## Chapter 9. Legal Instruments, Liens, Escrows and Related Issues

#### Overview

+------------+---------------------------------------------------------+
| ##### In   | > This chapter contains information about legal         |
| troduction | > instruments, liens, escrows, and related issues.      |
+------------+---------------------------------------------------------+

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

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

  1       Security Instruments                                     9-2

  2       Title Limitations                                        9-5

  3       Land Sale Contracts and Option Contracts                 9-8

  4       Secondary Borrowing                                      9-9

  5       Purchase of Property with Encumbrances                   9-11

  6       Liens Covering Community-Type Services and Facilities    9-12

  7       Powers of Attorney                                       9-14

  8       Lender Review of Sales Contracts on Proposed             9-17
          Construction                                             

  9       Escrow for Postponed Completion of Improvements          9-20

  10      Hazard Insurance                                         9-24

  11      Escrow for Taxes and Insurance                           9-27
  ------- -------------------------------------------------------- -------

#### 1. Security Instruments

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | Subsection d has been added to include VA's policy on   |
|            | escape clauses for sales contracts.                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > Lenders may use any note and mortgage forms they wish |
| #### a. Re | > for VA loans.                                         |
| quirements | >                                                       |
|            | > VA regulations at [38 CFR                             |
|            | > 36.4334](http://ww                                    |
|            | w.warms.vba.va.gov/regs/38cfr/bookh/part36/36_4334.doc) |
|            | > provide that security instruments used by a lender    |
|            | > which are inconsistent with VA regulations in effect  |
|            | > on the date the loan is closed will be considered     |
|            | > amended and supplemented to conform to the            |
|            | > regulations.                                          |
|            | >                                                       |
|            | > Lenders must ensure that the security instruments     |
|            | > they use:                                             |
|            |                                                         |
|            | -   Establish the required lien                         |
|            |                                                         |
|            | -   Comply with the laws and regulations governing VA's |
|            |     home loan program                                   |
|            |                                                         |
|            | -   Comply with applicable state laws, and              |
|            |                                                         |
|            | -   Contain the following VA clauses                    |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Assumption Approval clause                          |
|            |                                                         |
|            | -   Acceleration clause                                 |
|            |                                                         |
|            | -   Funding Fee clause                                  |
|            |                                                         |
|            | -   Processing Charge clause, and                       |
|            |                                                         |
|            | -   Indemnity Liability Assumption clause.              |
|            |                                                         |
|            |     > If a lender fails to obtain the required lien or  |
|            |     > otherwise comply with applicable law, VA may      |
|            |     > reduce or deny liability under its guaranty to    |
|            |     > the extent that such failure might have           |
|            |     > prejudiced the rights of the Secretary.           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b. A | > The instruments evidencing the loan must read         |
| ssumption  | > substantially as follows:                             |
| Approval C |                                                         |
| lause {#b. | > "THIS LOAN IS NOT ASSUMABLE WITHOUT THE APPROVAL OF   |
| -assumptio | > THE DEPARTMENT OF VETERANS AFFAIRS OR ITS AUTHORIZED  |
| n-approval | > AGENT."                                               |
| -clause .u |                                                         |
| nnumbered} | > The loan assumption notice must appear conspicuously  |
|            | > on at least one of the security instruments for the   |
|            | > loan.                                                 |
+------------+---------------------------------------------------------+

Continued on next page

1\. Security Instruments, Continued

+------------+---------------------------------------------------------+
| ####       | > The mortgage or deed of trust must contain four       |
| # c. Other | > additional clauses related to the assumption of the   |
|  Clauses { | > loan. VA does not specifically require that these     |
| #c.-other- | > clauses also be included in the note, unless this is  |
| clauses .u | > required under state law to make them enforceable.    |
| nnumbered} | > Due to variations in local laws, the lender should    |
|            | > obtain legal guidance as to any minor changes in      |
|            | > these sample clauses which may be necessary to ensure |
|            | > that they have the effect required by the law and     |
|            | > regulations; that is, the lender does not have to use |
|            | > the exact language provided for these four clauses.   |
|            |                                                         |
|            | > ***Acceleration Clause***:                            |
|            |                                                         |
|            | > "This loan may be declared immediately due and        |
|            | > payable upon transfer of the property securing such   |
|            | > loan to any transferee, unless the acceptability of   |
|            | > the assumption of the loan is established pursuant to |
|            | > [Section 3714 of Chapter 37, Title 38, United States  |
|            | > Code.](http://uscode.                                 |
|            | house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t37t40+ |
|            | 818+0++()  AND ((38) ADJ USC)%3ACITE AND (USC w%2F10 (3 |
|            | 714))%3ACITE  AND (CHAPTER ADJ (37))%3AEXPCITE       )" |
|            |                                                         |
|            | > ***Funding Fee Clause***:                             |
|            |                                                         |
|            | > "A fee equal to one-half of 1 percent of the balance  |
|            | > of this loan as of the date of transfer of the        |
|            | > property shall be payable at the time of transfer to  |
|            | > the loan holder or its authorized agent, as trustee   |
|            | > for the Department of Veterans Affairs. If the        |
|            | > assumer fails to pay this fee at the time of          |
|            | > transfer, the fee shall constitute an additional debt |
|            | > to that already secured by this instrument, shall     |
|            | > bear interest at the rate herein provided, and at the |
|            | > option of the payee of the indebtedness hereby        |
|            | > secured or any transferee thereof, shall be           |
|            | > immediately due and payable. This fee is              |
|            | > automatically waived if the assumer is exempt under   |
|            | > the provisions of [38 U.S.C.                          |
|            | > 3729(c)](http://uscode.h                              |
|            | ouse.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t37t40+8 |
|            | 28+1++()  AND ((38) ADJ USC)%3ACITE AND (USC w%2F10 (37 |
|            | 29))%3ACITE  AND (CHAPTER ADJ (37))%3AEXPCITE       )." |
|            |                                                         |
|            | > ***Processing Charge Clause***:                       |
|            |                                                         |
|            | > "Upon application for approval to allow assumption of |
|            | > this loan, a processing fee may be charged by the     |
|            | > loan holder or its authorized agent for determining   |
|            | > the creditworthiness of the assumer and subsequently  |
|            | > revising the holder's ownership records when an       |
|            | > approved transfer is completed. The amount of this    |
|            | > charge shall not exceed the maximum established by    |
|            | > the Department of Veterans Affairs for a loan to      |
|            | > which [Section 3714                                   |
|            | > of](http://uscode                                     |
|            | .house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t37t40 |
|            | +818+0++()  AND ((38) ADJ USC)%3ACITE AND (USC w%2F10 ( |
|            | 3714))%3ACITE  AND (CHAPTER ADJ (37))%3AEXPCITE       ) |
|            |                                                         |
|            | > [Chapter 37, Title 38, United States                  |
|            | > Code](http://uscode                                   |
|            | .house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t37t40 |
|            | +818+0++()  AND ((38) ADJ USC)%3ACITE AND (USC w%2F10 ( |
|            | 3714))%3ACITE  AND (CHAPTER ADJ (37))%3AEXPCITE       ) |
|            | > applies."                                             |
+------------+---------------------------------------------------------+

Continued on next page

1\. Security Instruments, Continued

+------------+---------------------------------------------------------+
| c\. Other  | > ***Indemnity Liability Assumption Clause:***          |
| Clauses    |                                                         |
| (          | > "If this obligation is assumed, then the assumer      |
| continued) | > hereby agrees to assume all of the obligations of the |
|            | > veteran under the terms of the instruments creating   |
|            | > and securing the loan. The assumer further agrees to  |
|            | > indemnify the Department of Veterans Affairs to the   |
|            | > extent of any claim payment arising from the guaranty |
|            | > or insurance of the indebtedness created by this      |
|            | > instrument."                                          |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > ***Escape Clause***                                   |
|  d. Escape |                                                         |
|  Clause Fo | > If the sales contract was signed by the veteran prior |
| r the Sale | > to receipt of the NOV, the contract must include, or  |
| s Contract | > be amended to include, the clause below.              |
|            |                                                         |
|            | "It is expressly agreed that, notwithstanding any other |
|            | provisions of this contract, the purchaser shall not    |
|            | incur any penalty by forfeiture of earnest money or     |
|            | otherwise or be obligated to complete the purchase of   |
|            | the property described herein, if the contract purchase |
|            | price or cost exceeds the reasonable value of the       |
|            | property established by the Department of Veterans      |
|            | Affairs. The purchaser shall, however, have the         |
|            | privilege and option of proceeding with the             |
|            | consummation of this contract without regard to the     |
|            | amount of the reasonable value established by the       |
|            | Department of Veterans Affairs. (Authority: 38 U.S.C.   |
|            | 501, 3703(c)(1))"                                       |
|            |                                                         |
|            | > This clause may be found at [38 CFR                   |
|            | > 4303(k)(4)](http://ww                                 |
|            | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4303.Doc) |
|            | > in its entirety.                                      |
+------------+---------------------------------------------------------+

#### 2. Title Limitations

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

+------------+---------------------------------------------------------+
| ##         | > VA regulations at [38 CFR                             |
| ### a. Est | > 36.4350](http://ww                                    |
| ate of the | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4350.Doc) |
|  Veteran i | > provide the parameters for the required estate of a   |
| n the Prop | > veteran in real property securing a VA guaranteed     |
| erty {#a.- | > loan. The lender is responsible for ensuring the loan |
| estate-of- | > conforms to these parameters.                         |
| the-vetera |                                                         |
| n-in-the-p | > Generally, title to the estate shall be that which is |
| roperty .u | > acceptable to informed buyers, title companies, and   |
| nnumbered} | > attorneys in the community in which the property is   |
|            | > situated.                                             |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b.   | > VA does **not** require a lender making a VA loan or  |
|  Title Ins | > the veteran-borrower to obtain title insurance. The   |
| urance {#b | > lender may apply its own title insurance requirements |
| .-title-in | > to VA loan transactions. VA requires only that title  |
| surance .u | > to the property meet the standards described above in |
| nnumbered} | > "Estate of the Veteran in the Property."              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Restrictions on the purchase or resale of the         |
| ### c. Res | > property are unacceptable to VA, with certain         |
| trictions  | > exceptions. The lender must                           |
| on the Pur |                                                         |
| chase or R | -   ensure any restrictions fall within the exceptions  |
| esale of P |     provided by VA regulations at [38 CFR               |
| roperties  |     36.4308](http://ww                                  |
| {#c.-restr | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4308.Doc) |
| ictions-on |     and [38 CFR                                         |
| -the-purch |     36.4350](http://ww                                  |
| ase-or-res | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4350.Doc) |
| ale-of-pro |                                                         |
| perties .u | -   consult VA where doubt exists                       |
| nnumbered} |                                                         |
|            | -   obtain VA approval where appropriate, and           |
|            |                                                         |
|            | -   fully inform the veteran and obtain his or her      |
|            |     consent to the restrictions in writing at the time  |
|            |     of loan application.                                |
+------------+---------------------------------------------------------+

Continued on next page

2\. Title Limitations, Continued

+------------+---------------------------------------------------------+
| #####      | > A lender may not accelerate a loan based on the sale  |
| d. Example | > of the secured property unless the acceptability of   |
| s of Restr | > the assumption of the loan has not been established   |
| ictions th | > pursuant to [Section 3714 of Chapter 37, Title 38,    |
| at Require | > U.S.C](http://uscode.h                                |
|  VA Approv | ouse.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t37t40+8 |
| al {#d.-ex | 18+0++()  AND ((38) ADJ USC)%3ACITE AND (USC w%2F10 (37 |
| amples-of- | 14))%3ACITE  AND (CHAPTER ADJ (37))%3AEXPCITE       )., |
| restrictio | > except that                                           |
| ns-that-re |                                                         |
| quire-va-a | -   Under [38 CFR                                       |
| pproval .u |     36.4308(b),](http://ww                              |
| nnumbered} | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4308.Doc) |
|            |     VA may guarantee a loan made through a State,       |
|            |     Territorial or local government program where       |
|            |     restrictions in the legal instruments require       |
|            |     acceleration of the loan if it is assumed by a      |
|            |     party ineligible for assistance under the program.  |
|            |                                                         |
|            | -   Such acceleration must be mandated by Federal,      |
|            |     State, Territorial or local law or regulation.      |
|            |                                                         |
|            |     > VA may guarantee a loan made through a state or   |
|            |     > local government program, designed to assist low- |
|            |     > or moderate-income individuals, which imposes     |
|            |     > resale and price restrictions on purchasers.      |
|            |                                                         |
|            |     > Under such a program, if the property is resold   |
|            |     > within a period established by local law or       |
|            |     > ordinance, certain restrictions as set forth in   |
|            |     > [38 CFR                                           |
|            |     > 36.4350(b)(5)(iv)(A)](http://ww                   |
|            | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4350.Doc) |
|            |     > on to whom the property may be sold, the resale   |
|            |     > price, and other restrictions approved by the     |
|            |     > Secretary may be applied.                         |
|            |                                                         |
|            |     > VA may guarantee a loan on which a title          |
|            |     > restriction limits the sale, lease, or occupancy  |
|            |     > of the dwelling to persons based on age,          |
|            |     > including a prohibition against the permanent     |
|            |     > occupancy of the dwelling by children, provided   |
|            |     > such restriction complies with applicable Federal |
|            |     > law.                                              |
|            |                                                         |
|            |     > VA may refuse to approve a property with an age   |
|            |     > restriction if its operation would work an undue  |
|            |     > hardship upon the owner in the case of sudden,    |
|            |     > unforeseen events or be likely to result in an    |
|            |     > increased risk of loan default.                   |
+------------+---------------------------------------------------------+

Continued on next page

2\. Title Limitations, Continued

+------------+---------------------------------------------------------+
| ##### e. E | > Title to property involving reasonable encroachments, |
| xamples of | > easements, servitudes, and reservations for water,    |
|  Restricti | > timber, or subsurface rights, generally do not        |
| ons That D | > require VA approval. However, they must be taken into |
| o Not Requ | > consideration in determining reasonable value.        |
| ire VA App |                                                         |
| roval {#e. | > If any of these restrictions impact the basic         |
| -examples- | > livability of the property, VA approval is required.  |
| of-restric |                                                         |
| tions-that |                                                         |
| -do-not-re |                                                         |
| quire-va-a |                                                         |
| pproval .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > Title conditions or limitations must be shown on the  |
| ### f. Eff | > NOV and considered by the appraiser in determining    |
| ect of Tit | > the reasonable value of the property.                 |
| le Limitat |                                                         |
| ions on Re | > If the lender discovers, prior to loan closing, title |
| asonable V | > conditions or limitations not shown on the NOV, the   |
| alue {#f.- | > lender must have VA review the conditions and         |
| effect-of- | > determine whether the value assigned to the property  |
| title-limi | > is materially affected.                               |
| tations-on |                                                         |
| -reasonabl | > Without such a determination by VA, the lender risks  |
| e-value .u | > a later finding that the condition or limitation      |
| nnumbered} | > affects the reasonable value of the property to the   |
|            | > extent that                                           |
|            |                                                         |
|            | -   the loan will be ineligible for guaranty, or        |
|            |                                                         |
|            | -   a claim on the guaranty will be subject to          |
|            |     reduction under                                     |
|            |                                                         |
|            | -   [38 CFR                                             |
|            |     36.4325(b)(10).](http://ww                          |
|            | w.warms.vba.va.gov/Regs/38CFR/BookH/Part36/36_4325.Doc) |
|            |                                                         |
|            |     > When VA reasonable value is based on [HUD Form    |
|            |     > 92800.5B](http://                                 |
|            | www.hudclips.org/sub_nonhud/html/pdfforms/92800-b.pdf), |
|            |     > Conditional Commitment, Direct Endorsement,       |
|            |     > Statement of Appraised Value, lenders must        |
|            |     > contact HUD to process requests for review of     |
|            |     > title conditions or limitations.                  |
+------------+---------------------------------------------------------+

#### 3. Land Sale Contracts and Option Contracts

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

+------------+---------------------------------------------------------+
| #####      | > VA may guarantee an obligation secured by a land sale |
| a. Eligibi | > contract for the purchase of improved residential     |
| lity of La | > property in the same manner as any obligation secured |
| nd Sale Co | > by a mortgage or deed of trust.                       |
| ntracts {# |                                                         |
| a.-eligibi | -   The land sale contract must contain the mandatory   |
| lity-of-la |     clauses provided in section 1 of this chapter.      |
| nd-sale-co |                                                         |
| ntracts .u | -   The contract must be recorded.                      |
| nnumbered} |                                                         |
|            |     > VA may also guarantee a loan to refinance the     |
|            |     > unpaid balance under a land sale contract for the |
|            |     > purchase of improved residential property,        |
|            |     > provided                                          |
|            |                                                         |
|            | -   the veteran will obtain title to the property       |
|            |     described in the contract upon closing of the loan, |
|            |     and                                                 |
|            |                                                         |
|            | -   the obligation to be guaranteed is in the form of a |
|            |     note or bond secured by a mortgage or other         |
|            |     acceptable form of security instrument other than   |
|            |     the existing land sale contract.                    |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b. E | > Option contracts are not eligible for guaranty,       |
| ligibility | > however, VA may guarantee a loan made for the unpaid  |
|  of Option | > purchase price of residential property when the       |
|  Contracts | > option is exercised.                                  |
|  {#b.-elig |                                                         |
| ibility-of |                                                         |
| -option-co |                                                         |
| ntracts .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

#### 4. Secondary Borrowing

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | Language in section c referring to interest rates on    |
|            | second mortgages has been removed.                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > For purposes of this topic, secondary borrowing       |
| ## a. What | > refers to the veteran obtaining a second mortgage     |
|  is Second | > simultaneously with a VA-guaranteed first mortgage,   |
| ary Borrow | > both secured by the same property.                    |
| ing? {#a.- |                                                         |
| what-is-se |                                                         |
| condary-bo |                                                         |
| rrowing .u |                                                         |
| nnumbered} |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### b. P | > Secondary borrowing is acceptable as long as          |
| olicy {#b. |                                                         |
| -policy .u | -   the veteran is not placed in a substantially worse  |
| nnumbered} |     position than if the entire amount borrowed had     |
|            |     been guaranteed by VA, and                          |
|            |                                                         |
|            | -   the requirements detailed below are met.            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > The second mortgage must meet the following           |
| #### c. Re | > requirements:                                         |
| quirements |                                                         |
+------------+---------------------------------------------------------+

+---------------+------------------------------------------------------+
| Factor        | Requirement                                          |
+---------------+------------------------------------------------------+
| Documentation | The lender must submit documentation disclosing the  |
|               | source, amount, and repayment terms of the second    |
|               | mortgage and agreement to such terms by the veteran  |
|               | and any co-obligors.                                 |
+---------------+------------------------------------------------------+
| Lien Position | The second mortgage must be subordinated to the      |
|               | VA-guaranteed loan, that is, the second mortgage     |
|               | must be in a junior lien position relative to the VA |
|               | loan.                                                |
+---------------+------------------------------------------------------+
| Allowable     | Proceeds of the second mortgage **may** be used for  |
| Purposes      | a variety of purposes, including but not limited to  |
|               |                                                      |
|               | -   closing costs, or                                |
|               |                                                      |
|               | -   a down payment to meet secondary market          |
|               |     requirements of the lender.                      |
|               |                                                      |
|               |     But **may not** be used to cover any portion of  |
|               |     a down payment required by VA to cover the       |
|               |     excess of the purchase price over VA's           |
|               |     reasonable value.                                |
+---------------+------------------------------------------------------+

Continued on next page

4\. Secondary Borrowing, Continued

  -----------------------------------------------------------------------
  c\. Requirements (continued)

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

+---------------+------------------------------------------------------+
| Factor        | Requirement                                          |
+---------------+------------------------------------------------------+
| Cash back     | There can be no cash back to the veteran from the VA |
|               | first mortgage or a second mortgage obtained         |
|               | simultaneously.                                      |
+---------------+------------------------------------------------------+
| Underwriting  | The veteran must qualify for the second mortgage     |
|               | which is underwritten as an additional recurring     |
|               | monthly obligation.                                  |
|               |                                                      |
|               | ***Reference***: See [section 5 of chapter           |
|               | 4](http://www.                                       |
|               | warms.vba.va.gov/admin26/pamphlet/pam26_7/ch04.doc). |
+---------------+------------------------------------------------------+
| Interest Rate | The rate on the second mortgage may exceed the rate  |
|               | on the VA-guaranteed first, however, it may not      |
|               | exceed industry standards for second mortgages.      |
+---------------+------------------------------------------------------+
| Assumability  | The second mortgage should not restrict the          |
|               | veteran's ability to sell the property any more than |
|               | the VA first mortgage.                               |
|               |                                                      |
|               | That is, it should be assumable by creditworthy      |
|               | purchasers.                                          |
+---------------+------------------------------------------------------+
| Grace Period  | There should be a reasonable grace period before     |
|               |                                                      |
|               | -   a late charge comes due, or                      |
|               |                                                      |
|               | -   commencement of foreclosure proceedings in the   |
|               |     event of default.                                |
+---------------+------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > Second mortgages bearing unusual terms, interest      |
| # d. Unusu | > rates, etc., are sometimes offered by parties such as |
| al Terms { |                                                         |
| #d.-unusua | -   Federal, state, or local government agencies        |
| l-terms .u |                                                         |
| nnumbered} | -   non-profit organizations                            |
|            |                                                         |
|            | -   private individuals                                 |
|            |                                                         |
|            | -   a builder, or                                       |
|            |                                                         |
|            | -   the seller.                                         |
|            |                                                         |
|            |     > Consult VA if it is unclear whether the terms of  |
|            |     > the second mortgage meet VA standards or if there |
|            |     > may be a reasonable basis for VA to make an       |
|            |     > exception to the standards detailed in this       |
|            |     > topic.                                            |
+------------+---------------------------------------------------------+

#### 5. Purchase of Property with Encumbrances

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

+------------+---------------------------------------------------------+
| ##### a. P | > Generally, VA-guaranteed loans must be first liens.   |
| olicy {#a. | > Any existing liens on the property must be paid off   |
| -policy .u | > or subordinated to the VA loan.                       |
| nnumbered} |                                                         |
|            | > A loan to purchase property subject to unpaid         |
|            | > delinquent taxes, special assessments, prior mortgage |
|            | > indebtedness, or other obligations secured by         |
|            | > effective liens that the veteran agrees to pay or     |
|            | > which constitute encumbrances on the property is not  |
|            | > eligible for guaranty if the loan amount plus these   |
|            | > unpaid obligations exceeds VA's reasonable value of   |
|            | > the property.                                         |
+------------+---------------------------------------------------------+

#### 6. Liens Covering Community-Type Services and Facilities

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

+------------+---------------------------------------------------------+
| ##         | > Generally, loans for the purchase and construction of |
| ### a. Pol | > homes will be first liens, subject only to taxes,     |
| icy {#a.-p | > special assessments, and ground rents.                |
| olicy-1 .u |                                                         |
| nnumbered} | > VA will not approve superior liens in favor of        |
|            | > private entities unless they                          |
|            |                                                         |
|            | -   are legally or practically necessary, and           |
|            |                                                         |
|            | -   result in no prejudice to veterans or the           |
|            |     Government.                                         |
+------------+---------------------------------------------------------+

+-----------+----------------------------------------------------------+
| ##### b   | > The lender must obtain VA approval of liens held by    |
| . Require | > private parties which are superior to VA home mortgage |
| ments {#b | > liens.                                                 |
| .-require |                                                          |
| ments .un | > Liens held by mandatory membership home associations   |
| numbered} | > in planned unit developments are not addressed in this |
|           | > topic.                                                 |
|           |                                                          |
|           | > The lender must demonstrate that                       |
|           |                                                          |
|           | -   it is not legal or practical to subordinate the      |
|           |     superior lien to the VA mortgage                     |
|           |                                                          |
|           | -   there is a viable rationale for not subordinating    |
|           |     the superior lien                                    |
|           |                                                          |
|           | -   the superior lien will not prejudice veterans or the |
|           |     Government, and                                      |
|           |                                                          |
|           | -   if periodic charges or assessments are involved, the |
|           |     amounts are reasonable and limits on the amounts     |
|           |     have been established.                               |
|           |                                                          |
|           |     > Always obtain VA approval before the lien is       |
|           |     > recorded. Builders and developers should be aware  |
|           |     > that if they plan to market properties through VA  |
|           |     > financing, covenants creating superior liens       |
|           |     > should not be recorded without VA approval.        |
+-----------+----------------------------------------------------------+

Continued on next page

6\. Liens Covering Community-Type Services and Facilities, Continued

+------------+---------------------------------------------------------+
| ####       | > VA may find the following types of superior liens     |
| # c. Examp | > acceptable:                                           |
| les {#c.-e |                                                         |
| xamples .u | -   Liens for taxes, assessments, and ground rents.     |
| nnumbered} |                                                         |
|            | -   Liens by private entities to secure assessments or  |
|            |     charges for municipal-type services and facilities  |
|            |     which                                               |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   are clearly governmental in nature                  |
|            |                                                         |
|            | -   a municipality could support out of public tax      |
|            |     revenue if it provided the service, **but**         |
|            |                                                         |
|            | -   the municipality does not provide them.             |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Liens to implement or augment a service or facility |
|            |     if the government's provision of such service or    |
|            |     facility is inadequate.                             |
|            |                                                         |
|            | -   Liens for services or facilities in locations where |
|            |     the services or facilities are adequately supplied  |
|            |     by local government generally will **not** be       |
|            |     approved by VA.                                     |
|            |                                                         |
|            | -   Liens created by recorded covenants in favor of     |
|            |     private entities to secure the homeowner's share of |
|            |     the costs of the management, operation,             |
|            |     maintenance, services or programs for the benefit   |
|            |     of a development.                                   |
|            |                                                         |
|            | -   Liens (on existing properties) previously retained  |
|            |     by trustees, improvement associations or other      |
|            |     nongovernmental entities for community-type         |
|            |     services and facilities in a given area or          |
|            |     subdivision, such as maintenance of streets,        |
|            |     parkways, playgrounds, water systems, sewage        |
|            |     systems, police and fire protection, or street      |
|            |     lighting.                                           |
+------------+---------------------------------------------------------+

#### 7. Powers of Attorney

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

+------------+---------------------------------------------------------+
| ##         | > VA will allow a veteran to use an attorney-in-fact to |
| ### a. Pol | > execute any documents necessary to obtain a VA        |
| icy {#a.-p | > guaranteed loan. This enables active duty             |
| olicy-2 .u | > servicepersons stationed overseas, and other veterans |
| nnumbered} | > who cannot be present to execute loan documents, to   |
|            | > obtain VA loans.                                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > The veteran must execute a general or specific power  |
| #### b. Re | > of attorney which is valid and legally adequate. The  |
| quirements | > veteran's attorney-in-fact may use this power of      |
|            | > attorney to apply for a [Certificate of               |
|            | > El                                                    |
|            | igibility](http://www.homeloans.va.gov/eligibility.htm) |
|            | > and initiate processing of a loan on behalf of the    |
|            | > veteran.                                              |
|            |                                                         |
|            | > To complete the loan transaction using an             |
|            | > attorney-in-fact, ensure that the general or specific |
|            | > power of attorney complies with state law to the      |
|            | > extent that                                           |
|            |                                                         |
|            | -   the mortgage can be legally enforced in that        |
|            |     jurisdiction, and                                   |
|            |                                                         |
|            | -   clear title can be conveyed in the event of         |
|            |     foreclosure.                                        |
|            |                                                         |
|            |     > To complete the loan transaction using an         |
|            |     > attorney-in-fact VA also requires the veteran's   |
|            |     > written consent to the specifics of the           |
|            |     > transaction. This requirement can be satisfied by |
|            |     > either                                            |
|            |                                                         |
|            | -   the veteran's signature on both the sales contract  |
|            |     and the URLA, as long as the veteran's intention to |
|            |     obtain a VA loan on the particular property is      |
|            |     expressed somewhere in those documents, or          |
|            |                                                         |
|            | -   a specific power of attorney or other document(s)   |
|            |     signed by the veteran, which encompasses the        |
|            |     following elements:                                 |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Entitlement---A clear intention to use all or a     |
|            |     specified amount of entitlement.                    |
|            |                                                         |
|            | -   Purpose---A clear intention to obtain a loan for    |
|            |     purchase, construction, repair, alteration,         |
|            |     improvement, or refinancing.                        |
|            |                                                         |
|            | -   Property Identification---Identification of the     |
|            |     specific property.                                  |
|            |                                                         |
|            | -   Price and Terms---The sales price, if applicable,   |
|            |     and other relevant terms of the transaction.        |
|            |                                                         |
|            | -   Occupancy---The veteran's intention to use the      |
|            |     property as a home to be occupied by the veteran    |
|            |     (or other applicable VA occupancy requirement).     |
+------------+---------------------------------------------------------+

Continued on next page

7\. Powers of Attorney, Continued

+-----------+----------------------------------------------------------+
| b\.       | > In addition, at the time of loan closing, the lender   |
| Req       | > must                                                   |
| uirements |                                                          |
| (c        | -   verify that the veteran is alive, and, if on active  |
| ontinued) |     military duty, not missing in action, and            |
|           |                                                          |
|           | -   make the following certification:                    |
|           |                                                          |
|           |     > "The undersigned lender certifies that written     |
|           |     > evidence in the form of correspondence from the    |
|           |     > veteran or, if on active military duty, statement  |
|           |     > of his or her commanding officer (including        |
|           |     > statement of person authorized to act for said     |
|           |     > officer), affirmatively indicating that the        |
|           |     > veteran was alive and, if the veteran is on active |
|           |     > military duty, not missing in action status on     |
|           |     > ([date]{.underline}), was examined by the          |
|           |     > undersigned and that the said date is subsequent   |
|           |     > to the date the note and security instruments were |
|           |     > executed on the veteran's behalf by the            |
|           |     > attorney-in-fact."                                 |
+-----------+----------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > The lender must always verify that the veteran is     |
| #### c. Ve | > alive at the time of loan closing, whether or not the |
| teran's St | > veteran is still in the military.                     |
| atus as Al |                                                         |
| ive and no | > If the lender has difficulty obtaining verification   |
| t MIA {#c. | > that a service person in a combat area is alive and   |
| -veterans- | > not in MIA status, the lender may request that VA     |
| status-as- | > obtain the necessary information on its behalf.       |
| alive-and- |                                                         |
| not-mia .u | > VA may deny guaranty on a loan if the lender failed   |
| nnumbered} | > to properly verify the veteran's status and the       |
|            | > veteran was deceased (or MIA) at the time the loan    |
|            | > was closed.                                           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### d.   | > VA will issue a Certificate of Commitment only if the |
|  Prior App | > veteran has executed a valid and legally adequate     |
| roval Loan | > power of attorney and consented to the specific       |
| s {#d.-pri | > transaction (as described under the "Requirement"     |
| or-approva | > heading). If VA has information that the veteran is   |
| l-loans .u | > MIA or deceased, VA will not issue a commitment.      |
| nnumbered} |                                                         |
|            | > The Certificate of Commitment issued in power of      |
|            | > attorney cases contains the condition indicated under |
|            | > "Conditional Commitments" in [section 4 of chapter    |
|            | > 5.](http://                                           |
|            | www.warms.vba.va.gov/admin26/pamphlet/pam26_7/ch05.doc) |
+------------+---------------------------------------------------------+

Continued on next page

7\. Powers of Attorney, Continued

+------------+---------------------------------------------------------+
| #####      | > VA may relax the requirements in an exceptional case  |
| e. Hardshi | > if serious hardship may result due to the time or     |
| p Exceptio | > other pertinent factors involved in obtaining the     |
| ns {#e.-ha | > veteran's consent to the specific transaction.        |
| rdship-exc |                                                         |
| eptions .u | > Submit the facts of the case to VA for a              |
| nnumbered} | > determination.                                        |
+------------+---------------------------------------------------------+

#### 8. Lender Review of Sales Contracts on Proposed Construction

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

+------------+---------------------------------------------------------+
| ##### a.   | > Prior to requesting an appraisal of proposed          |
|  Procedure | > construction, the lender must review the sales        |
| s {#a.-pro | > contract or purchase agreement on the property. The   |
| cedures .u | > lender must determine whether the contract            |
| nnumbered} |                                                         |
|            | -   is acceptable, and                                  |
|            |                                                         |
|            | -   does not contain unfair contractual provisions.     |
|            |                                                         |
|            |     > The lender may request revision of an             |
|            |     > unacceptable contract by the parties to the       |
|            |     > transaction.                                      |
|            |                                                         |
|            |     > The lender should report unacceptable contract    |
|            |     > practices by a VA program participant (such as a  |
|            |     > builder) to VA if                                 |
|            |                                                         |
|            | -   the program participant is engaged in practices     |
|            |     which seriously prejudice the interests of veterans |
|            |     or the Government, or                               |
|            |                                                         |
|            | -   the program participant repeatedly uses             |
|            |     unacceptable contracts or contracts containing      |
|            |     unfair contractual provisions, and is uncooperative |
|            |     in changing such practices.                         |
|            |                                                         |
|            |     > The closing of the loan indicates that the lender |
|            |     > has determined the contract is acceptable.        |
+------------+---------------------------------------------------------+

Continued on next page

8\. Lender Review of Sales Contracts on Proposed Construction, Continued

+-----------+---+-------+-------------------------------------------------+
| ##        |   | > U   |                                                 |
| ### b. Ex |   | nfair |                                                 |
| amples of |   | > c   |                                                 |
|  Unfair C |   | ontra |                                                 |
| ontract P |   | ctual |                                                 |
| rovisions |   | >     |                                                 |
|  or Featu |   | provi |                                                 |
| res {#b.- |   | sions |                                                 |
| examples- |   | > or  |                                                 |
| of-unfair |   | > fea |                                                 |
| -contract |   | tures |                                                 |
| -provisio |   | > inc |                                                 |
| ns-or-fea |   | lude, |                                                 |
| tures .un |   | > but |                                                 |
| numbered} |   | > are |                                                 |
|           |   | > not |                                                 |
|           |   | > li  |                                                 |
|           |   | mited |                                                 |
|           |   | > to, |                                                 |
|           |   | > the |                                                 |
|           |   | > i   |                                                 |
|           |   | nform |                                                 |
|           |   | ation |                                                 |
|           |   | > in  |                                                 |
|           |   | > the |                                                 |
|           |   | >     |                                                 |
|           |   | table |                                                 |
|           |   | > b   |                                                 |
|           |   | elow. |                                                 |
+-----------+---+-------+-------------------------------------------------+
|           | E |       | Unfair Contract Provisions or Features          |
|           | x |       |                                                 |
|           | a |       |                                                 |
|           | m |       |                                                 |
|           | p |       |                                                 |
|           | l |       |                                                 |
|           | e |       |                                                 |
+-----------+---+-------+-------------------------------------------------+
|           | 1 |       | Provisions allowing the down payment or earnest |
|           |   |       | money of the purchaser to be forfeited or       |
|           |   |       | retained as liquidated damages if the purchaser |
|           |   |       | cannot obtain VA financing.                     |
+-----------+---+-------+-------------------------------------------------+
|           | 2 |       | Inclusion in a lump-sum contract of an          |
|           |   |       | "escalator clause" which obligates the          |
|           |   |       | purchaser to pay a higher price in the event of |
|           |   |       | increased costs for labor, material, or other   |
|           |   |       | items prior to delivery of title unless         |
|           |   |       | accompanied by a proviso which gives the        |
|           |   |       | purchaser the option of canceling the contract  |
|           |   |       | and obtaining a refund of the moneys paid if    |
|           |   |       | the increased price is not acceptable to the    |
|           |   |       | veteran.                                        |
+-----------+---+-------+-------------------------------------------------+
|           | 3 |       | Provisions which infringe upon the usual or     |
|           |   |       | customary freedom or right of an owner to sell  |
|           |   |       | a property, except as allowed under [38 CFR     |
|           |   |       | 36.4308(e)](http://www.warms.                   |
|           |   |       | vba.va.gov/Regs/38CFR/BookH/Part36/36_4308.Doc) |
|           |   |       | and                                             |
|           |   |       | [36.4350(b)(5).](http://www.warms.              |
|           |   |       | vba.va.gov/Regs/38CFR/BookH/Part36/36_4350.Doc) |
|           |   |       | For example, a provision that the purchaser     |
|           |   |       | will give a stated real estate agency an        |
|           |   |       | exclusive listing if he or she resells the      |
|           |   |       | property within 2 years after acquisition, or   |
|           |   |       | will give the seller or another a first option  |
|           |   |       | to buy other than in a cooperative housing      |
|           |   |       | project or as provided in                       |
|           |   |       |                                                 |
|           |   |       | [38 CFR                                         |
|           |   |       | 36.4350(b)(5).](http://www.warms.               |
|           |   |       | vba.va.gov/Regs/38CFR/BookH/Part36/36_4350.Doc) |
+-----------+---+-------+-------------------------------------------------+

Continued on next page

8\. Lender Review of Sales Contracts on Proposed Construction, Continued

  -----------------------------------------------------------------------
  b\. Examples of Unfair Contract Provisions or Features (continued)

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

+---------+------------------------------------------------------------+
| Example | Unfair Contract Provisions or Features                     |
+---------+------------------------------------------------------------+
| 4       | A requirement that purchasers waive or release any claim   |
|         | or right for nonperformance by the builder under the       |
|         | contract.                                                  |
|         |                                                            |
|         | -   This does not prevent a builder from obtaining a       |
|         |     statement from the purchaser at closing that he or she |
|         |     has inspected the house and has not observed any       |
|         |     unsatisfactory construction, nor                       |
|         |                                                            |
|         | -   does it prevent the builder from obtaining a release   |
|         |     from the purchaser in settlement of a bona fide        |
|         |     dispute.                                               |
+---------+------------------------------------------------------------+
| 5       | Omission of a description sufficient to identify           |
|         | accurately the property sold.                              |
+---------+------------------------------------------------------------+
| 6       | Omission of a provision specifying whether the builder or  |
|         | the veteran is to be charged with any special assessments  |
|         | or improvement bonds. This includes those assessments or   |
|         | bonds which are payable in the future, for improvements    |
|         | included in the plans and specifications or commenced or   |
|         | completed at the time of closing, such as streets,         |
|         | sidewalks, curbs, gutters, and sewers.                     |
+---------+------------------------------------------------------------+
| 7       | Omission of a date for completion of proposed construction |
|         | or failure to give the veteran the option of canceling the |
|         | contract and obtaining a refund of the deposit if the      |
|         | dwelling is not completed on a specified date or within a  |
|         | reasonable time afterwards.                                |
+---------+------------------------------------------------------------+
| 8       | Failure of a contract covering proposed construction to    |
|         | obligate the seller to complete the dwelling in            |
|         | substantial accordance with identified and definite plans  |
|         | and specifications.                                        |
+---------+------------------------------------------------------------+

#### 9. Escrow for Postponed Completion of Improvements 

+------------+---------------------------------------------------------+
| ##### C    | > July 20, 2007, Change 5                               |
| hange Date |                                                         |
|            | -   Subsections a and c have been changed to remove     |
|            |     references to off-site improvements like road       |
|            |     surfacing or public sidewalks.                      |
|            |                                                         |
|            | -   Subsections e and f have been changed to remove     |
|            |     references to VA Forms 26-1847 and 26-6378 which    |
|            |     are no longer required. Additionally, the steps in  |
|            |     section e have been renumbered to reflect this      |
|            |     change.                                             |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > In some instances, it may not be possible to complete |
| ### a. Gen | > certain items before the veteran wishes to move into  |
| eral {#a.- | > the property. The escrow of funds can permit the      |
| general .u | > veteran-purchaser to gain occupancy of the dwelling   |
| nnumbered} | > prior to completion of certain items which must be    |
|            | > postponed due to weather conditions or other          |
|            | > circumstances. Such items include, but are not        |
|            | > limited to:                                           |
|            |                                                         |
|            | -   walkways, driveways, and retaining walls            |
|            |                                                         |
|            | -   exterior painting                                   |
|            |                                                         |
|            | -   landscaping                                         |
|            |                                                         |
|            | -   garages                                             |
|            |                                                         |
|            |     > VA may permit the escrow of funds necessary to    |
|            |     > complete the unfinished work later, and still     |
|            |     > issue evidence of guaranty.                       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > An escrow involves the following:                     |
| ## b. What |                                                         |
|  is an Esc | -   withholding 1 1/2 times the dollar amount necessary |
| row? {#b.- |     to complete the postponed items (as estimated by a  |
| what-is-an |     third party) from the proceeds due the seller at    |
| -escrow .u |     closing                                             |
| nnumbered} |                                                         |
|            | -   holding the escrowing funds in a proper, secure     |
|            |     manner, and                                         |
|            |                                                         |
|            | -   releasing the funds once the postponed items have   |
|            |     been satisfactorily completed.                      |
+------------+---------------------------------------------------------+

Continued on next page

9\. Escrow for Postponed Completion of Improvements, Continued

+------------+---------------------------------------------------------+
| ##### c    | > To establish an escrow, the following must apply:     |
| . What is  |                                                         |
| Required t | -   Construction of the dwelling must be complete and   |
| o Establis |     the house must be suitable for immediate occupancy  |
| h an Escro |                                                         |
| w? {#c.-wh | -   postponement of the improvements must be beyond the |
| at-is-requ |     control of the builder/seller                       |
| ired-to-es |                                                         |
| tablish-an | -   the duration of the postponement must not be        |
| -escrow .u |     unreasonable (usually 90 to 120 days)               |
| nnumbered} |                                                         |
|            | -   the amount escrowed must be at least 1 1/2 times an |
|            |     estimate of the amount needed to complete the work. |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### d.   | > Lender's are not required to escrow funds when:       |
| When is an |                                                         |
|  Escrow No | -   the incomplete work is limited to the installation  |
| t Required |     of landscaping features (lawns, shrubbery, etc.)    |
| ? {#d.-whe |                                                         |
| n-is-an-es | -   the estimate of the cost to complete the work is    |
| crow-not-r |     not greater than \$500, and                         |
| equired .u |                                                         |
| nnumbered} | -   there is adequate assurance that the work will be   |
|            |     completed timely and satisfactorily (usually 90 to  |
|            |     120 days).                                          |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > No prior approval of VA is required to escrow funds.  |
| # e. Gener | > Lenders are responsible for establishing escrows in   |
| al Procedu | > accordance with the guidelines presented in this      |
| res {#e.-g | > topic. Lenders are also responsible for assuring that |
| eneral-pro | > the postponed work is completed. Once the loan        |
| cedures .u | > closes, VA will randomly monitor cases to ensure      |
| nnumbered} | > completion of escrowed items.                         |
|            |                                                         |
|            | > Lenders escrowing funds should follow the procedures  |
|            | > below:                                                |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| Step  | Action                                                       |
+-------+--------------------------------------------------------------+
| 1     | > Close loan and escrow the required funds.                  |
+-------+--------------------------------------------------------------+
| 2     | > Submit closed loan package for issuance of guaranty with   |
|       |                                                              |
|       | -   lender evidence of escrow agreement, or                  |
|       |                                                              |
|       | -   a completed [VA Form                                     |
|       |     26-1849](http://www.vba.va.gov/pubs/forms/26-1849.pdf),  |
|       |     Escrow Agreement for Postponed Exterior Onsite           |
|       |     Improvements.                                            |
+-------+--------------------------------------------------------------+

Continued on next page

9\. Escrow for Postponed Completion of Improvements, Continued

  -----------------------------------------------------------------------
  e\. General Procedures (continued)

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

+-------+--------------------------------------------------------------+
| Step  | Action                                                       |
+-------+--------------------------------------------------------------+
| 3     | > Release escrowed funds when work is satisfactorily         |
|       | > completed, as evidenced by doing the following:            |
|       |                                                              |
|       | -   Complete [VA Form                                        |
|       |     26-1839](http://www.vba.va.gov/pubs/forms/26-1839.pdf),  |
|       |     Compliance Inspection Report, indicating the postponed   |
|       |     work has been satisfactorily completed, or               |
|       |                                                              |
|       | -   if the postponed work is minor, uncomplicated, and not   |
|       |     involving structural issues, provide written             |
|       |     certification from the lender indicating the work has    |
|       |     been completed, and a                                    |
|       |                                                              |
|       |     statement from the veteran-purchaser that he or she is   |
|       |     satisfied with the work.                                 |
+-------+--------------------------------------------------------------+

+-----------------------------------------------------------------------+
| > ***Note***: In cases involving postponed improvements which affect  |
| > more than one loan by a lender in a tract development, [VA Form     |
| > 26-1849](http://www.vba.va.gov/pubs/forms/26-1849.pdf) will only be |
| > required for the initial loan to a veteran in the development.      |
+-----------------------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > A commercial letter of credit may be used in lieu of  |
| ### f. Let | > a cash escrow provided:                               |
| ters of Cr |                                                         |
| edit {#f.- | -   the dollar amount of available credit is at least 1 |
| letters-of |     1/2 times the estimated cost of the postponed work  |
| -credit .u |                                                         |
| nnumbered} | -   a trust agreement describing the duties,            |
|            |     obligations, and responsibilities is submitted ([VA |
|            |     Form                                                |
|            |                                                         |
|            |  26-1849](http://www.vba.va.gov/pubs/forms/26-1849.pdf) |
|            |     may be used)                                        |
|            |                                                         |
|            | -   the letter of credit is irrevocable and a valid and |
|            |     binding obligation on the issuing bank **and**      |
|            |     extends at least six months beyond the date for     |
|            |     completion of improvements                          |
|            |                                                         |
|            | -   a copy of the letter of credit and trust agreement  |
|            |     is furnished to the appropriate VA office so a      |
|            |     control can be maintained on the available credit.  |
|            |                                                         |
|            |     > ***Note***: A letter of credit acceptable to HUD  |
|            |     > which conforms to the standards above is also     |
|            |     > acceptable to VA. In such cases, the escrow agent |
|            |     > or trustee must agree to keep VA informed of      |
|            |     > charges against the letter of credit.             |
+------------+---------------------------------------------------------+

Continued on next page

9\. Escrow for Postponed Completion of Improvements, Continued

+------------+---------------------------------------------------------+
| ##         | > Cash escrows are not required when the offsite        |
| ### g. Sur | > improvements are to be installed by the builder,      |
| ety Bonds  | > provided that:                                        |
| {#g.-suret |                                                         |
| y-bonds .u | -   a surety bond acceptable to the local government    |
| nnumbered} |     authority provides assurance of the builder's       |
|            |     obligation to install the offsite improvements.     |
|            |                                                         |
|            | -   the amount of the bond is at least equal to the     |
|            |     estimated cost of installing the offsite            |
|            |     improvements.                                       |
|            |                                                         |
|            | -   the local government provides VA evidence           |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   that the offsite improvements will be installed     |
|            |     without cost or assessment to the purchasers of the |
|            |     abutting properties, and                            |
|            |                                                         |
|            | -   if the builder does not complete the improvements   |
|            |     by a specified date, the local government authority |
|            |     will be responsible for their completion, with no   |
|            |     cost or assessment to the purchasers of properties  |
|            |     affected by the improvements.                       |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   the local government has provided evidence that it  |
|            |     will be responsible for continuous maintenance of   |
|            |     the completed offsite improvements.                 |
|            |                                                         |
|            | -   the principal law officer of the local authority    |
|            |     advises VA that the local authority is legally      |
|            |     empowered to assume these obligations.              |
+------------+---------------------------------------------------------+

#### 10. Hazard Insurance

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

+------------+---------------------------------------------------------+
| ##### a.   | > The lender is responsible for ensuring that hazard    |
|  General R | > insurance is obtained prior to loan closing, and      |
| equirement | > maintained for the term of the loan. It must be of a  |
| s {#a.-gen | > type or types and in an amount sufficient to protect  |
| eral-requi | > the property against risks or hazards to which it may |
| rements .u | > be subjected in the locality.                         |
| nnumbered} |                                                         |
|            | > Generally, the type(s) and amount of insurance        |
|            | > coverage customary in the locality will satisfy this  |
|            | > requirement.                                          |
|            |                                                         |
|            | > Policies must provide that all amounts payable,       |
|            | > including unearned premiums, shall be payable to the  |
|            | > holder, or to a trustee or other person for the       |
|            | > holder. All policy payments received for insured      |
|            | > losses must be applied to the restoration of the      |
|            | > security or to the loan balance.                      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > The lender is responsible for ensuring that flood     |
| # b. Flood | > insurance is obtained and maintained on any building  |
|  Insurance | > or personal property that secures a VA loan if the    |
|  Requireme | > property is located in a special flood hazard area    |
| nts {#b.-f | > (SFHA), as identified by the Federal Emergency        |
| lood-insur | > Management Agency (FEMA).                             |
| ance-requi |                                                         |
| rements .u | -   The lender/holder's responsibility extends through  |
| nnumbered} |     the entire term of the loan, and includes insuring  |
|            |     any secured property that becomes newly located in  |
|            |     a SFHA due to FEMA remapping.                       |
|            |                                                         |
|            | -   The VA appraiser's opinion on whether the property  |
|            |     is located in a SFHA does not relieve the lender    |
|            |     from responsibility for ensuring flood insurance    |
|            |     coverage on a property which is in fact located in  |
|            |     a SFHA                                              |
|            |                                                         |
|            | -   Personal property requiring coverage can include a  |
|            |     manufactured home and its appliances, carpet, etc.  |
|            |     if they secure the loan.                            |
|            |                                                         |
|            | -   The amount of flood insurance must be equal to the  |
|            |     lesser of the outstanding principal balance of the  |
|            |     loan or the maximum limit of coverage available for |
|            |     the particular type(s) of property under the        |
|            |     National Flood Insurance Act.                       |
|            |                                                         |
|            | -   Contact local property insurance agents or brokers, |
|            |     or FEMA regional offices, for current information   |
|            |     on maximum available coverage.                      |
|            |                                                         |
|            | > ***Note***: VA cannot guarantee a loan if the         |
|            | > security is located in a SFHA and flood insurance is  |
|            | > not available.                                        |
+------------+---------------------------------------------------------+

Continued on next page

10\. Hazard Insurance, Continued

+------------+---------------------------------------------------------+
| ####       | > If it is not possible to obtain and maintain          |
| # c. Unava | > insurance on the property, contact VA. VA will        |
| ilable or  | > determine whether to waive the requirement or declare |
| Terminated | > the (existing) loan to be in default.                 |
|  Insurance |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > VA may reduce a future guaranty claim based on the    |
| #### d. Co | > lender's noncompliance with VA hazard/flood insurance |
| nsequences | > requirements which results in uninsured losses        |
|  of Uninsu | > (unless a waiver has been granted).                   |
| red Losses |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > The lender may request VA to determine the minimum    |
| #### e. VA | > insurance coverage needed to meet the requirements of |
|  Determina | > [38 CFR                                               |
| tion of th | > 36.4326](http://ww                                    |
| e Amount o | w.warms.vba.va.gov/regs/38cfr/bookh/part36/36_4326.doc) |
| f Insuranc | > for a specific loan.                                  |
| e Required | >                                                       |
|            | > If the required amount of coverage is maintained, no  |
|            | > future guaranty claim can be reduced due to           |
|            | > inadequate coverage provided there has been no change |
|            | > in the nature, value, or use of the security that     |
|            | > would require new or additional coverage (based on    |
|            | > what is customary in the locality) since VA's         |
|            | > determination was made.                               |
+------------+---------------------------------------------------------+

Continued on next page

10\. Hazard Insurance, Continued

+------------+---------------------------------------------------------+
| ##### f. S | > Condominiums and many townhouse homeowners            |
| pecial Con | > associations (HOAs) maintain blanket or master        |
| sideration | > policies on common areas, including common mechanical |
| s with Hom | > and structural elements. The limits of coverage       |
| eowners As | > should be described in the policy, and may also be    |
| sociations | > referred to in the organizational documents.          |
|            | >                                                       |
| #####      | > Lenders should be aware that policies maintained by   |
|            | > some HOAs may not provide adequate coverage. They may |
| #####      | > protect only the shell of the structure. These "studs |
|            | > out" policies do not cover                            |
|            |                                                         |
|            | -   interior walls                                      |
|            |                                                         |
|            | -   flooring                                            |
|            |                                                         |
|            | -   plumbing or electrical fixtures                     |
|            |                                                         |
|            | -   cabinets                                            |
|            |                                                         |
|            | -   HVAC equipment                                      |
|            |                                                         |
|            | -   appliances, and                                     |
|            |                                                         |
|            | -   other items considered part of the real property.   |
|            |                                                         |
|            | > Carefully review the terms of each blanket policy, or |
|            | > confirm with the HOA that adequate coverage is in     |
|            | > effect (and check periodically for any changes in     |
|            | > coverage). If coverage is inadequate, the homeowner   |
|            | > can be held responsible through the terms of the loan |
|            | > instruments, for maintaining coverage on the portions |
|            | > of the real property not covered by the master        |
|            | > policy.                                               |
+------------+---------------------------------------------------------+

#### 11. Escrow for Taxes and Insurance

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

+------------+---------------------------------------------------------+
| #          | > VA does not require the lender to establish escrow    |
| #### a. Re | > accounts for the collection and payment of property   |
| quirements | > taxes, hazard insurance premiums, and similar items.  |
|            | > However, it is the lender's responsibility to ensure  |
|            | > that these items are paid timely.                     |
|            | >                                                       |
|            | > A lender who chooses to escrow for taxes and          |
|            | > insurance must comply with applicable laws, including |
|            | > the Real Estate Settlement Procedures Act (RESPA).    |
+------------+---------------------------------------------------------+