/or assets may compensate for income/asset
                    weaknesses of the other. However, satisfactory credit
                    of one veteran cannot compensate for the other's poor
                    credit.
  ----------------- -----------------------------------------------------

Continued on next page

1\. Joint Loans, Continued

  -----------------------------------------------------------------------
  g\. How to Underwrite a Joint Loan (continued)

  -----------------------------------------------------------------------

+------------------+---------------------------------------------------+
| Part Type of     | Underwriting Considerations Function              |
| Joint Loan       |                                                   |
+------------------+---------------------------------------------------+
| Ve               | Veteran's credit must be satisfactory and         |
| teran/nonveteran | veteran's income must be sufficient to repay that |
| joint loan       | portion of the loan allocable to the veteran's    |
|                  | interest in the property.                         |
|                  |                                                   |
|                  | A different analysis applies to the portion of    |
|                  | the loan allocable to the nonveteran. The credit  |
|                  | of the nonveteran must be satisfactory. However,  |
|                  | the combined income of both borrowers can be      |
|                  | considered in evaluating repayment ability.       |
|                  |                                                   |
|                  | In other words:                                   |
|                  |                                                   |
|                  | -   income strength of the veteran may compensate |
|                  |     for income weakness of the nonveteran, but    |
|                  |                                                   |
|                  | -   income strength of the nonveteran cannot      |
|                  |     compensate for income weakness of the veteran |
|                  |     in analyzing the veteran's ability to repay   |
|                  |     his or her allocable portion of the loan.     |
+------------------+---------------------------------------------------+

+-------------+--------------------------------------------------------+
| ##### h. Ho | > Guaranty is limited to that portion of the loan      |
| w to Calcul | > allocable to the veteran's interest in the property. |
| ate Guarant |                                                        |
| y and Entit | > The lender **must** satisfy itself that the          |
| lement Use  | > requirements of its investor or the secondary market |
| on Veteran/ | > can be met with this limited guaranty.               |
|  Nonveteran |                                                        |
|  Joint Loan |                                                        |
| s {#h.-how- |                                                        |
| to-calculat |                                                        |
| e-guaranty- |                                                        |
| and-entitle |                                                        |
| ment-use-on |                                                        |
| -veteran-no |                                                        |
| nveteran-jo |                                                        |
| int-loans . |                                                        |
| unnumbered} |                                                        |
+-------------+--------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| #####      | > VA calculates the guaranty as described in the table  |
| i. Procedu | > below.                                                |
| re {#i.-pr |                                                         |
| ocedure .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+-----+----------------------------------------------------------------+
| S   | Action                                                         |
| tep |                                                                |
+-----+----------------------------------------------------------------+
| 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 on 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](                                                            |
|     | http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch03.doc) |
|     | 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.                                         |
|     |                                                                |
|     | If the result of Step 2 is greater than \$144,000, additional  |
|     | entitlement may be added to each veteran's entitlement. The    |
|     | maximum entitlement on the loan cannot exceed 25 percent of    |
|     | the Freddie Mac single family conventional conforming loan     |
|     | limit. Please contact a Regional Loan Center to discuss        |
|     | specifics for joint loans.                                     |
+-----+----------------------------------------------------------------+
| 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.                    |
+-----+----------------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| ####       | > Veteran/Nonveteran Loans                              |
| # j. Examp |                                                         |
| les {#j.-e |                                                         |
| xamples .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+--------------+----------+---------+--------------------+------------+
| Borrowers    | Total    | Vet's   | Maximum Potential  | E          |
| and          | Loan     | Portion | Guaranty on Vet's  | ntitlement |
| Available    | Amount   |         | Portion            | Charge     |
| Entitlement  |          |         |                    |            |
|              |          |         |                    | \-\-\-\-\- |
|              |          |         |                    | \-\-\-\-\- |
|              |          |         |                    | \--T=Total |
+--------------+----------+---------+--------------------+------------+
| Vet \$36,000 | \        | \$      | \$22,500           | \$22,500   |
| Nonvet \$0   | $100,000 | 50,000  |                    |            |
+--------------+----------+---------+--------------------+------------+
| Vet \$36,000 | \        | \$      | \$36,250           | \$36,250   |
|              | $290,000 | 145,000 |                    |            |
| Nonvet \$0   |          |         |                    |            |
+--------------+----------+---------+--------------------+------------+
| Vet \$27,500 | \        | Total   | Total for both     | \$14,400   |
|              | $108,000 | for     | vets               |            |
| Vet \$36,000 |          | both    |                    | \$14,400   |
|              |          | vets    | \$28,800           |            |
| Nonvet \$0   |          |         |                    | T=\$28,800 |
|              |          | \       |                    |            |
|              |          | $72,000 |                    |            |
+--------------+----------+---------+--------------------+------------+
| Vet \$25,000 | \        | Total   | \$36,000           | \$25,000   |
|              | $201,000 | for     |                    |            |
| Vet \$11,000 |          | both    |                    | \$11,000   |
|              |          | vets    |                    |            |
| Nonvet \$0   |          | \$      |                    | T=\$36,000 |
|              |          | 134,000 |                    |            |
+--------------+----------+---------+--------------------+------------+

+-----------------------------------------------------------------------+
| > ***Note***: The last example would require a written agreement from |
| > the veterans to make unequal charges to their entitlement.          |
+-----------------------------------------------------------------------+

+----+-----------------------------------------------------------------+
| Q  |                                                                 |
| ui |                                                                 |
| ck |                                                                 |
| R  |                                                                 |
| ef |                                                                 |
| er |                                                                 |
| en |                                                                 |
| ce |                                                                 |
| F  |                                                                 |
| or |                                                                 |
| C  |                                                                 |
| al |                                                                 |
| cu |                                                                 |
| la |                                                                 |
| ti |                                                                 |
| on |                                                                 |
| Us |                                                                 |
| ed |                                                                 |
+----+-----------------------------------------------------------------+
| St | Action                                                          |
| ep |                                                                 |
+----+-----------------------------------------------------------------+
| 1  | Divide the total loan amount by the number of borrowers.        |
+----+-----------------------------------------------------------------+
| 2  | Multiply the result by the number of veterans using             |
|    | entitlement.                                                    |
+----+-----------------------------------------------------------------+
| 3  | Calculate the maximum potential guaranty on the portion of the  |
|    | loan arrived at in Step 2, using the maximum guaranty table in  |
|    | [section 4 of chapter                                           |
|    | 3](                                                             |
|    | http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch03.doc). |
+----+-----------------------------------------------------------------+
| 4  | VA will make a charge to entitlement up to the amount arrived   |
|    | at in Step 3.                                                   |
|    |                                                                 |
|    | -   VA will divide the charge equally between multiple veterans |
|    |     if possible.                                                |
|    |                                                                 |
|    | -   If Step 2 is greater than \$144,000, additional entitlement |
|    |     may be added to each veterans entitlement. The maximum      |
|    |     entitlement on the loan cannot exceed 25 percent of the     |
|    |     Freddie Mac single family conventional conforming loan      |
|    |     limit.                                                      |
+----+-----------------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| ##         | > As with a non-joint loan, the potential maximum       |
| ### k. How | > guaranty on a joint loan is calculated based on the   |
|  to Calcul | > total loan amount and cannot exceed 25 percent of the |
| ate Guaran | > Freddie Mac single family conventional conforming     |
| ty and Ent | > loan limit (please contact your RLC to discuss these  |
| itlement U | > situations), even if the available entitlement of the |
| se on Two  | > veterans involved adds up to a greater amount.        |
| Veteran Jo |                                                         |
| int Loans  |                                                         |
| {#k.-how-t |                                                         |
| o-calculat |                                                         |
| e-guaranty |                                                         |
| -and-entit |                                                         |
| lement-use |                                                         |
| -on-two-ve |                                                         |
| teran-join |                                                         |
| t-loans .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > VA calculates the guaranty as described in the        |
| l. Procedu | > following table.                                      |
| re {#l.-pr |                                                         |
| ocedure .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+-----+----------------------------------------------------------------+
| S   | Action                                                         |
| tep |                                                                |
+-----+----------------------------------------------------------------+
| 1   | Calculate the maximum potential guaranty on the total loan     |
|     | amount.                                                        |
|     |                                                                |
|     | Use the maximum guaranty table in [section 4 of chapter        |
|     | 3](                                                            |
|     | http://www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch03.doc) |
|     | of this handbook.                                              |
+-----+----------------------------------------------------------------+
| 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 veterans entitlement. The     |
|     | maximum entitlement on the loan cannot exceed 25 percent of    |
|     | the Freddie Mac single family conventional conforming loan     |
|     | limit.                                                         |
|     |                                                                |
|     | 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 charge equally between the      |
|     | veterans if possible, or, if only unequal entitlement is       |
|     | available, unequal charges may be made with the veterans'      |
|     | written agreement.                                             |
|     |                                                                |
|     | ***Exception***: VA will make the entitlement charge for       |
|     | husband and wife veterans according to their preference.       |
+-----+----------------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| ####       | > Two veteran joint loans                               |
| # m. Examp |                                                         |
| les {#m.-e |                                                         |
| xamples .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+--------+----------+--------------+-----------+--------+
| Veterans   | Total  | Maximum  | Additional   | Total     | Total  |
| and        | Loan   | P        | Entitlement  | En        | Gu     |
| Available  | Amount | otential | Use Per Vet  | titlement | aranty |
| E          |        | Guaranty |              | Charge    | on     |
| ntitlement |        |          |              | Per Vet   | Loan   |
+------------+--------+----------+--------------+-----------+--------+
| Vet 1      | \$1    | \$36,000 | \$0          | \$18,000  | \$     |
| \$36,000   | 00,000 |          |              |           | 36,000 |
|            |        |          | \$0          | \$18,000  |        |
| Vet 2      | 0      |          |              |           |        |
| \$36,000   |        |          |              |           |        |
+------------+--------+----------+--------------+-----------+--------+
| Vet 1      | \$     | \$32,000 |              | \$23,500  | \$     |
| \$23,500   | 80,000 |          |              |           | 32,000 |
|            |        |          |              | \$ 8,500  |        |
| Vet 2 \$   | 0      |          |              |           |        |
| 8,500      |        |          |              |           |        |
+------------+--------+----------+--------------+-----------+--------+
| Vet 1      | \$3    | \$75,000 | Maximum      | \$37,500  | \$     |
| \$36,000   | 00,000 |          | entitlement  |           | 75,000 |
|            |        |          | on the loan  | \$37,500  |        |
| Vet 2      | 0      |          | cannot       |           |        |
| \$36,000   |        |          | exceed 25    |           |        |
|            |        |          | percent of   |           |        |
|            |        |          | the Freddie  |           |        |
|            |        |          | Mac single   |           |        |
|            |        |          | family       |           |        |
|            |        |          | conventional |           |        |
|            |        |          | conforming   |           |        |
|            |        |          | loan limit   |           |        |
+------------+--------+----------+--------------+-----------+--------+
| Vet 1      | \$2    | \$50,750 |              | \$25,375  | \$     |
| \$15,000   | 03,000 |          |              |           | 50,750 |
|            |        |          |              | \$25,375  |        |
| Vet 2      | 0      |          |              |           |        |
| \$20,000   |        |          |              |           |        |
+------------+--------+----------+--------------+-----------+--------+
| Vet 1 \$0  | \$3    | \$75,000 |              | \$25,000  | \$     |
|            | 00,000 |          |              |           | 75,000 |
| Vet 2 \$0  |        |          |              | \$25,000  |        |
|            |        |          |              |           |        |
| Vet 3 \$   |        |          |              | \$25,000  |        |
| 6,500      |        |          |              |           |        |
+------------+--------+----------+--------------+-----------+--------+

+-----------------------------------------------------------------------+
| > ***Note***: The last two examples on the chart would require a      |
| > written agreement from the veterans to make unequal charges to      |
| > their entitlement.                                                  |
+-----------------------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| ##### n.   | > For joint loans involving one or more nonveterans:    |
|  Certifica |                                                         |
| te of Comm | -   the loan amount shown on the commitment is limited  |
| itment {#n |     to the veteran's portion of the loan, and           |
| .-certific |                                                         |
| ate-of-com | -   the percent of guaranty is based on the ratio of    |
| mitment .u |     the amount of entitlement the veteran has available |
| nnumbered} |     to the veteran's portion of the loan.               |
|            |                                                         |
|            |     > VA will issue the Certificate of Commitment with  |
|            |     > a reminder that:                                  |
|            |                                                         |
|            | -   no part of the guaranty applies to the portion of   |
|            |     the loan allocated to the nonveteran, and           |
|            |                                                         |
|            | -   in the event of foreclosure where a loss is         |
|            |     sustained, the holder must absorb any loss          |
|            |     attributable to the nonveteran's portion of the     |
|            |     loan.                                               |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### o.   | > The "Amount of Loan" reflects **only** the veteran's  |
|  Loan Guar | > portion of the loan.                                  |
| anty Certi |                                                         |
| ficate {#o | > If more than one veteran used entitlement on the      |
| .-loan-gua | > loan, it will reflect the total of **all** portions   |
| ranty-cert | > allocable to those veterans.                          |
| ificate .u |                                                         |
| nnumbered} | > For veteran/nonveteran joint loans, the Loan Guaranty |
|            | > Certificate (LGC) will contain the statement, "The    |
|            | > amount of guaranty on this loan is limited to the     |
|            | > veteran's portion of the loan."                       |
|            |                                                         |
|            | > The lender must satisfy itself that the requirements  |
|            | > of its investor or the secondary market can be met    |
|            | > with this limited guaranty.                           |
|            |                                                         |
|            | > Whereas the whole loan amount will appear on the      |
|            | > mortgage security documents; that is, mortgage note   |
|            | > or deed of trust, only the veteran's portion is shown |
|            | > on the Certificate of Commitment and the LGC.         |
+------------+---------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| #####      | > The applicability of the guaranty to only a portion   |
| p. ECOA Co | > of the loan in the case of a veteran/nonveteran joint |
| nsideratio | > loan may cause a lender to refuse to accept an        |
| ns {#p.-ec | > application for such loan.                            |
| oa-conside |                                                         |
| rations .u | > This may appear to conflict with the Equal Credit     |
| nnumbered} | > Opportunity Act (ECOA) prohibition against            |
|            | > discrimination based on marital status, however, the  |
|            | > lender may refuse the application under these         |
|            | > circumstances without violating ECOA.                 |
|            |                                                         |
|            | > This is based on an exemption for VA being a special  |
|            | > purpose credit program.                               |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### q.   | > Apply the appropriate funding fee percentage to any   |
|  Calculati | > portion of the loan allocable to a veteran using his  |
| on of the  | > or her entitlement who is not exempt from the funding |
| Funding Fe | > fee. Determine the appropriate percentage for the     |
| e {#q.-cal | > type of veteran involved from the funding fee tables  |
| culation-o | > in [section 8 of chapter                              |
| f-the-fund | > 8](http://                                            |
| ing-fee .u | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch08.doc) |
| nnumbered} | > of this handbook.                                     |
|            |                                                         |
|            | > ***Example***: On a no-down payment loan to three     |
|            | > veterans; one a first-time homebuyer, one a           |
|            | > subsequent user, and one a first-time reservist;      |
|            | > funding fee percentages of 2.15 percent, 3.3 percent, |
|            | > and 2.4 percent, respectively, would each be applied  |
|            | > to one-third of the loan amount.                      |
|            |                                                         |
|            | > No funding fee will be assessed on any portion of a   |
|            | > joint loan allocable to:                              |
|            |                                                         |
|            | -   a nonveteran                                        |
|            |                                                         |
|            | -   a veteran who did not use his or her entitlement,   |
|            |     or                                                  |
|            |                                                         |
|            | -   a veteran who used his or her entitlement, but is   |
|            |     exempt from the funding fee.                        |
+------------+---------------------------------------------------------+

Continued on next page

1\. Joint Loans, Continued

+------------+---------------------------------------------------------+
| q\.        | > ***Downpayment***: The actual loan amount is          |
| C          | > allocated equally between the borrowers for purposes  |
| alculation | > of calculating the funding fee, whether or not a down |
| of the     | > payment is made, and regardless of where the funds    |
| Funding    | > for such a down payment come from.                    |
| Fee        |                                                         |
| (          | > ***Example***: On a veteran/nonveteran loan, the      |
| continued) | > nonveteran makes a \$5,000                            |
|            |                                                         |
|            | > (5 percent) down payment out of his cash resources,   |
|            | > to purchase a \$100,000 property, resulting in a      |
|            | > \$95,000 loan amount. The veteran is a first-time     |
|            | > homebuyer. The veteran must pay a funding fee of      |
|            | > \$712.50, based on                                    |
|            |                                                         |
|            | > 1.5 percent of his/her \$47,500 portion.              |
|            |                                                         |
|            | > If situations arise which are not addressed here,     |
|            | > contact VA for assistance.                            |
+------------+---------------------------------------------------------+

#### 2. Construction/Permanent Home Loans

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date |                                                         |
|            | -   This section has been changed to create subsection  |
|            |     lettering.                                          |
|            |                                                         |
|            | -   Subsections e and f have been added back into this  |
|            |     section. The previous change to the handbook        |
|            |     erroneously removed these sections.                 |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a.   | > VA will guarantee a "construction/permanent home      |
|  The Basic | > loan," that is, a loan to finance the                 |
| s {#a.-the | > construction/purchase of a residence. The loan is     |
| -basics .u | > closed prior to the start of construction with        |
| nnumbered} | > proceeds disbursed to cover the cost of, or balance   |
|            | > owed on, the land, and the balance into escrow. The   |
|            | > escrowed monies are paid out to the builder during    |
|            | > construction.                                         |
|            |                                                         |
|            | > The lender must obtain written approval from the      |
|            | > borrower before each draw payment is provided to the  |
|            | > builder.                                              |
|            |                                                         |
|            | > This section does not address other construction      |
|            | > loans guaranteed by VA;                               |
|            |                                                         |
|            | > that is, those for the purchase of a residence newly  |
|            | > constructed for the veteran by a builder who financed |
|            | > the construction from his or her own resources.       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > The veteran begins making payments on a               |
| ### b. Amo | > construction/permanent home loan **only** after       |
| rtization  | > construction is complete. Therefore, the initial      |
| {#b.-amort | > payment on principal may be postponed up to one year  |
| ization .u | > if necessary. The loan must be amortized to achieve   |
| nnumbered} | > full repayment within its remaining term.             |
|            |                                                         |
|            | > ***Example***: If it takes six months to complete     |
|            | > construction, the payment schedule for the veteran    |
|            | > obtaining a 30-year mortgage must provide for full    |
|            | > repayment of the loan in 29 years and six months.     |
|            |                                                         |
|            | > Rather than requiring a balloon payment, it may be    |
|            | > preferable to set up equal payments (beginning after  |
|            | > construction is complete) which are large enough to   |
|            | > repay the loan within the original maturity without a |
|            | > balloon payment.                                      |
|            |                                                         |
|            | > VA's amortization requirements that payments be       |
|            | > approximately equal and principal be reduced at least |
|            | > once annually apply to construction loans. (See       |
|            | > [section 9 of chapter                                 |
|            | > 3](http://ww                                          |
|            | w.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch03.doc).) |
|            | > However, the final installment requirement is         |
|            | > different. The final installment may be for an amount |
|            | > that does not exceed 5 percent of the original        |
|            | > principal amount of the loan.                         |
+------------+---------------------------------------------------------+

Continued on next page

2\. Construction/Permanent Home Loans, Continued

+------------+---------------------------------------------------------+
| ##### c.   | > On a construction/permanent home loan, the builder is |
|  What the  | > responsible for                                       |
| Builder Mu |                                                         |
| st Pay {#c | -   interest payments during the construction period,   |
| .-what-the |     and                                                 |
| -builder-m |                                                         |
| ust-pay .u | -   all fees normally paid by a builder who obtains an  |
| nnumbered} |     interim construction loan including, but **not**    |
|            |     limited to                                          |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   inspection fees                                     |
|            |                                                         |
|            | -   commitment fees                                     |
|            |                                                         |
|            | -   title update fees, and                              |
|            |                                                         |
|            | -   hazard insurance during construction.               |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > The permanent mortgage loan interest rate is          |
| ### d. Int | > established at closing.                               |
| erest Rate | >                                                       |
|            | > Lender's may offer a "ceiling-floor" where the        |
|            | > veteran "floats" the interest rate during             |
|            | > construction. The agreement must provide that at      |
|            | > lock-in, the permanent interest rate will not exceed  |
|            | > a specific maximum interest rate yet also permit the  |
|            | > borrower to lock-in at a lower rate based on market   |
|            | > fluctuations.                                         |
|            | >                                                       |
|            | > ***Note***: The borrower must qualify for the         |
|            | > mortgage at the maximum rate.                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > The veteran may **not** pay any fees which are the    |
| e. What Fe | > builder's responsibility. Fees the veteran can pay    |
| es the Vet | > are described in [section 2 of chapter                |
| eran Can P | > 8](http://w                                           |
| ay {#e.-wh | ww.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch08.doc). |
| at-fees-th |                                                         |
| e-veteran- |                                                         |
| can-pay .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### f.   | > The funding fee is due and payable to VA within 15    |
|  Funding F | > days of loan closing; that is, it is **not** tied to  |
| ee and Loa | > the commencement or completion of construction. The   |
| n Reportin | > loan must be reported to VA within 60 days of receipt |
| g {#f.-fun | > of a clear final compliance inspection report.        |
| ding-fee-a |                                                         |
| nd-loan-re |                                                         |
| porting .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### g.   | > Although the loan will normally be considered         |
|  Loan Guar | > guaranteed upon closing, the LGC on a                 |
| anty Certi | > construction/permanent home loan will not be issued   |
| ficate {#g | > until a clear final compliance inspection report has  |
| .-loan-gua | > been received by VA.                                  |
| ranty-cert |                                                         |
| ificate .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

2\. Construction/Permanent Home Loans, Continued

+------------+---------------------------------------------------------+
| ##### h. I | > If construction is not fully completed and loan       |
| f Loan Pro | > proceeds not fully disbursed, guaranty will apply     |
| ceeds not  | > **only** to the proper pro rata part of the loan. To  |
| Fully Disb | > calculate the proper pro rata part of the loan        |
| ursed {#h. |                                                         |
| -if-loan-p | -   take loan proceeds disbursed for construction       |
| roceeds-no |     purposes                                            |
| t-fully-di |                                                         |
| sbursed .u | -   add any other payments made to the builder by or on |
| nnumbered} |     behalf of the veteran                               |
|            |                                                         |
|            | -   take the lesser of the above total or 80 percent of |
|            |     the value of that portion of the construction       |
|            |     actually completed, and                             |
|            |                                                         |
|            | -   add any loan disbursements made for the purchase of |
|            |     the land on which the construction is situated.     |
+------------+---------------------------------------------------------+

#### 3. Energy Efficient Mortgages (EEMs)

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date |                                                         |
|            | -   This section has been changed to create subsection  |
|            |     lettering.                                          |
|            |                                                         |
|            | -   Subsection c has been changed to delete references  |
|            |     to "CRV."                                           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > EEMs are loans to cover the cost of making energy     |
|  a. What a | > efficiency improvements to a dwelling. They can be    |
| re EEMs? { | > made in conjunction with                              |
| #a.-what-a |                                                         |
| re-eems .u | -   a VA loan for the purchase of an existing dwelling, |
| nnumbered} |     or                                                  |
|            |                                                         |
|            | -   a VA refinancing loan secured by the dwelling.      |
|            |                                                         |
|            |     > Acceptable energy efficiency improvements         |
|            |     > include, but are not limited to                   |
|            |                                                         |
|            | -   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.                                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Funds for energy efficiency improvements are          |
| ### b. Req | > considered part of the total loan, which must be      |
| uirements  | > secured by a first lien.                              |
| {#b.-requi |                                                         |
| rements .u | > If the labor is to be performed by the veteran, the   |
| nnumbered} | > loan increase will be limited to the amount necessary |
|            | > to pay for materials.                                 |
+------------+---------------------------------------------------------+

Continued on next page

3\. Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| b\.        | > A loan for existing property may be increased by up   |
| Re         | > to \$6,000 for energy efficiency improvements at the  |
| quirements | > option of the lender and veteran at any time up to    |
| (          | > loan closing without VA's prior approval.             |
| continued) |                                                         |
|            | > The lender must determine that the proposed           |
|            | > weatherization and/or energy conservation             |
|            | > improvements are reasonable for the particular        |
|            | > property.                                             |
|            |                                                         |
|            | > The lender must evaluate the veteran's ability to pay |
|            | > the increased loan payments caused by addition of     |
|            | > energy efficiency improvements.                       |
|            |                                                         |
|            | > For energy efficiency improvements that will increase |
|            | > a loan amount by more than \$6,000, the amount of the |
|            | > increase must be supported by an increased valuation  |
|            | > in an equal amount.                                   |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### c. B | > Information on EEMs is provided to a veteran who      |
| orrower No | > applies for a loan which requires a NOV (that is, a   |
| tice on th | > loan for a home purchase or cash-out refinance). The  |
| e NOV {#c. | > NOV includes the following notice to the veteran:     |
| -borrower- |                                                         |
| notice-on- | > "The buyer may wish to contact a qualified            |
| the-nov .u | > person/firm for a home energy audit to identify       |
| nnumbered} | > 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         |
|            | > considered.                                           |
|            |                                                         |
|            | > The mortgage may be increased by                      |
|            |                                                         |
|            | -   up to \$3,000 based solely on the documented costs  |
|            |                                                         |
|            | -   up to \$6,000 provided the increase in monthly      |
|            |     mortgage payment does not exceed the likely         |
|            |     reduction in monthly utility costs, or              |
|            |                                                         |
|            | -   more than \$6,000 subject to a value determination  |
|            |     by VA.                                              |
+------------+---------------------------------------------------------+

Continued on next page

3\. Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| ##         | > ***Energy efficiency improvements up to \$3,000**:*   |
| ### d. Und |                                                         |
| erwriting  | > The resulting increase in loan payments will normally |
| Considerat | > be offset by a reduction in utility costs.            |
| ions {#d.- |                                                         |
| underwriti | > ***Energy efficiency improvements more than \$3,000,  |
| ng-conside | > up to \$6,000**:*                                     |
| rations .u |                                                         |
| nnumbered} | > The lender must make a determination that the         |
|            | > increase in monthly mortgage payments does not exceed |
|            | > the likely reduction in monthly utility costs. Rely   |
|            | > on locally available information provided by utility  |
|            | > companies, municipalities, state agencies or other    |
|            | > reliable sources, and document the determination.     |
|            |                                                         |
|            | > ***Energy efficiency improvements over \$6,000**:*    |
|            |                                                         |
|            | > Lenders should exercise discretion and consider       |
|            |                                                         |
|            | -   whether the increase in monthly mortgage payments   |
|            |     exceeds the likely reduction in monthly utility     |
|            |     costs, and                                          |
|            |                                                         |
|            | -   whether the veteran's income is sufficient to cover |
|            |     the higher loan payment.                            |
|            |                                                         |
|            |     > A VA Certificate of Commitment issued before the  |
|            |     > decision to make energy efficiency improvements   |
|            |     > over \$6,000 must be returned to VA for a         |
|            |     > determination that the applicant still qualifies. |
|            |                                                         |
|            |     > ***Energy efficiency improvements in conjunction  |
|            |     > with an IRRRL***:                                 |
|            |                                                         |
|            |     > If the monthly payment (PITI) for the new loan    |
|            |     > exceeds the PITI of the loan being refinanced by  |
|            |     > 20 percent or more, the lender **must** certify   |
|            |     > to having determined that the veteran qualified   |
|            |     > for the higher payment.                           |
+------------+---------------------------------------------------------+

Continued on next page

3\. Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| ##         | > ***Energy efficiency improvements up to \$3,000**:*   |
| ### e. Doc |                                                         |
| umentation | > Evidence of the cost of improvements such as a copy   |
|  Required  | > of the bid(s) or contract itemizing the improvements  |
| with Close | > and their cost.                                       |
| d Loan Pac |                                                         |
| kage {#e.- | > ***Improvements more than \$3,000, up to \$6,000**:*  |
| documentat |                                                         |
| ion-requir | > Evidence of the                                       |
| ed-with-cl |                                                         |
| osed-loan- | -   cost of improvements such as a copy of the bid(s)   |
| package .u |     or contract itemizing the improvements and their    |
| nnumbered} |     cost, and                                           |
|            |                                                         |
|            | -   the lender's determination that the increase in     |
|            |     monthly mortgage payments does not exceed the       |
|            |     likely reduction in monthly utility costs.          |
|            |                                                         |
|            | > ***Improvements over \$6,000:***                      |
|            |                                                         |
|            | -   Documentation of VA's valuation of the energy       |
|            |     efficiency improvements, and                        |
|            |                                                         |
|            | -   for prior approval loans, the Certificate of        |
|            |     Commitment must reflect the additional amount.      |
|            |                                                         |
|            | > ***IRRRL with significant increase in payments:***    |
|            |                                                         |
|            | > If the cost of the improvements causes the new loan   |
|            | > payment (PITI) to be 20 percent or more higher than   |
|            | > the old payment (on the loan being refinanced), then  |
|            | > include the lender's certification that it has        |
|            | > determined that the veteran qualified for the higher  |
|            | > payment.                                              |
+------------+---------------------------------------------------------+

Continued on next page

3\. Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| ##### f.   | > Guaranty is calculated on an energy efficient         |
|  How to Ca | > mortgage as described in the following table.         |
| lculate Gu |                                                         |
| aranty and |                                                         |
|  Entitleme |                                                         |
| nt Use {#f |                                                         |
| .-how-to-c |                                                         |
| alculate-g |                                                         |
| uaranty-an |                                                         |
| d-entitlem |                                                         |
| ent-use .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

  -------- --------------------------------------------------------------
  Step     Action

  1        Calculate guaranty on the loan **without** the portion
           attributable to the energy efficiency improvements.

  2        Calculate guaranty on the energy efficiency improvements
           portion by applying the same percentage used in Step 1.

  3        Add the results of Steps 1 and 2 to arrive at guaranty on the
           entire loan.
  -------- --------------------------------------------------------------

+-----------------------------------------------------------------------+
| > **However**                                                         |
|                                                                       |
| > The veteran's entitlement will **only** be charged the amount       |
| > arrived at in Step 1; that is, based upon the loan amount           |
| > **before** adding the cost of the energy efficiency improvements.   |
|                                                                       |
| > ***Example* 1**: 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.    |
| >                                                                     |
| > ***Example* 2**: If a veteran with full entitlement applies for a   |
| > \$144,000 loan to purchase a home, and adds \$6,000 in energy       |
| > efficiency improvements, the 25 percent guaranty on the loan will   |
| > only require the use of \$36,000 entitlement, but the dollar amount |
| > of guaranty will be \$37,500.                                       |
+-----------------------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Calculate the funding fee based on the full loan      |
| ### g. How | > amount including the cost of the energy efficiency    |
|  to Calcul | > improvements.                                         |
| ate the Fu |                                                         |
| nding Fee  |                                                         |
| {#g.-how-t |                                                         |
| o-calculat |                                                         |
| e-the-fund |                                                         |
| ing-fee .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

3\. Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| ##### h. I | > If the energy efficiency improvements are not         |
| mprovement | > completed before closing, the lender may establish an |
| s Not Comp | > escrow or earmarked account and close the loan.       |
| leted Befo |                                                         |
| re Closing | -   A formal escrow is not required.                    |
|  {#h.-impr |                                                         |
| ovements-n | -   Only the amount needed to complete the improvements |
| ot-complet |     must be withheld.                                   |
| ed-before- |                                                         |
| closing .u | -   Check the appropriate block in item 23 [VA Form     |
| nnumbered} |                                                         |
|            | 26-1820](http://www.vba.va.gov/pubs/forms/26-1820.pdf), |
|            |     Report and Certification of Loan Disbursement.      |
|            |                                                         |
|            | -   No additional documentation concerning the          |
|            |     escrowed/earmarked funds must be submitted when     |
|            |     reporting the closed loan.                          |
|            |                                                         |
|            |     > Generally, the improvements should be completed   |
|            |     > within six months from the date of loan closing.  |
|            |                                                         |
|            | -   Provide written notification to VA when             |
|            |     improvements are completed and the escrow funds are |
|            |     disbursed, and                                      |
|            |                                                         |
|            | -   assure the funds are properly applied to the costs  |
|            |     of improvements.                                    |
|            |                                                         |
|            |     > If, after a reasonable time, the lender           |
|            |     > determines that the improvements will not be      |
|            |     > completed                                         |
|            |                                                         |
|            | -   apply the balance of the escrowed/earmarked funds   |
|            |     to reduce the principal balance on the loan, and    |
|            |                                                         |
|            | -   provide written notification to VA that this has    |
|            |     been done.                                          |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### i. R | > The veteran generally may not obtain cash proceeds    |
| eimburseme | > from an IRRRL.                                        |
| nt of Vete |                                                         |
| ran out of | > ***Note***: There is **one** exception. Up to \$6,000 |
|  IRRRL Pro | > of IRRRL loan proceeds may be used to reimburse the   |
| ceeds {#i. | > veteran for the cost of energy efficiency             |
| -reimburse | > improvements completed within the 90 days immediately |
| ment-of-ve | > preceding the date of the loan.                       |
| teran-out- |                                                         |
| of-irrrl-p |                                                         |
| roceeds .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 4. Loans for Alteration and Repair {#loans-for-alteration-and-repair .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date |                                                         |
|            | This section has been changed to create subsection      |
|            | lettering.                                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a. D | > VA may guarantee a loan for alteration and repair     |
| escription |                                                         |
|  {#a.-desc | -   of a residence already owned by the veteran and     |
| ription .u |     occupied as a home, or                              |
| nnumbered} |                                                         |
|            | -   made in conjunction with a purchase loan on the     |
|            |     property.                                           |
|            |                                                         |
|            |     > The alterations and repairs must be those         |
|            |     > ordinarily found on similar property of           |
|            |     > comparable value in the community.                |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b.   | > The cost of alterations and repairs to structures may |
|  Value Con | > be included in a loan for the purchase of improved    |
| sideration | > property to the extent that their value supports the  |
| s {#b.-val | > loan amount.                                          |
| ue-conside |                                                         |
| rations .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 5. Supplemental Loans {#supplemental-loans .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date |                                                         |
|            | -   This section has been changed to create subsection  |
|            |     lettering.                                          |
|            |                                                         |
|            | -   Subsection e has been changed to delete references  |
|            |     to "CRV."                                           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > A supplemental loan is a loan for the alteration,     |
| ## a. What | > improvement, or repair of a residential property. The |
|  is a Supp | > residential property must                             |
| lemental L |                                                         |
| oan? {#a.- | -   secure an **existing** VA-guaranteed loan, and      |
| what-is-a- |                                                         |
| supplement | -   be owned and occupied by the veteran, or the        |
| al-loan .u |     veteran will reoccupy upon completion of major      |
| nnumbered} |     alterations, repairs, or improvements.              |
|            |                                                         |
|            |     > The alterations, improvements, or repairs must    |
|            |                                                         |
|            | -   be for the purpose of substantially protecting or   |
|            |     improving the basic livability or utility of the    |
|            |     property, and                                       |
|            |                                                         |
|            | -   be restricted primarily to the maintenance,         |
|            |     replacement, improvement or acquisition of real     |
|            |     property, including fixtures.                       |
|            |                                                         |
|            |     > Installation of features such as barbecue pits,   |
|            |     > swimming pools, etc., does not meet this          |
|            |     > requirement.                                      |
|            |                                                         |
|            |     > No more than 30 percent of the loan proceeds may  |
|            |     > be used for the maintenance, replacement,         |
|            |     > improvement, repair or acquisition of nonfixtures |
|            |     > or quasi-fixtures such as refrigeration, cooking, |
|            |     > washing, and heating equipment, and the equipment |
|            |     > must be related to or supplement the principal    |
|            |     > alteration for which the loan is proposed.        |
+------------+---------------------------------------------------------+

Continued on next page

5\. Supplemental Loans, Continued

+------------+---------------------------------------------------------+
| ##### b.   | > It is the lender's responsibility to obtain an        |
|  Required  | > effective lien of the required dignity.               |
| Lien and M |                                                         |
| aximum Loa | > Possible methods to secure a supplemental loan are    |
| n Term {#b |                                                         |
| .-required | -   through an open end provision of the instrument     |
| -lien-and- |     securing the existing loan                          |
| maximum-lo |                                                         |
| an-term .u | -   through an amendment of the existing loan security  |
| nnumbered} |     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 maximum loan term is                          |
|            |                                                         |
|            | -   30 years if amortized, or                           |
|            |                                                         |
|            | -   5 years if not amortized.                           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > The existing loan must be current with respect to     |
| # c. Other | > taxes, insurance, and amortized payments, and must    |
|  Requireme | > not otherwise be in default **unless** a primary      |
| nts {#c.-o | > purpose of the supplemental loan is to improve the    |
| ther-requi | > ability of the borrower to maintain the loan          |
| rements .u | > obligation.                                           |
| nnumbered} |                                                         |
|            | > The making of a supplemental loan can never result in |
|            | > any increase in the rate of interest on the existing  |
|            | > loan.                                                 |
|            |                                                         |
|            | > A supplemental loan to be written at a higher rate of |
|            | > interest than that payable on the existing loan must  |
|            | > be evidenced by a separate note from the existing     |
|            | > loan.                                                 |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### d.   | > A supplemental loan will require the prior approval   |
|  Prior App | > of VA if                                              |
| roval or A |                                                         |
| utomatic L | -   the loan will be made by a lender who is not the    |
| oan Closin |     holder of the currently guaranteed obligation       |
| g {#d.-pri |                                                         |
| or-approva | -   the loan is to be made by a lender that does not    |
| l-or-autom |     have authority to close loans on an automatic       |
| atic-loan- |     basis, or                                           |
| closing .u |                                                         |
| nnumbered} | -   an obligor liable on the currently outstanding      |
|            |     obligation will be released from personal liability |
|            |     by operation of law or otherwise.                   |
+------------+---------------------------------------------------------+

Continued on next page

5\. Supplemental Loans, Continued

+------------+---------------------------------------------------------+
| ##### e.   | > Submit a statement describing the alterations,        |
|  Procedure | > improvements, or repairs made or to be made with the  |
| s {#e.-pro | > prior approval application (or loan closing package,  |
| cedures .u | > if closed automatically). In addition, report the     |
| nnumbered} | > amount outstanding on the existing loan as of the     |
|            | > date of closing of the supplemental loan in the loan  |
|            | > closing package.                                      |
|            |                                                         |
|            | > ***If the cost of the repairs, alterations, or        |
|            | > improvements exceeds \$3,500***:                      |
|            |                                                         |
|            | > A NOV and compliance inspections are required.        |
|            |                                                         |
|            | > ***If the cost of the repairs, alterations, or        |
|            | > improvements does not exceed \$3,500***               |
|            |                                                         |
|            | > A NOV and compliance inspections are not required.    |
|            | > Instead, a statement of reasonable value may be       |
|            | > submitted. The statement must be completed and signed |
|            | > by a VA-designated appraiser. A VA-designated         |
|            | > appraiser is an individual nominated by the lender    |
|            | > (who may be an officer, trustee, or employee of the   |
|            | > lender or its agent) who has been approved by the     |
|            | > local VA office. The statement must specify           |
|            |                                                         |
|            | -   the work done or to be done                         |
|            |                                                         |
|            | -   the purchase price or cost of the work and          |
|            |     material, and                                       |
|            |                                                         |
|            | -   that the purchase price or cost does not exceed the |
|            |     reasonable value.                                   |
|            |                                                         |
|            |     > In lieu of VA compliance inspections, the lender  |
|            |     > must submit a certification 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](http://www.vba.va.gov/pubs/forms/26-1820.pdf) |
|            |     > appear to have been completed in substantial      |
|            |     > conformance with related contracts."              |
+------------+---------------------------------------------------------+

Continued on next page

5\. Supplemental Loans, Continued

+------------+---------------------------------------------------------+
| #####      | > *If the supplemental loan will not be consolidated    |
| f. Guarant | > with a related outstanding guaranteed loan*:          |
| y and Enti |                                                         |
| tlement {# | -   the veteran must have sufficient entitlement for    |
| f.-guarant |     the new loan, and                                   |
| y-and-enti |                                                         |
| tlement .u | -   VA will issue a new Loan Guaranty Certificate       |
| nnumbered} |     solely for supplemental loans.                      |
|            |                                                         |
|            |     > *If the supplemental loan will be consolidated    |
|            |     > with a related outstanding guaranteed loan*:      |
|            |                                                         |
|            |     > VA will issue a new modified guaranty             |
|            |     > certificate.                                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > If the veteran has no available entitlement, VA can   |
| g. Procedu | > still guarantee the supplemental loan provided the    |
| re {#g.-pr | > lender is the holder of the veteran's existing loan   |
| ocedure .u | > and the loans are to be consolidated.                 |
| nnumbered} |                                                         |
|            | > The amount of the modified guaranty will be the       |
|            | > maximum guaranty effective on the existing loan at    |
|            | > the time the supplemental loan is closed.             |
|            |                                                         |
|            | > To calculate the percentage of guaranty applicable to |
|            | > the combined indebtedness take the result of Step 1,  |
|            | > and divide by the result of Step 3.                   |
|            |                                                         |
|            | > Follow the steps in the table below to calculate the  |
|            | > percentage of guaranty applicable to the combined     |
|            | > indebtedness.                                         |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| Step  | Action                                                       |
+-------+--------------------------------------------------------------+
| 1     | -   Take the balance of the existing loan at the time of     |
|       |     closing of the supplemental loan, and                    |
|       |                                                              |
|       | -   multiply by the percentage of guaranty for the existing  |
|       |     loan, as shown on the guaranty certificate.              |
+-------+--------------------------------------------------------------+
| 2     | Calculate the amount of guaranty that would be issued on the |
|       | supplemental loan as an independent loan (do not exceed the  |
|       | amount of entitlement available to the veteran).             |
+-------+--------------------------------------------------------------+
| 3     | -   Take the balance of the existing loan, and               |
|       |                                                              |
|       | -   add the amount of the supplemental loan.                 |
+-------+--------------------------------------------------------------+
| 4     | -   Take the result of Step 1 above, and                     |
|       |                                                              |
|       | -   add the result of Step 2 above.                          |
+-------+--------------------------------------------------------------+
| 5     | Divide by the result of Step 3 above.                        |
+-------+--------------------------------------------------------------+

#### 6. Adjustable Rate Mortgages (ARMs)

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | This section has been created to provide specific       |
|            | information pertaining to the Adjustable Rate Mortgage  |
|            | and Hybrid Adjustable Rate Mortgage loan types.         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a    | > Public Law 108-454 gives VA authority to guarantee    |
| . Definiti | > "traditional" Adjustable Rate Mortgages (ARMs) in a   |
| on of Adju | > manner similar to HUD's Adjustable Rate Mortgages     |
| stable Rat | > under section 251 of the National Housing Act. VA     |
| e Mortgage | > previously had this authority but it expired          |
|            | > September 30, 1995. The legislation provides          |
|            | > authority through September 30, 2008.                 |
|            | >                                                       |
|            | > An ARM loan offers more flexible interest rates based |
|            | > on negotiated initial fixed interest rates coupled    |
|            | > with periodic adjustments to the interest rate over   |
|            | > time. Hybrid ARMs have longer initial fixed rates of  |
|            | > three, five, seven, or ten years while a              |
|            | > "traditional" ARM allows for an annual adjustment     |
|            | > after 1 year.                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > ***Traditional ARMs***                                |
|  b. Intere | >                                                       |
| st Rate Ad | > Interest rate adjustments occur on an annual basis.   |
| justments  | > The annual interest rate adjustments are limited to a |
|            | > maximum increase or decrease of 1 percentage point.   |
|            | > Additionally, interest rate increases are limited to  |
|            | > a maximum of 5 percentage points over the life of the |
|            | > loan.                                                 |
|            | >                                                       |
|            | > ***Hybrid ARMs***                                     |
|            | >                                                       |
|            | > If the initial contract interest rate remains fixed   |
|            | > for less than five years, the initial adjustment is   |
|            | > limited to a maximum increase or decrease of 1        |
|            | > percentage point and the interest rate increase over  |
|            | > the life of the loan is limited to 5 percentage       |
|            | > points.                                               |
|            | >                                                       |
|            | > If the initial contract interest rate remains fixed   |
|            | > for five years or more, the initial adjustment will   |
|            | > be limited to a maximum increase or decrease of 2     |
|            | > percentage points and the interest rate increase over |
|            | > the life of the loan will be limited to 6 percentage  |
|            | > points.                                               |
|            | >                                                       |
|            | > *Note*: After the initial interest rate adjustment,   |
|            | > annual adjustments may be up to 2 percentage points.  |
+------------+---------------------------------------------------------+

Continued on next page

6\. Adjustable Rate Mortgages (ARMs), Continued

+------------+---------------------------------------------------------+
| ##### c.   | > ARM loans that may adjust after one year **MUST** be  |
|  Underwrit | > underwritten at 1 percentage point above the initial  |
| ing an ARM | > rate.                                                 |
|            | >                                                       |
|            | > Hybrid ARMs with a fixed period of three or more      |
|            | > years may be underwritten at the initial interest     |
|            | > rate.                                                 |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > The provisions of Public Law 108-454 will not affect  |
| ### d. Ext | > existing hybrid ARMs. VA hybrid ARM loans made prior  |
| ension of  | > to Public Law 108-454 will be subject to the terms in |
| Authority  | > effect at the time they were made.                    |
| for Hybrid | >                                                       |
|  ARM Loans | > ***Example:*** A hybrid ARM with an initial fixed     |
|            | > rate for five years made in October 2004 is limited   |
|            | > to a 1 percent initial adjustment and a 5 percent     |
|            | > limit over the life of the loan.                      |
|            |                                                         |
|            | ***Note***: Public Law 108-454 extends VA authority to  |
|            | guarantee hybrid ARM loans to September 30, 2008.       |
+------------+---------------------------------------------------------+

#### 7. Graduated Payment Mortgages (GPMs)

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date |                                                         |
|            | -   This section has been changed to create subsection  |
|            |     lettering.                                          |
|            |                                                         |
|            | -   Subsections c and i have been changed to delete     |
|            |     references to "CRV."                                |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a. D | > A GPM is a mortgage with the following amortization   |
| escription | > features:                                             |
|            |                                                         |
|            | -   lower initial monthly payments than payments on a   |
|            |     comparable mortgage under the standard amortization |
|            |     plan                                                |
|            |                                                         |
|            | -   periodic (normally annual) increases in the monthly |
|            |     payment by a fixed percentage for a stated          |
|            |     "graduation period," and                            |
|            |                                                         |
|            | -   monthly payments that level off after the           |
|            |     graduation period and remain the same for the       |
|            |     duration of the loan.                               |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   The payments, after the leveling off period, are    |
|            |     higher than payments on a comparable mortgage under |
|            |     the standard amortization plan.                     |
|            |                                                         |
|            |     > The method used to achieve this involves          |
|            |     > deferring a portion of the interest due on the    |
|            |     > loan each month during the graduation period and  |
|            |     > adding that interest to the principal balance.    |
|            |     > This                                              |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   **decreases** the monthly payments during the       |
|            |     graduation period, and                              |
|            |                                                         |
|            | -   **increases** the outstanding principal balance     |
|            |     during the graduation period, creating "negative    |
|            |     amortization."                                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > GPMs should be used as an alternative for qualified   |
| ### b. Acc | > veterans whose income                                 |
| eptable Us |                                                         |
| e of GPMs  | -   is expected to increase at a rate which can         |
| {#b.-accep |     accommodate the increase in monthly payments, or    |
| table-use- |                                                         |
| of-gpms .u | -   is currently sufficient to accommodate the higher   |
| nnumbered} |     GPM payments after the leveling off period.         |
|            |                                                         |
|            |     > GPMs should **not** be used as a tool to qualify  |
|            |     > veterans who cannot qualify for loans under the   |
|            |     > standard amortization plan **unless** their       |
|            |     > income can reasonably be expected to increase at  |
|            |     > a rate which can accommodate the increase in      |
|            |     > monthly payments.                                 |
+------------+---------------------------------------------------------+

Continued on next page

7\. Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| b\.        | > A GPM may be used **only** to acquire a single-family |
| Acceptable | > dwelling unit (but **not** a manufactured home) and   |
| Use of     | > can include funds for energy efficiency improvements. |
| GPMs       |                                                         |
| (          | > A GPM may **not** be used for a refinancing loan, for |
| continued) | > alteration, repair, or improvement only purposes, or  |
|            | > to acquire a multiple unit dwelling.                  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### c.   | > ***Existing properties***:                            |
|  Maximum L |                                                         |
| oan Amount | > The principal amount of the loan may **never** exceed |
|  and Down  | > the initial reasonable value of the property (that    |
| Payment Re | > is, the value indicated on the NOV used for loan      |
| quired {#c | > closing).                                             |
| .-maximum- |                                                         |
| loan-amoun | -   Since the principal balance increases during the    |
| t-and-down |     initial years of the loan, a loan made for the full |
| -payment-r |     amount of reasonable value would violate this       |
| equired .u |     provision.                                          |
| nnumbered} |                                                         |
|            | -   Therefore, a down payment is required to keep the   |
|            |     principal balance from **ever** exceeding the       |
|            |     initial reasonable value of the property.           |
|            |                                                         |
|            |     > To calculate the maximum initial loan amount and  |
|            |     > the required down payment, use HUD tables for     |
|            |     > Plan III Section 245 GPMs showing outstanding     |
|            |     > principal balance factors and monthly installment |
|            |     > amounts per \$1,000 of original loan proceeds.    |
|            |     > The factors vary according to the interest rate   |
|            |     > on the loan.                                      |
|            |                                                         |
|            | -   These tables are available on diskette through HUD  |
|            |     offices.                                            |
|            |                                                         |
|            |     > Determine the maximum initial loan amount as      |
|            |     > follows:                                          |
|            |                                                         |
|            |     > Initial reasonable value of the property          |
|            |                                                         |
|            |     > **÷**                                             |
|            |                                                         |
|            |     > Highest outstanding principal balance factor per  |
|            |     > \$1,000 of original loan proceeds for the         |
|            |     > particular interest rate (from the HUD tables)    |
|            |                                                         |
|            |     > x                                                 |
|            |                                                         |
|            |     > 1,000                                             |
|            |                                                         |
|            |     > The difference between this maximum initial loan  |
|            |     > amount and the initial reasonable value of the    |
|            |     > property is the amount of down payment required.  |
+------------+---------------------------------------------------------+

Continued on next page

7\. Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| ##### c. M | > ***New construction or existing homes not previously  |
| aximum Loa | > occupied***:                                          |
| n Amount a |                                                         |
| nd Down Pa | > The initial loan amount may not exceed the lesser of  |
| yment Requ | > the purchase price or 97.50 percent of the initial    |
| ired (cont | > reasonable value of the property.                     |
| inued) {#c |                                                         |
| .-maximum- | -   A down payment will be required to cover the        |
| loan-amoun |     difference between the reasonable value and the     |
| t-and-down |     initial loan amount.                                |
| -payment-r |                                                         |
| equired-co |     > The principal amount of the loan thereafter       |
| ntinued .u |     > (including the amount of all interest deferred    |
| nnumbered} |     > and added to principal, but not including any     |
|            |     > amount attributable to the funding fee or energy  |
|            |     > efficiency improvements) may not be scheduled to  |
|            |     > exceed the projected value of the property at any |
|            |     > time.                                             |
|            |                                                         |
|            |     > Calculate the projected value of the property by  |
|            |     > increasing the reasonable value of the property   |
|            |     > from the time the loan is made at a rate not in   |
|            |     > excess of 2.5 percent per year, but never to      |
|            |     > exceed 115 percent of the initial reasonable      |
|            |     > value.                                            |
|            |                                                         |
|            |     > ***Downpayment***:                                |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   The amount required depends upon whether the        |
|            |     dwelling is new or existing. (See above.)           |
|            |                                                         |
|            | -   The veteran may choose to pay a higher down payment |
|            |     to offset the negative amortization.                |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   The downpayment must be paid in cash from the       |
|            |     veteran's own resources.                            |
|            |                                                         |
|            |     > ***Impact of interest rate increase on loans in   |
|            |     > process***:                                       |
|            |                                                         |
|            |     > Any increase in the interest rate requires        |
|            |     > recalculation of the maximum loan amount, down    |
|            |     > payment, and payment schedule.                    |
|            |                                                         |
|            |     > ***Funding fee and energy efficiency              |
|            |     > improvements***:                                  |
|            |                                                         |
|            |     > The initial loan amount may be increased by the   |
|            |     > amount of the VA funding fee, if financed in the  |
|            |     > loan, and the cost of any energy efficiency       |
|            |     > improvements.                                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Loan payments increase each year at a rate of 7.5     |
| ### d. Amo | > percent per year for the first five years. At the     |
| rtization  | > beginning of the sixth year, the payments become      |
| {#d.-amort | > level for the remaining term. This amortization plan  |
| ization .u | > is similar (except for the "minimum cash investment"  |
| nnumbered} | > requirement) to HUD's GPM Plan III under Section 245  |
|            | > of the National Housing Act.                          |
+------------+---------------------------------------------------------+

Continued on next page

7\. Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| ##         | > Perform the necessary calculations using HUD tables   |
| ### e. How | > for Plan III Section 245 GPMs showing outstanding     |
|  to Calcul | > principal balance factors and monthly installment     |
| ate Monthl | > amounts per \$1,000 of original loan proceeds. The    |
| y Installm | > factors vary according to the interest rate on the    |
| ents {#e.- | > loan.                                                 |
| how-to-cal |                                                         |
| culate-mon | > ***Note***: These tables are available on diskette to |
| thly-insta | > lenders through HUD offices.                          |
| llments .u |                                                         |
| nnumbered} | > Determine the monthly installment amounts as follows: |
|            |                                                         |
|            | > Number of thousands of dollars in the original loan   |
|            | > amount (including the VA funding fee, if financed,    |
|            | > and the cost of any energy efficiency improvements)   |
|            |                                                         |
|            | > x                                                     |
|            |                                                         |
|            | > Monthly installment factor per \$1,000 of original    |
|            | > loan proceeds for the particular interest rate from   |
|            | > the HUD tables (Different factors are                 |
|            |                                                         |
|            | > provided for each of years one through five, and year |
|            | > six and beyond.)                                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### f.   | > HUD's GPM Annual Percentage Rate (APR) tables may     |
|  APR Calcu | > **not** be used for VA purposes because they include  |
| lation {#f | > an adjustment for the HUD mortgage insurance premium. |
| .-apr-calc |                                                         |
| ulation .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > If there are strong indications that the applicant's  |
| ### g. Und | > income can reasonably be expected to keep pace with   |
| erwriting  | > the increases in the monthly mortgage payment         |
| Considerat |                                                         |
| ions {#g.- | > then                                                  |
| underwriti |                                                         |
| ng-conside | -   analyze the adequacy of the applicant's income, and |
| rations .u |                                                         |
| nnumbered} | -   complete [VA Form                                   |
|            |                                                         |
|            | 26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf), |
|            |     Loan Analysis, using only the first year's mortgage |
|            |     payment in monthly shelter expenses.                |
|            |                                                         |
|            |     > However, if such strong indications are absent    |
|            |     > then                                              |
|            |                                                         |
|            | -   analyze the adequacy of the applicant's income, and |
|            |                                                         |
|            | -   complete [VA Form                                   |
|            |                                                         |
|            | 26-6393](http://www.vba.va.gov/pubs/forms/26-6393.pdf), |
|            |     Loan Analysis, using the payment which would apply  |
|            |     if the loan was under the standard amortization     |
|            |     plan.                                               |
|            |                                                         |
|            |     > The lower initial payments of the GPM can be      |
|            |     > considered a compensating factor, if appropriate. |
+------------+---------------------------------------------------------+

Continued on next page

7\. Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| #####      | > The following statement must be signed by the veteran |
|  h. Vetera | > and submitted with each prior approval application or |
| n's Statem | > automatic loan report involving a VA GPM:             |
| ent {#h.-v |                                                         |
| eterans-st | > "I fully understand that because of the               |
| atement .u | > graduated-payment loan obligation I am undertaking,   |
| nnumbered} | > my mortgage payment excluding taxes and insurance     |
|            | > will start at \$\_\_\_\_\_\_\_\_ and will increase by |
|            | > 7.5 percent each year for five 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."                    |
|            |                                                         |
|            |     > If the interest rate increases after the veteran  |
|            |     > has signed the initial statement, an amended      |
|            |     > statement must be prepared and signed by the      |
|            |     > veteran before loan closing, and included with    |
|            |     > the loan closing package.                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > The property securing the loan must have a remaining  |
| # i. Other | > economic life of at least 30 years, as shown on the   |
|  Requireme | > NOV.                                                  |
| nts {#i.-o |                                                         |
| ther-requi | > While a GPM cannot be used to refinance another loan, |
| rements .u | > a GPM can be refinanced by a fixed rate VA-guaranteed |
| nnumbered} | > refinancing loan.                                     |
+------------+---------------------------------------------------------+

#### 8. Growing Equity Mortgages (GEMs) {#growing-equity-mortgages-gems .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > A GEM has gradually increasing monthly payments, with |
| ### a. Des | > all of the increase applied to the principal balance. |
| cription { | > Compared to the standard amortization plan, GEMs have |
| #a.-descri | > a faster accumulation of equity and earlier loan      |
| ption-2 .u | > payoff.                                               |
| nnumbered} |                                                         |
|            | > GEM amortization plans are generally acceptable for   |
|            | > VA loan purposes.                                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b. A | > The initial payment on a GEM is typically based on    |
| mortizatio | > what the payment would be for a 30-year mortgage      |
| n Examples | > under the standard amortization plan. Payment         |
|  {#b.-amor | > increases can be fixed or tied to an index.           |
| tization-e |                                                         |
| xamples .u | > ***Example* 1**: Monthly payments are increased by 3  |
| nnumbered} | > percent each year for the first ten years. The        |
|            | > payments level off in the 11^th^ year and remain      |
|            | > constant through loan payoff. Loan payoff may occur   |
|            | > within a few years of the leveling off of the         |
|            | > payment, depending upon interest rate.                |
|            | >                                                       |
|            | > ***Example* 2**: The increases in the monthly         |
|            | > payments are based on a percentage of a Commerce      |
|            | > Department index that measures per capita, after-tax  |
|            | > disposable personal income in the United States.      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > The lender must determine that the applicant's income |
| ### c. Und | > can reasonably be expected to keep pace with the      |
| erwriting  | > increases in the monthly mortgage payment.            |
| {#c.-under |                                                         |
| writing .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 9. Loans Involving Temporary Interest Rate Buydowns {#loans-involving-temporary-interest-rate-buydowns .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > As a marketing tool, builders, sellers, or lenders    |
| ### a. Des | > will sometimes establish and fund escrows to          |
| cription { | > temporarily reduce a borrower's loan payments during  |
| #a.-descri | > the initial years of the mortgage. The borrower may   |
| ption-3 .u | > also fund such an escrow for herself/himself as a     |
| nnumbered} | > financial management tool.                            |
|            |                                                         |
|            | > VA will guaranty loans involving temporary interest   |
|            | > rate buydowns, if otherwise eligible.                 |
|            |                                                         |
|            | > A temporary interest rate buydown can be used in      |
|            | > conjunction with **any** type of VA-guaranteed loan   |
|            | > except a GPM.                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Funds must be safely escrowed with an independent     |
| b. Escrow  | > third-party escrow agent beyond the reach of          |
| Requiremen | > prospective creditors of the builder, seller, lender, |
| ts {#b.-es | > and the borrower.                                     |
| crow-requi |                                                         |
| rements .u | > ***Exception***: If the Federal National Mortgage     |
| nnumbered} | > Association (FNMA) is the holder, it may take custody |
|            | > of the funds.                                         |
|            |                                                         |
|            | > The escrow agent must make payments directly to the   |
|            | > lender or servicer. The funds may be used **only**    |
|            | > for payments due on the note. The funds may **not**   |
|            | > be used to pay past due monthly loan payments. If the |
|            | > loan is foreclosed or prepaid, the funds must be      |
|            | > credited against the veteran's indebtedness.          |
|            |                                                         |
|            | > Escrowed funds may **not** revert to the party that   |
|            | > established the escrow. If the property is sold       |
|            | > subject to, or on an assumption of the loan, the      |
|            | > escrow must continue to pay out on behalf of the new  |
|            | > owner.                                                |
+------------+---------------------------------------------------------+

Continued on next page

9\. Loans Involving Temporary Interest Rate Buydowns, Continued

+------------+---------------------------------------------------------+
| ###        | > The loan application may be underwritten based on the |
| ## c. If B | > first year's payment amount if there are strong       |
| orrower's  | > indications that the income used to support the       |
| Income is  | > application will increase to cover the yearly         |
| Expected t | > increases in loan payments.                           |
| o Keep Pac |                                                         |
| e with Pay | -   Routine cost of living increases **cannot** be used |
| ment Incre |     for this purpose.                                   |
| ases {#c.- |                                                         |
| if-borrowe | -   Increases resulting from confirmed future           |
| rs-income- |     promotions or wage percentage increases guaranteed  |
| is-expecte |     by labor contracts (for example, teachers, auto     |
| d-to-keep- |     workers) may be given favorable consideration.      |
| pace-with- |                                                         |
| payment-in |     > The assistance payments must run for a minimum of |
| creases .u |     > one year. Scheduled reductions in the assistance  |
| nnumbered} |     > payments must occur annually on the anniversary   |
|            |     > of the first mortgage payment.                    |
|            |                                                         |
|            |     > The reduction in the assistance payments may be   |
|            |     > accomplished through                              |
|            |                                                         |
|            | -   annual payment increases in equal or approximately  |
|            |     equal amounts, or                                   |
|            |                                                         |
|            | -   equal annual increases in the interest rate.        |
+------------+---------------------------------------------------------+

Continued on next page

9\. Loans Involving Temporary Interest Rate Buydowns, Continued

+------------+---------------------------------------------------------+
| ##### d.   | > The loan application must be underwritten based on    |
| If it is U | > the **full** payment amount if there are no strong    |
| nclear Whe | > indications that the income used to support the       |
| ther Borro | > application can reasonable be expected to keep pace   |
| wer's Inco | > with the increases in loan payments.                  |
| me Can Kee |                                                         |
| p Pace wit | > The buydown arrangement can be considered a           |
| h Increase | > compensating factor.                                  |
| s {#d.-if- |                                                         |
| it-is-uncl | > If the residual income and/or debt-to-income ratio is |
| ear-whethe | > marginal, the buydown plan (used to offset a          |
| r-borrower | > short-term debts), along with other compensating      |
| s-income-c | > factors, may support approval of the loan. See        |
| an-keep-pa | > "Compensating Factors" in [section 10 of chapter      |
| ce-with-in | > 4](http://w                                           |
| creases .u | ww.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch04.doc). |
| nnumbered} |                                                         |
|            | > Provide a statement signed by the underwriter giving  |
|            | > reasons for approval.                                 |
|            |                                                         |
|            | > The terms of the buydown arrangement are **not**      |
|            | > limited to specific criteria such as a minimum or     |
|            | > maximum number of years for application of the        |
|            | > assistance payments.                                  |
|            |                                                         |
|            | > It is the lender's responsibility to review and       |
|            | > determine the acceptability of the buydown.           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > Lenders must provide the veteran-borrower with a      |
| # e. Other | > clear, written explanation of the buydown agreement.  |
|  Requireme |                                                         |
| nts {#e.-o | > A copy of the buydown and escrow agreements must      |
| ther-requi | > accompany the loan submission.                        |
| rements .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 10. Farm Residence Loans {#farm-residence-loans .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a. E | > A loan for the purchase, construction, repair,        |
| ligibility | > alteration, or improvement of a farm residence which  |
|  {#a.-elig | > is occupied or will be occupied by the veteran as a   |
| ibility .u | > home is eligible for guaranty.                        |
| nnumbered} |                                                         |
|            | > The loan cannot cover                                 |
|            |                                                         |
|            | -   the nonresidential value of farm land in excess of  |
|            |     the homesite                                        |
|            |                                                         |
|            | -   the barn, silo, or other outbuildings necessary to  |
|            |     the operation of the farm, or                       |
|            |                                                         |
|            | -   farm equipment or livestock.                        |
|            |                                                         |
|            |     > 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).                                          |
+------------+---------------------------------------------------------+

Continued on next page

10\. Farm Residence Loans, Continued

+------------+---------------------------------------------------------+
| ##         | > If some or all of the income necessary to support the |
| ### b. Und | > loan payments comes from farming operations, the      |
| erwriting  | > veteran's ability and experience as a farm operator   |
| {#b.-under | > must be established. The procedures and analysis      |
| writing .u | > provided under "Self-Employment Income" in [section 2 |
| nnumbered} | > of chapter                                            |
|            | > 4](http://                                            |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch04.doc) |
|            | > apply generally. In addition, apply the following:    |
|            |                                                         |
|            | > ***New farmer or new farm operation***:               |
|            |                                                         |
|            | > Obtain the following:                                 |
|            |                                                         |
|            | -   The veteran's proposed plan of operation of the     |
|            |     farm, showing the number of acres for each crop,    |
|            |     amount of livestock, etc., upon which an estimate   |
|            |     of income and expenses may be made.                 |
|            |                                                         |
|            | -   The veteran's statement that he or she owns or      |
|            |     proposes purchasing the farm equipment required to  |
|            |     operate the farm. If additional indebtedness is to  |
|            |     be incurred in the purchase of this equipment, the  |
|            |     statement should contain full details as to         |
|            |     repayment terms, etc...                             |
|            |                                                         |
|            | -   An estimate of farm income and expenses by a local  |
|            |     farm appraiser designated by VA or another          |
|            |     qualified person, or the estimate used by a lender  |
|            |     that has agreed to carry an operating line of       |
|            |     credit for the veteran. The estimate should be      |
|            |     based on the veteran's proposed plan of operation,  |
|            |     his or her ability and experience, and the nature   |
|            |     and condition of the farm to be sold, including     |
|            |     livestock and livestock products. The expense       |
|            |     estimate must detail labor, seed, fertilizer, taxes |
|            |     and insurance, repairs, machinery, fuel, etc...     |
|            |                                                         |
|            | -   A copy of a commitment from a lender for an         |
|            |     operating line of credit or evidence of the         |
|            |     resources to be used to cover operating expenses.   |
|            |                                                         |
|            |     > ***Experienced farmer continuing same farm        |
|            |     > operation***:                                     |
|            |                                                         |
|            |     > 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 three years (or additional periods if needed |
|            |     > to demonstrate stability of veteran's operation). |
|            |     > Analyze the reasons for any build-up of operating |
|            |     > debt.                                             |
+------------+---------------------------------------------------------+

#### 11. Cooperative Home Loans {#cooperative-home-loans .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### a.   | > Before a NOV is issued in any case involving a        |
|  Procedure | > cooperative plan of ownership, the details of the     |
| s {#a.-pro | > case must be referred by the local VA office to VA    |
| cedures .u | > Central Office for specific processing instructions.  |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 12. Loans for Manufactured Homes Classified as Real Estate {#loans-for-manufactured-homes-classified-as-real-estate .unnumbered}

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > This section only addresses manufactured homes which  |
| ### a. How | > are, or will be, permanently affixed to a lot **and** |
|  to Begin  | > considered real estate under state law.               |
| {#a.-how-t |                                                         |
| o-begin .u | > Lenders considering making a loan involving a         |
| nnumbered} | > manufactured home that is **not** permanently affixed |
|            | > should contact the local VA office for processing     |
|            | > instructions.                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Permanently affixed manufactured home loans can be    |
| ### b. All | > made for any of the allowable loan purposes listed in |
| owable Loa | > the table below. Loan specifications and treatment of |
| n Purposes | > these loans are virtually the same as for any other   |
|  and Calcu | > VA-guaranteed home loans from a loan processing       |
| lation of  | > standpoint, except for calculation of the maximum     |
| Maximum Lo | > loan amount.                                          |
| an Amount  |                                                         |
| {#b.-allow | > The following table provides the methods for          |
| able-loan- | > calculating maximum loan amount.                      |
| purposes-a |                                                         |
| nd-calcula |                                                         |
| tion-of-ma |                                                         |
| ximum-loan |                                                         |
| -amount .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+--------------------+-------------------------------------------------+
| Allowable Loan     | Maximum Loan                                    |
| Purpose            |                                                 |
|                    | The loan amount is limited to:                  |
+--------------------+-------------------------------------------------+
| To purchase a      | The lesser of                                   |
| manufactured home  |                                                 |
| to be affixed to a | -   the sum of the purchase price plus the cost |
| lot already owned  |     of all other real property improvements, or |
| by the veteran.    |                                                 |
|                    | -   the total reasonable value of the unit,     |
|                    |     lot, and real property improvements, plus   |
|                    |                                                 |
|                    | -   the VA funding fee                          |
+--------------------+-------------------------------------------------+

Continued on next page

12\. Loans for Manufactured Homes Classified as Real Estate, Continued

  -----------------------------------------------------------------------
  b\. Allowable Loan Purposes and Calculation of Maximum Loan Amount
  (continued)

  -----------------------------------------------------------------------

+--------------------+-------------------------------------------------+
| Allowable Loan     | Maximum Loan                                    |
| Purpose            |                                                 |
|                    | The loan amount is limited to:                  |
+--------------------+-------------------------------------------------+
| To purchase a      | The lesser of                                   |
| manufactured home  |                                                 |
| and a lot to which | -   the total purchase price of the             |
| it will be affixed |     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    | The lesser of                                   |
| existing loan on a |                                                 |
| manufactured home  | -   the sum of the balance of the loan being    |
| and purchase the   |     refinanced plus the purchase price of the   |
| lot to which the   |     lot, not to exceed its reasonable value     |
| home will be       |     plus the costs of the necessary site        |
| affixed            |     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.                         |
+--------------------+-------------------------------------------------+

Continued on next page

12\. Loans for Manufactured Homes Classified as Real Estate, Continued

  -----------------------------------------------------------------------
  b\. Allowable Loan Purposes and Calculation of Maximum Loan Amount
  (continued)

  -----------------------------------------------------------------------

+--------------------+-------------------------------------------------+
| Allowable Loan     | Maximum Loan                                    |
| Purpose            |                                                 |
|                    | The loan amount is limited to:                  |
+--------------------+-------------------------------------------------+
| > An IRRRL to      | The sum of                                      |
| > refinance an     |                                                 |
| > existing         | -   the balance of the VA loan being            |
|                    |     refinanced, plus                            |
| VA loan on a       |                                                 |
| permanently        | -   allowable closing costs, plus               |
| affixed            |                                                 |
| manufactured home  | -   up to 2 discount points, plus               |
| and lot            |                                                 |
|                    | -   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 [section 1 of chapter                |
|                    | 6](http://www.warms                             |
|                    | .vba.va.gov/admin26/pamphlet/pam26_7/ch06.doc)) |
|                    | except the term of the loan may be as long as   |
|                    | 30 years and 32 days.                           |
+--------------------+-------------------------------------------------+

#### 13. Loans to Native American Veterans on Trust Lands

+------------+---------------------------------------------------------+
| ##### C    | > September 15, 2004, Change 4                          |
| hange Date | >                                                       |
|            | > This section has been changed to create subsection    |
|            | > lettering.                                            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > VA can guarantee loans to Native American veterans on |
| a. General | > trust land. Lenders have shown little interest in     |
|            | > making these loans because of difficulties obtaining  |
|            | > title to properties on trust land in the event of     |
|            | > foreclosure.                                          |
|            | >                                                       |
|            | > VA does have a Native American Direct Loan Program.   |
|            | > Lenders should advise interested Native American      |
|            | > veterans to contact the nearest VA office for         |
|            | > information.                                          |
+------------+---------------------------------------------------------+