## FHEChapter 7 Loans Requiring Special Underwriting, Guaranty and Other Considerations

#### Overview

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

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

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

  7.01 Joint Loans                                           7-2

  7.02 Construction/Permanent Home Loans                     7-13

  7.03 Energy Efficient Mortgages (EEMs)                     7-15

  7.04 Loans for Alteration and Repair                       7-21

  7.05 Supplemental Loans                                    7-22

  7.06 Graduated Payment Mortgages (GPMs)                    7-27

  7.07 Growing Equity Mortgages (GEMs)                       7-32

  7.08 Loans Involving Temporary Interest Rate Buydowns      7-33

  7.09 Farm Residence Loans                                  7-36

  7.10 Cooperative Home Loans                                7-38

  7.11 Loans for Manufactured Homes Classified as Real       7-39
  Estate                                                     

  7.12 Loans to Native American Veterans on Trust Lands      7-42
  ---------------------------------------------------------- ------------

#### Number range chapter7.01 Joint Loans

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

+------------+---------------------------------------------------------+
| ##### VA R | > The regulations at [38 CFR 36.4307]{.underline}       |
| egulations | > address joint loans.                                  |
|            | >                                                       |
|            | > **\[[38 CFR 36.4307]{.underline}\]**                  |
+------------+---------------------------------------------------------+

Continued on next page

7.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| ##### Te   | > To avoid confusion, the terms "veteran/nonveteran     |
| rminology  | > joint loan" and "2 veteran joint loan" will be used   |
| Used in th | > throughout this section to include the various types  |
| is Section | > of joint loans.                                       |
|            | >                                                       |
|            | > ***Veteran/nonveteran joint loan***: Common meaning:  |
|            | > A loan involving one veteran and one nonveteran (not  |
|            | > spouse).                                              |
|            | >                                                       |
|            | > For purposes of applying the principles explained in  |
|            | > this section, this term will also be used to          |
|            | > represent **any** other type of joint loan involving  |
|            | > at least one veteran using his or her entitlement and |
|            | > at least one other person **not** using entitlement   |
|            | > (can be a veteran or nonveteran, but not a spouse).   |
|            | >                                                       |
|            | > ***Examples***:                                       |
|            |                                                         |
|            | -   Three veterans using entitlement and one            |
|            |     nonveteran.                                         |
|            |                                                         |
|            | -   One veteran using entitlement and 4 nonveterans.    |
|            |                                                         |
|            | -   Two veterans using entitlement and 2 veterans       |
|            |     **not** using entitlement.                          |
|            |                                                         |
|            | > ***2 veteran joint loan:*** Common meaning: A loan    |
|            | > involving 2 veterans who are not married to each      |
|            | > other, both using their entitlement.                  |
|            | >                                                       |
|            | > For purposes of applying the principles explained in  |
|            | > this section, this term will also be used to          |
|            | > represent **any** other type of joint loan involving  |
|            | > only veterans, each of whom uses his or her           |
|            | > entitlement.                                          |
|            | >                                                       |
|            | > It can include loans to                               |
|            |                                                         |
|            | -   the veteran and the veteran's spouse who is also a  |
|            |     veteran, if **both** entitlements will be used, or  |
|            |                                                         |
|            | -   three, four, or more veterans, **all** of whom will |
|            |     use their entitlement.                              |
+------------+---------------------------------------------------------+

Continued on next page

7.01 Joint Loans, Continued

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

+------------+---------------------------------------------------------+
| ###        | > If a property is to be owned by two or more eligible  |
| ## How Man | > veterans, it may consist of four family units and one |
| y Units Ca | > business unit, plus one additional unit for each      |
| n the Prop | > veteran participating in the ownership.               |
| erty Have? | >                                                       |
|            | > Thus, two veterans may purchase or construct          |
|            | > residential property consisting of up to six family   |
|            | > units (the basic four units plus one unit for each of |
|            | > the two veterans), and one business unit.             |
|            | >                                                       |
|            | > If the property contains more units than four family  |
|            | > units plus one family unit for each veteran           |
|            | > participating in the ownership and/or more than one   |
|            | > business unit, the loan is **not** eligible for       |
|            | > guaranty.                                             |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### W    | > Any joint loan for which the veteran will hold title  |
| hich Joint | > to the property and any person **other than** the     |
|  Loans Req | > veteran's spouse must be submitted for prior          |
| uire Prior | > approval.                                             |
|  Approval? | >                                                       |
|            | > Any loan for which the veteran and the veteran's      |
|            | > spouse will hold title to the property, whether or    |
|            | > not the spouse also uses entitlement, may be closed   |
|            | > automatically by a lender with automatic authority.   |
+------------+---------------------------------------------------------+

Continued on next page

7.01 Joint Loans, Continued

+------------+---+----------------+---------------------------------------+---+
| #####      | > |                |                                       |   |
| How to Und |   |                |                                       |   |
| erwrite a  | T |                |                                       |   |
| Joint Loan | h |                |                                       |   |
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|            | a |                |                                       |   |
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|            | y |                |                                       |   |
|            | : |                |                                       |   |
+------------+---+----------------+---------------------------------------+---+
|            |   | **Type of      | **Underwriting Considerations**       |   |
|            |   | Joint Loan**   |                                       |   |
+------------+---+----------------+---------------------------------------+---+
|            |   | Vete           | Veteran's credit must be satisfactory |   |
|            |   | ran/nonveteran | and veteran's income must be          |   |
|            |   | joint loan     | sufficient to repay that portion of   |   |
|            |   |                | the loan allocable to the veteran's   |   |
|            |   |                | interest in the property.             |   |
|            |   |                |                                       |   |
|            |   |                | A different analysis applies to the   |   |
|            |   |                | portion of the loan allocable to the  |   |
|            |   |                | nonveteran. The credit of the         |   |
|            |   |                | nonveteran must be satisfactory.      |   |
|            |   |                | However, the combined income of both  |   |
|            |   |                | borrowers can be considered in        |   |
|            |   |                | evaluating repayment ability.         |   |
|            |   |                |                                       |   |
|            |   |                | In other words                        |   |
|            |   |                |                                       |   |
|            |   |                | -   income strength of the veteran    |   |
|            |   |                |     may compensate for income         |   |
|            |   |                |     weakness of the nonveteran, but   |   |
|            |   |                |                                       |   |
|            |   |                | -   income strength of the nonveteran |   |
|            |   |                |     cannot compensate for income      |   |
|            |   |                |     weakness of the veteran in        |   |
|            |   |                |     analyzing the veteran's ability   |   |
|            |   |                |     to repay his or her allocable     |   |
|            |   |                |     portion of the loan.              |   |
+------------+---+----------------+---------------------------------------+---+
|            |   | 2 veteran      | Consider the credit and combined      |   |
|            |   | joint loan     | income and assets of both parties.    |   |
|            |   |                | Strengths of one veteran related to   |   |
|            |   |                | income and/or assets may compensate   |   |
|            |   |                | for income/asset weaknesses of the    |   |
|            |   |                | other. However, satisfactory credit   |   |
|            |   |                | of one veteran cannot compensate for  |   |
|            |   |                | the other's poor credit.              |   |
+------------+---+----------------+---------------------------------------+---+

Continued on next page

7.01 Joint Loans, Continued

+-------------+--------------------------------------------------------+
| ##### How   | > Guaranty is limited to that portion of the loan      |
|  to Calcula | > allocable to the veteran's interest in the property. |
| te Guaranty | >                                                      |
|  and Entitl | > The lender **must** satisfy itself that the          |
| ement Use o | > requirements of its investor or the secondary market |
| n Veteran/  | > can be met with this limited guaranty.               |
| Nonveteran  |                                                        |
| Joint Loans |                                                        |
+-------------+--------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > VA calculates the guaranty as described in the table  |
|  Procedure | > below.                                                |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| **S   | **Action**                                                   |
| tep** |                                                              |
+-------+--------------------------------------------------------------+
| 1     | > Divide the total loan amount by the number of borrowers.   |
+-------+--------------------------------------------------------------+
| 2     | Multiply the result by the number of veteran borrowers who   |
|       | will be using entitlement on the loan.                       |
|       |                                                              |
|       | > There is usually only one veteran borrower, in which case  |
|       | > the result of this Step is the same as the result of Step  |
|       | > 1.                                                         |
+-------+--------------------------------------------------------------+
| 3     | Calculate the maximum potential guaranty on the portion of   |
|       | the loan arrived at in Step 2 (as if that portion was the    |
|       | total loan).                                                 |
|       |                                                              |
|       | > Use the maximum guaranty table in Section 3.04 of this     |
|       | > handbook.                                                  |
+-------+--------------------------------------------------------------+
| 4     | VA will guarantee the lesser of                              |
|       |                                                              |
|       | -   the maximum potential guaranty amount arrived at in Step |
|       |     3, or                                                    |
|       |                                                              |
|       | -   the combined available entitlement of all                |
|       |     veteran-borrowers.                                       |
|       |                                                              |
|       | > If the result of Step 2 is greater than \$144,000,         |
|       | > additional entitlement of up to \$14,750 may be added to   |
|       | > **each** veteran's entitlement for use on the loan, if     |
|       | > needed.                                                    |
+-------+--------------------------------------------------------------+
| 5     | VA makes a charge to the veteran-borrowers' available        |
|       | entitlement in the amount of the guaranty.                   |
|       |                                                              |
|       | > If more than one veteran is involved, VA divides the       |
|       | > entitlement charge equally between them if possible, or,   |
|       | > if only unequal entitlement is available, unequal charges  |
|       | > may be made with the written agreement of the veterans.    |
+-------+--------------------------------------------------------------+

Continued on next page

7.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| ####       | > **Veteran/Nonveteran Loans**                          |
| # Examples |                                                         |
+------------+---------------------------------------------------------+

+-------------+---------+------------+---------------+----------------+
| Borrowers   | Total   | Vet's      | Maximum       | Entitlement    |
| and         | Loan    | Portion    | Potential     | Charge\        |
| Available   | Amount  |            | Guaranty on   | \-             |
| Entitlement |         |            | Vet's Portion | \-\-\-\-\-\-\- |
|             |         |            |               | \-\-\--T=Total |
+-------------+---------+------------+---------------+----------------+
| Vet         | \$      | \$50,000   | \$22,500      | \$22,500       |
| \$36,000    | 100,000 |            |               |                |
| Nonvet \$0  |         |            |               |                |
+-------------+---------+------------+---------------+----------------+
| Vet         | \$      | \$60,000   | \$24,000      | \$24,000       |
| \$36,000    | 120,000 |            |               |                |
|             |         |            |               |                |
| Nonvet \$0  |         |            |               |                |
+-------------+---------+------------+---------------+----------------+
| Vet         | \$      | Total for  | Total for     | \$14,400       |
| \$27,500    | 108,000 | both vets  | both vets     |                |
|             |         |            |               | \$14,400       |
| Vet         |         | \$72,000   | \$28,800      |                |
| \$36,000    |         |            |               | T=\$28,800     |
|             |         |            |               |                |
| Nonvet \$0  |         |            |               |                |
+-------------+---------+------------+---------------+----------------+
| Vet         | \$      | Total for  | \$36,000      | \$25,000       |
| \$25,000    | 201,000 | both vets  |               |                |
|             |         | \$134,000  |               | \$11,000       |
| Vet         |         |            |               |                |
| \$11,000    |         |            |               | T=\$36,000     |
|             |         |            |               |                |
| Nonvet \$0  |         |            |               |                |
+-------------+---------+------------+---------------+----------------+

+----+-----------------------------------------------------------------+
| *  |                                                                 |
| *Q |                                                                 |
| ui |                                                                 |
| ck |                                                                 |
| R  |                                                                 |
| ef |                                                                 |
| er |                                                                 |
| en |                                                                 |
| ce |                                                                 |
| F  |                                                                 |
| or |                                                                 |
| C  |                                                                 |
| al |                                                                 |
| cu |                                                                 |
| la |                                                                 |
| ti |                                                                 |
| on |                                                                 |
| Us |                                                                 |
| ed |                                                                 |
| ** |                                                                 |
+----+-----------------------------------------------------------------+
| ** | **Action**                                                      |
| St |                                                                 |
| ep |                                                                 |
| ** |                                                                 |
+----+-----------------------------------------------------------------+
| 1  | Divide the total loan amount by the number of borrowers.        |
+----+-----------------------------------------------------------------+
| 2  | Multiply the result by the number of veterans using             |
|    | entitlement.                                                    |
+----+-----------------------------------------------------------------+
| 3  | > Calculate the maximum potential guaranty on the portion of    |
|    | > the loan arrived at in Step 2, using the maximum guaranty     |
|    | > table in Section 3.04.                                        |
+----+-----------------------------------------------------------------+
| 4  | VA will make a charge to entitlement up to the amount arrived   |
|    | at in Step 3.                                                   |
|    |                                                                 |
|    | -   VA will divide the charge equally between multiple veterans |
|    |     if possible.                                                |
|    |                                                                 |
|    | -   Add up to \$14,750 per veteran if Step 2 is greater than    |
|    |     \$144,000.                                                  |
+----+-----------------------------------------------------------------+

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

Continued on next page

7.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| #####      | > As with a non-joint loan, the potential maximum       |
| How to Cal | > guaranty on a joint loan is calculated based on the   |
| culate Gua | > total loan amount and cannot exceed \$50,750, even if |
| ranty and  | > the available entitlement of the veterans involved    |
| Entitlemen | > adds up to a greater amount.                          |
| t Use on 2 |                                                         |
|  Veteran J |                                                         |
| oint Loans |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > VA calculates the guaranty as described in the table  |
|  Procedure | > below.                                                |
+------------+---------------------------------------------------------+

+-------+--------------------------------------------------------------+
| **S   | **Action**                                                   |
| tep** |                                                              |
+-------+--------------------------------------------------------------+
| 1     | Calculate the maximum potential guaranty on the total loan   |
|       | amount.                                                      |
|       |                                                              |
|       | > Use the maximum guaranty table in Section 3.04 of this     |
|       | > handbook..                                                 |
+-------+--------------------------------------------------------------+
| 2     | VA will guarantee the lesser of                              |
|       |                                                              |
|       | -   the maximum potential guaranty amount arrived at in Step |
|       |     1, or                                                    |
|       |                                                              |
|       | -   the combined available entitlement of all                |
|       |     veteran-borrowers.                                       |
|       |                                                              |
|       | If the loan amount is greater than \$144,000, additional     |
|       | entitlement of up to \$14,750 may be added to **each**       |
|       | veteran's entitlement for use on the loan, if needed.        |
|       |                                                              |
|       | > If possible, VA will use this additional entitlement to    |
|       | > arrive at equal entitlement charges for the veterans       |
|       | > involved.                                                  |
+-------+--------------------------------------------------------------+
| 3     | VA will make charges to the veterans' available entitlement  |
|       | which total the maximum guaranty arrived at in Step 1, or    |
|       | the total of their available entitlement if less that the    |
|       | maximum potential guaranty.                                  |
|       |                                                              |
|       | > VA will divide the entitlement charge equally between the  |
|       | > veterans if possible, or, if only unequal entitlement is   |
|       | > available, unequal charges may be made with the veterans'  |
|       | > written agreement.                                         |
|       | >                                                            |
|       | > ***Exception***: VA will make the entitlement charge for   |
|       | > husband and wife veterans according to their preference;   |
|       | > usually charged to one entitlement, taking it out of the   |
|       | > realm of a "joint loan."                                   |
+-------+--------------------------------------------------------------+

Continued on next page

7.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| ####       | > **Two veteran loans**                                 |
| # Examples |                                                         |
+------------+---------------------------------------------------------+

+--------------+----------+----------+---------+----------+----------+
| Veterans and | Total    | Maximum  | Addi    | Total    | Total    |
| Available    | Loan     | P        | -tional | Enti     | Guaranty |
| Entitlement  | Amount   | otential | Entit   | tle-ment | on Loan  |
|              |          | Guaranty | le-ment | Charge   |          |
|              |          |          | Use Per | Per Vet  |          |
|              |          |          | Vet     |          |          |
+--------------+----------+----------+---------+----------+----------+
| Vet 1        | \        | \$36,000 | \$0     | \$18,000 | \$36,000 |
| \$36,000     | $100,000 |          |         |          |          |
|              |          |          | \$0     | \$18,000 |          |
| Vet 2        |          |          |         |          |          |
| \$36,000     |          |          |         |          |          |
+--------------+----------+----------+---------+----------+----------+
| Vet 1        | \        | \$50,750 | \       | \$25,375 | \$50,750 |
| \$15,000     | $203,000 |          | $10,375 |          |          |
|              |          |          |         | \$25,375 |          |
| Vet 2        |          |          | \$5,375 |          |          |
| \$20,000     |          |          |         |          |          |
+--------------+----------+----------+---------+----------+----------+
| Vet 1        | \        | \$50,750 | \$0     | \$25,375 | \$50,750 |
| \$36,000     | $300,000 |          |         |          |          |
|              |          |          | \$0     | \$25,375 |          |
| Vet 2        |          |          |         |          |          |
| \$36,000     |          |          |         |          |          |
+--------------+----------+----------+---------+----------+----------+
| Vet 1        | \$80,000 | \$32,000 | \$0     | \$23,500 | \$32,000 |
| \$23,500     |          |          |         |          |          |
|              |          |          | \$0     | \$8,500  |          |
| Vet 2        |          |          |         |          |          |
| \$8,500      |          |          |         |          |          |
+--------------+----------+----------+---------+----------+----------+
| Vet 1 \$0    | \        | \$50,750 | \       | \$14,750 | \$50,750 |
|              | $300,000 |          | $14,750 |          |          |
| Vet 2 \$0    |          |          |         | \$14,750 |          |
|              |          |          | \       |          |          |
| Vet 3        |          |          | $14,750 | \$21,250 |          |
| \$6,500      |          |          |         |          |          |
|              |          |          | \       |          |          |
|              |          |          | $14,750 |          |          |
+--------------+----------+----------+---------+----------+----------+

+----+-----------------------------------------------------------------+
| *  |                                                                 |
| *Q |                                                                 |
| ui |                                                                 |
| ck |                                                                 |
| R  |                                                                 |
| ef |                                                                 |
| er |                                                                 |
| en |                                                                 |
| ce |                                                                 |
| F  |                                                                 |
| or |                                                                 |
| C  |                                                                 |
| al |                                                                 |
| cu |                                                                 |
| la |                                                                 |
| ti |                                                                 |
| on |                                                                 |
| Us |                                                                 |
| ed |                                                                 |
| ** |                                                                 |
+----+-----------------------------------------------------------------+
| ** | **Action**                                                      |
| St |                                                                 |
| ep |                                                                 |
| ** |                                                                 |
+----+-----------------------------------------------------------------+
| 1  | > Calculate the maximum potential guaranty on the total loan    |
|    | > amount, using the maximum guaranty table in Section 3.04.     |
+----+-----------------------------------------------------------------+
| 2  | VA will make a charge to entitlement up to the amount arrived   |
|    | at in Step 1.                                                   |
|    |                                                                 |
|    | -   VA will divide the charge equally between all veterans if   |
|    |     possible.                                                   |
|    |                                                                 |
|    | -   Add up to \$14,750 per veteran if the loan is greater than  |
|    |     \$144,000.                                                  |
+----+-----------------------------------------------------------------+

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

Continued on next page

7.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| #          | > For joint loans involving one or more nonveterans     |
| #### Certi |                                                         |
| ficate of  | -   the loan amount shown on the commitment is limited  |
| Commitment |     to the veteran's portion of the loan, and           |
|            |                                                         |
|            | -   the percent of guaranty is based on the ratio of    |
|            |     the amount of entitlement the veteran has available |
|            |     to the veteran's portion of the loan.               |
|            |                                                         |
|            | > VA will issue the Certificate of Commitment with a    |
|            | > reminder that                                         |
|            |                                                         |
|            | -   no part of the guaranty applies to the portion of   |
|            |     the loan allocated to the nonveteran, and           |
|            |                                                         |
|            | -   in the event of foreclosure where a loss is         |
|            |     sustained, the holder must absorb any loss          |
|            |     attributable to the nonveteran's portion of the     |
|            |     loan.                                               |
+------------+---------------------------------------------------------+

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

Continued on next page

7.01 Joint Loans, Continued

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

Continued on next page

7.01 Joint Loans, Continued

+------------+---------------------------------------------------------+
| #####      | > Apply the appropriate funding fee percentage to any   |
| Calculatio | > portion of the loan allocable to a veteran using his  |
| n of the F | > or her entitlement who is not exempt from the funding |
| unding Fee | > fee. Determine the appropriate percentage for the     |
|            | > type of veteran involved from the funding fee tables  |
|            | > in Section 8.08 of this handbook.                     |
|            | >                                                       |
|            | > ***Example***: On a no-down payment loan to three     |
|            | > veterans; one a first-time homebuyer, one a           |
|            | > subsequent user, and one a first-time reservist;      |
|            | > funding fee percentages of 2.0%, 3.0%, and 2.75%,     |
|            | > respectively, would each be applied to one-third of   |
|            | > the loan amount.                                      |
|            | >                                                       |
|            | > No funding fee will be assessed on any portion of a   |
|            | > joint loan allocable to                               |
|            |                                                         |
|            | -   a nonveteran                                        |
|            |                                                         |
|            | -   a veteran who did not use his or her entitlement,   |
|            |     or                                                  |
|            |                                                         |
|            | -   a veteran who used his or her entitlement, but is   |
|            |     exempt from the funding fee.                        |
|            |                                                         |
|            | > ***Downpayment***: The actual loan amount is          |
|            | > allocated equally between the borrowers for purposes  |
|            | > of calculating the funding fee, whether or not a down |
|            | > payment is made, and regardless of where the funds    |
|            | > for such a down payment come from.                    |
|            | >                                                       |
|            | > ***Example***: On a veteran/nonveteran loan, the      |
|            | > nonveteran makes a \$5,000 (5%) down payment out of   |
|            | > his cash resources, to purchase a \$100,000 property, |
|            | > resulting in a \$95,000 loan amount. The veteran is a |
|            | > first-time homebuyer. The veteran must pay a funding  |
|            | > fee of \$712.50, based on 1.5% of his/her \$47,500    |
|            | > portion.                                              |
|            | >                                                       |
|            | > If situations arise which are not addressed here,     |
|            | > contact VA for assistance.                            |
+------------+---------------------------------------------------------+

#### 7.02 Construction/Permanent Home Loans

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

+------------+---------------------------------------------------------+
| ##### Am   | > The veteran begins making payments on a               |
| ortization | > construction/permanent home loan **only** after       |
|            | > construction is complete. Therefore, the initial      |
|            | > payment on principal may be postponed up to one year  |
|            | > if necessary. The loan must be amortized to achieve   |
|            | > full repayment within its remaining term.             |
|            | >                                                       |
|            | > ***Example***: If it takes six months to complete     |
|            | > construction, the payment schedule for the veteran    |
|            | > obtaining a 30-year mortgage must provide for full    |
|            | > repayment of the loan in 29 years and six months.     |
|            | >                                                       |
|            | > Rather than requiring a balloon payment, it may be    |
|            | > preferable to set up equal payments (beginning after  |
|            | > construction is complete) which are large enough to   |
|            | > repay the loan within the original maturity without a |
|            | > balloon payment.                                      |
|            | >                                                       |
|            | > VA's amortization requirements that payments be       |
|            | > approximately equal and principal be reduced at least |
|            | > once annually apply to construction loans. (See       |
|            | > Section 3.09.) However, the final installment         |
|            | > requirement is different.                             |
|            | >                                                       |
|            | > The final installment may be for an amount that does  |
|            | > not exceed 5% of the original principal amount of the |
|            | > loan.                                                 |
+------------+---------------------------------------------------------+

Continued on next page

7.02 Construction/Permanent Home Loans, Continued

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

+------------+---------------------------------------------------------+
| #####      | > The veteran may **not** pay any fees which are the    |
|  What Fees | > builder's responsibility. Fees the veteran can pay    |
|  the Veter | > are described in Section 8.02.                        |
| an Can Pay |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > The funding fee is due and payable to VA within 15    |
| Funding Fe | > days of loan closing; that is, it is **not** tied to  |
| e and Loan | > the commencement or completion of construction. The   |
|  Reporting | > loan must be reported to VA within 60 days of receipt |
|            | > of a clear final compliance inspection report.        |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > Although the loan will normally be considered         |
| #### Loan  | > guaranteed upon closing, the LGC on a                 |
| Guaranty C | > construction/permanent home loan will not be issued   |
| ertificate | > until a clear final compliance inspection report has  |
|            | > been received by VA.                                  |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | > If construction is not fully completed and loan       |
| ### If Loa | > proceeds not fully disbursed, guaranty will apply     |
| n Proceeds | > **only** to the proper pro rata part of the loan. To  |
|  not Fully | > calculate the proper pro rata part of the loan        |
|  Disbursed |                                                         |
|            | -   take loan proceeds disbursed for construction       |
|            |     purposes                                            |
|            |                                                         |
|            | -   add any other payments made to the builder by or on |
|            |     behalf of the veteran                               |
|            |                                                         |
|            | -   take the lesser of the above total or 80 percent of |
|            |     the value of that portion of the construction       |
|            |     actually completed, and                             |
|            |                                                         |
|            | -   add any loan disbursements made for the purchase of |
|            |     the land on which the construction is situated.     |
+------------+---------------------------------------------------------+

#### 7.03 Energy Efficient Mortgages (EEMs)

+------------+---------------------------------------------------------+
| ##### What | > EEMs are loans to cover the cost of making energy     |
|  are EEMs? | > efficiency improvements to a dwelling. They can be    |
|            | > made in conjunction with                              |
|            |                                                         |
|            | -   a VA loan for the purchase of an existing dwelling, |
|            |     or                                                  |
|            |                                                         |
|            | -   a VA refinancing loan secured by the dwelling.      |
|            |                                                         |
|            | > Acceptable energy efficiency improvements include,    |
|            | > but are not limited to                                |
|            |                                                         |
|            | -   solar heating systems, including solar systems for  |
|            |     heating water for domestic use                      |
|            |                                                         |
|            | -   solar heating and cooling systems                   |
|            |                                                         |
|            | -   caulking and weather-stripping                      |
|            |                                                         |
|            | -   furnace efficiency modifications limited to         |
|            |     replacement burners, boilers, or furnaces designed  |
|            |     to reduce the firing rate or to achieve a reduction |
|            |     in the amount of fuel consumed as a result of       |
|            |     increased combustion efficiency, devices for        |
|            |     modifying flue openings which will increase the     |
|            |     efficiency of the heating system, and electrical or |
|            |     mechanical furnace ignition systems which replace   |
|            |     standing gas pilot lights                           |
|            |                                                         |
|            | -   clock thermostats                                   |
|            |                                                         |
|            | -   new or additional ceiling, attic, wall and floor    |
|            |     insulation                                          |
|            |                                                         |
|            | -   water heater insulation                             |
|            |                                                         |
|            | -   storm windows and/or doors, including thermal       |
|            |     windows and/or doors                                |
|            |                                                         |
|            | -   heat pumps, and                                     |
|            |                                                         |
|            | -   vapor barriers.                                     |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### Re   | > Funds for energy efficiency improvements are          |
| quirements | > considered part of the total loan, which must be      |
|            | > secured by a first lien.                              |
|            | >                                                       |
|            | > If the labor is to be performed by the veteran, the   |
|            | > loan increase will be limited to the amount necessary |
|            | > to pay for materials.                                 |
|            | >                                                       |
|            | > A loan for existing property may be increased by up   |
|            | > to \$6,000 for energy efficiency improvements at the  |
|            | > option of the lender and veteran at any time up to    |
|            | > loan closing without VA's prior approval.             |
+------------+---------------------------------------------------------+

Continued on next page

7.03 Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| ##### Requ | > The lender must determine that the proposed           |
| irements ( | > weatherization and/or energy conservation             |
| continued) | > improvements are reasonable for the particular        |
|            | > property.                                             |
|            | >                                                       |
|            | > The lender must evaluate the veteran's ability to pay |
|            | > the increased loan payments caused by addition of     |
|            | > energy efficiency improvements.                       |
|            | >                                                       |
|            | > For energy efficiency improvements that will increase |
|            | > a loan amount by more than \$6,000, the amount of the |
|            | > increase must be supported by an increased valuation  |
|            | > in an equal amount.                                   |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Information on EEMs is provided to a veteran who      |
| Borrower N | > applies for a loan which requires a CRV or NOV (that  |
| otice on t | > is, a loan for a home purchase or cash-out            |
| he CRV/NOV | > refinance). The CRV or NOV includes the following     |
|            | > notice to the veteran:                                |
|            | >                                                       |
|            | > "The buyer may wish to contact a qualified            |
|            | > person/firm for a home energy audit to identify       |
|            | > needed energy efficiency improvements to the          |
|            | > property. In some localities, the utility company may |
|            | > perform this service. The mortgage amount may be      |
|            | > increased as a result of making energy efficiency     |
|            | > improvements such as: Solar or conventional           |
|            | > heating/cooling systems, water heaters, insulation,   |
|            | > weather-stripping/caulking, and storm windows/doors.  |
|            | > Other energy related improvements may also be         |
|            | > considered.                                           |
|            | >                                                       |
|            | > The mortgage may be increased by                      |
|            |                                                         |
|            | -   up to \$3,000 based solely on the documented costs  |
|            |                                                         |
|            | -   up to \$6,000 provided the increase in monthly      |
|            |     mortgage payment does not exceed the likely         |
|            |     reduction in monthly utility costs, or              |
|            |                                                         |
|            | -   more than \$6,000 subject to a value determination  |
|            |     by VA.                                              |
+------------+---------------------------------------------------------+

Continued on next page

7.03 Energy Efficient Mortgages (EEMs), Continued

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

Continued on next page

7.03 Energy Efficient Mortgages (EEMs), Continued

+------------+---------------------------------------------------------+
| ###        | > ***Energy efficiency improvements up to \$3,000**:*   |
| ## Documen | >                                                       |
| tation Req | > Evidence of the cost of improvements such as a copy   |
| uired with | > of the bid(s) or contract itemizing the improvements  |
|  Closed Lo | > and their cost.                                       |
| an Package | >                                                       |
|            | > ***Improvements more than \$3,000, up to \$6,000**:*  |
|            | >                                                       |
|            | > Evidence of the                                       |
|            |                                                         |
|            | -   cost of improvements such as a copy of the bid(s)   |
|            |     or contract itemizing the improvements and their    |
|            |     cost, and                                           |
|            |                                                         |
|            | -   the lender's determination that the increase in     |
|            |     monthly mortgage payments does not exceed the       |
|            |     likely reduction in monthly utility costs.          |
|            |                                                         |
|            | *Improvements over \$6,000:*                            |
|            |                                                         |
|            | -   Documentation of VA's valuation of the energy       |
|            |     efficiency improvements, and                        |
|            |                                                         |
|            | -   for prior approval loans, the Certificate of        |
|            |     Commitment must reflect the additional amount.      |
|            |                                                         |
|            | *IRRRL with significant increase in payments:*          |
|            |                                                         |
|            | > If the cost of the improvements causes the new loan   |
|            | > payment (PITI) to be 20% or more higher than the old  |
|            | > payment (on the loan being refinanced), then include  |
|            | > the lender's certification that it has determined     |
|            | > that the veteran qualified for the higher payment.    |
+------------+---------------------------------------------------------+

Continued on next page

7.03 Energy Efficient Mortgages (EEMs), Continued

+------------+---+-----+-------------------------------------------------+---+
| #          | > |     |                                                 |   |
| #### How t |   |     |                                                 |   |
| o Calculat | G |     |                                                 |   |
| e Guaranty | u |     |                                                 |   |
|  and Entit | a |     |                                                 |   |
| lement Use | r |     |                                                 |   |
|            | a |     |                                                 |   |
|            | n |     |                                                 |   |
|            | t |     |                                                 |   |
|            | y |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | i |     |                                                 |   |
|            | s |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | c |     |                                                 |   |
|            | a |     |                                                 |   |
|            | l |     |                                                 |   |
|            | c |     |                                                 |   |
|            | u |     |                                                 |   |
|            | l |     |                                                 |   |
|            | a |     |                                                 |   |
|            | t |     |                                                 |   |
|            | e |     |                                                 |   |
|            | d |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | o |     |                                                 |   |
|            | n |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | a |     |                                                 |   |
|            | n |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | e |     |                                                 |   |
|            | n |     |                                                 |   |
|            | e |     |                                                 |   |
|            | r |     |                                                 |   |
|            | g |     |                                                 |   |
|            | y |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | e |     |                                                 |   |
|            | f |     |                                                 |   |
|            | f |     |                                                 |   |
|            | i |     |                                                 |   |
|            | c |     |                                                 |   |
|            | i |     |                                                 |   |
|            | e |     |                                                 |   |
|            | n |     |                                                 |   |
|            | t |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | m |     |                                                 |   |
|            | o |     |                                                 |   |
|            | r |     |                                                 |   |
|            | t |     |                                                 |   |
|            | g |     |                                                 |   |
|            | a |     |                                                 |   |
|            | g |     |                                                 |   |
|            | e |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | a |     |                                                 |   |
|            | s |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | d |     |                                                 |   |
|            | e |     |                                                 |   |
|            | s |     |                                                 |   |
|            | c |     |                                                 |   |
|            | r |     |                                                 |   |
|            | i |     |                                                 |   |
|            | b |     |                                                 |   |
|            | e |     |                                                 |   |
|            | d |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | i |     |                                                 |   |
|            | n |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | t |     |                                                 |   |
|            | h |     |                                                 |   |
|            | e |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | f |     |                                                 |   |
|            | o |     |                                                 |   |
|            | l |     |                                                 |   |
|            | l |     |                                                 |   |
|            | o |     |                                                 |   |
|            | w |     |                                                 |   |
|            | i |     |                                                 |   |
|            | n |     |                                                 |   |
|            | g |     |                                                 |   |
|            | > |     |                                                 |   |
|            |   |     |                                                 |   |
|            | t |     |                                                 |   |
|            | a |     |                                                 |   |
|            | b |     |                                                 |   |
|            | l |     |                                                 |   |
|            | e |     |                                                 |   |
|            | . |     |                                                 |   |
+------------+---+-----+-------------------------------------------------+---+
|            |   | S   | Action                                          |   |
|            |   | tep |                                                 |   |
+------------+---+-----+-------------------------------------------------+---+
|            |   | 1   | Calculate guaranty on the loan **without** the  |   |
|            |   |     | portion attributable to the energy efficiency   |   |
|            |   |     | improvements.                                   |   |
+------------+---+-----+-------------------------------------------------+---+
|            |   | 2   | Calculate guaranty on the energy efficiency     |   |
|            |   |     | improvements portion by applying the same       |   |
|            |   |     | percentage used in Step 1.                      |   |
+------------+---+-----+-------------------------------------------------+---+
|            |   | 3   | Add the results of Steps 1 and 2 to arrive at   |   |
|            |   |     | guaranty on the entire loan.                    |   |
+------------+---+-----+-------------------------------------------------+---+

+-----------------------------------------------------------------------+
| > **However**                                                         |
| >                                                                     |
| > The veteran's entitlement will **only** be charged the amount       |
| > arrived at in Step 1; that is, based upon the loan amount           |
| > **before** adding the cost of the energy efficiency improvements.   |
| >                                                                     |
| > ***Example* 1**: If a veteran has full entitlement and applies for  |
| > a loan of \$80,000, plus \$6,000 in energy efficiency improvements, |
| > VA will guarantee 40% of the full loan amount of \$86,000. Thus,    |
| > the dollar amount of the guaranty will be \$34,400, even though the |
| > charge to the veteran's entitlement is only \$32,000.               |
| >                                                                     |
| > ***Example* 2**: If a veteran with full entitlement applies for a   |
| > \$144,000 loan to purchase a home, and adds \$6,000 in energy       |
| > efficiency improvements, the 25% guaranty on the loan will only     |
| > require the use of \$36,000 entitlement, but the dollar amount of   |
| > guaranty will be \$37,500.                                          |
+-----------------------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### Ho   | > Calculate the funding fee based on the full loan      |
| w to Calcu | > amount including the cost of the energy efficiency    |
| late the F | > improvements.                                         |
| unding Fee |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

7.03 Energy Efficient Mortgages (EEMs), Continued

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

+------------+---------------------------------------------------------+
| ##         | > The veteran generally may not obtain cash proceeds    |
| ### Reimbu | > from an IRRRL.                                        |
| rsement of | >                                                       |
|  Veteran o | > ***Note***: There is **one** exception. Up to \$6,000 |
| ut of IRRR | > of IRRRL loan proceeds may be used to reimburse the   |
| L Proceeds | > veteran for the cost of energy efficiency             |
|            | > improvements completed within the 90 days immediately |
|            | > preceding the date of the loan.                       |
+------------+---------------------------------------------------------+

#### 7.04 Loans for Alteration and Repair

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

+------------+---------------------------------------------------------+
| #####      | > The cost of alterations and repairs to structures may |
| Value Cons | > be included in a loan for the purchase of improved    |
| iderations | > property to the extent that their value supports the  |
|            | > loan amount.                                          |
+------------+---------------------------------------------------------+

#### 7.05 Supplemental Loans

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

7.05 Supplemental Loans, Continued

+------------+---------------------------------------------------------+
| #          | > It is the lender's responsibility to obtain an        |
| #### Requi | > effective lien of the required dignity.               |
| red Lien a | >                                                       |
| nd Maximum | > Possible methods to secure a supplemental loan are    |
|  Loan Term |                                                         |
|            | -   through an open end provision of the instrument     |
|            |     securing the existing loan                          |
|            |                                                         |
|            | -   through an amendment of the existing loan security  |
|            |     instrument                                          |
|            |                                                         |
|            | -   by taking a new lien to cover both the existing and |
|            |     the supplemental loans, or                          |
|            |                                                         |
|            | -   by taking a separate lien immediately junior to the |
|            |     existing lien.                                      |
|            |                                                         |
|            | > The maximum loan term is                              |
|            |                                                         |
|            | -   30 years if amortized, or                           |
|            |                                                         |
|            | -   5 years if not amortized.                           |
+------------+---------------------------------------------------------+

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

+------------+---------------------------------------------------------+
| #####      | > A supplemental loan will require the prior approval   |
| Prior Appr | > of VA if                                              |
| oval or Au |                                                         |
| tomatic Lo | -   the loan will be made by a lender who is not the    |
| an Closing |     holder of the currently guaranteed obligation       |
|            |                                                         |
|            | -   the loan is to be made by a lender that does not    |
|            |     have authority to close loans on an automatic       |
|            |     basis, or                                           |
|            |                                                         |
|            | -   an obligor liable on the currently outstanding      |
|            |     obligation will be released from personal liability |
|            |     by operation of law or otherwise.                   |
+------------+---------------------------------------------------------+

Continued on next page

7.05 Supplemental Loans, Continued

+-----------+----------------------------------------------------------+
| ##### P   | > Submit a statement describing the alterations,         |
| rocedures | > improvements, or repairs made or to be made with the   |
|           | > prior approval application (or loan closing package,   |
|           | > if closed automatically). In addition, report the      |
|           | > amount outstanding on the existing loan as of the date |
|           | > of closing of the supplemental loan in the loan        |
|           | > closing package.                                       |
|           | >                                                        |
|           | > ***If the cost of the repairs, alterations, or         |
|           | > improvements exceeds \$3,500***:                       |
|           | >                                                        |
|           | > A CRV or NOV and compliance inspections are required.  |
|           | >                                                        |
|           | > ***If the cost of the repairs, alterations, or         |
|           | > improvements does not exceed \$3,500***:               |
|           | >                                                        |
|           | > A CRV or NOV and compliance inspections are not        |
|           | > required. Instead, a statement of reasonable value may |
|           | > be submitted. The statement must be completed and      |
|           | > signed by a VA-designated appraiser. A VA-designated   |
|           | > appraiser is an individual nominated by the lender     |
|           | > (who may be an officer, trustee, or employee of the    |
|           | > lender or its agent) who has been approved by the      |
|           | > local VA office. The statement must specify            |
|           |                                                          |
|           | -   the work done or to be done                          |
|           |                                                          |
|           | -   the purchase price or cost of the work and material, |
|           |     and                                                  |
|           |                                                          |
|           | -   that the purchase price or cost does not exceed the  |
|           |     reasonable value.                                    |
|           |                                                          |
|           | > In lieu of VA compliance inspections, the lender must  |
|           | > submit a certification as follows:                     |
|           | >                                                        |
|           | > "The undersigned lender certifies to the Department of |
|           | > Veterans Affairs that the property as repaired,        |
|           | > altered, or improved has been inspected by a qualified |
|           | > individual designated by the undersigned, and based on |
|           | > the inspection report, the undersigned has determined  |
|           | > that the repairs, alterations, or improvements         |
|           | > financed with the proceeds of the loan described in    |
|           | > the attached [VA Form 26-1820]{.underline} appear to   |
|           | > have been completed in substantial conformance with    |
|           | > related contracts."                                    |
+-----------+----------------------------------------------------------+

Continued on next page

7.05 Supplemental Loans, Continued

+------------+---------------------------------------------------------+
| ##### Guar | > ***If the supplemental loan will not be consolidated  |
| anty and E | > with a related outstanding guaranteed loan***:        |
| ntitlement |                                                         |
|            | -   the veteran must have sufficient entitlement for    |
|            |     the new loan, and                                   |
|            |                                                         |
|            | -   VA will issue a new Certificate of Guaranty solely  |
|            |     for the supplemental loan.                          |
|            |                                                         |
|            | > ***If the supplemental loan will be consolidated with |
|            | > a related outstanding guaranteed loan***:             |
|            | >                                                       |
|            | > VA will issue a new modified guaranty certificate.    |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #####      | > Follow the steps in the table below to calculate the  |
|  Procedure | > percentage of guaranty applicable to the combined     |
|            | > indebtedness.                                         |
+------------+---------------------------------------------------------+

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

Continued on next page

7.05 Supplemental Loans, Continued

+------------+---------------------------------------------------------+
| ##### P    | > If the veteran has no available entitlement, VA can   |
| rocedure ( | > still guarantee the supplemental loan provided the    |
| continued) | > lender is the holder of the veteran's existing loan   |
|            | > and the loans are to be consolidated.                 |
|            | >                                                       |
|            | > The amount of the modified guaranty will be the       |
|            | > maximum guaranty effective on the existing loan at    |
|            | > the time the supplemental loan is closed.             |
|            | >                                                       |
|            | > To calculate the percentage of guaranty applicable to |
|            | > the combined indebtedness                             |
|            |                                                         |
|            | -   take the result of Step 1 above, and                |
|            |                                                         |
|            | -   divide by the result of Step 3 above.               |
+------------+---------------------------------------------------------+

#### 7.06 Graduated Payment Mortgages (GPMs)

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

+------------+---------------------------------------------------------+
| ##### Ac   | > GPMs should be used as an alternative for qualified   |
| ceptable U | > veterans whose income                                 |
| se of GPMs |                                                         |
|            | -   is expected to increase at a rate which can         |
|            |     accommodate the increase in monthly payments, or    |
|            |                                                         |
|            | -   is currently sufficient to accommodate the higher   |
|            |     GPM payments after the leveling off period.         |
|            |                                                         |
|            | > GPMs should **not** be used as a tool to qualify      |
|            | > veterans who cannot qualify for loans under the       |
|            | > standard amortization plan **unless** their income    |
|            | > can reasonably be expected to increase at a rate      |
|            | > which can accommodate the increase in monthly         |
|            | > payments.                                             |
|            | >                                                       |
|            | > A GPM may be used **only** to acquire a single-family |
|            | > dwelling unit (but **not** a manufactured home) and   |
|            | > can include funds for energy efficiency improvements. |
|            | >                                                       |
|            | > A GPM may **not** be used for a refinancing loan, for |
|            | > alteration, repair, or improvement only purposes, or  |
|            | > to acquire a multiple unit dwelling.                  |
+------------+---------------------------------------------------------+

Continued on next page

7.06 Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| #          | > ***Existing properties***:                            |
| #### Maxim | >                                                       |
| um Loan Am | > The principal amount of the loan may **never** exceed |
| ount and D | > the initial reasonable value of the property (that    |
| own Paymen | > is, the value indicated on the CRV or NOV used for    |
| t Required | > loan closing).                                        |
|            |                                                         |
|            | -   Since the principal balance increases during the    |
|            |     initial years of the loan, a loan made for the full |
|            |     amount of reasonable value would violate this       |
|            |     provision.                                          |
|            |                                                         |
|            | -   Therefore, a down payment is required to keep the   |
|            |     principal balance from **ever** exceeding the       |
|            |     initial reasonable value of the property.           |
|            |                                                         |
|            | > To calculate the maximum initial loan amount and the  |
|            | > required down payment, use HUD tables for Plan III    |
|            | > Section 245 GPMs showing outstanding principal        |
|            | > balance factors and monthly installment amounts per   |
|            | > \$1,000 of original loan proceeds. The factors vary   |
|            | > according to the interest rate on the loan.           |
|            |                                                         |
|            | -   These tables are available on diskette through HUD  |
|            |     offices.                                            |
|            |                                                         |
|            | > Determine the maximum initial loan amount as follows: |
|            | >                                                       |
|            | > Initial reasonable value of the property              |
|            | >                                                       |
|            | > **÷**                                                 |
|            | >                                                       |
|            | > Highest outstanding principal balance factor per      |
|            | > \$1,000 of original loan proceeds for the particular  |
|            | > interest rate (from the HUD tables)                   |
|            | >                                                       |
|            | > x                                                     |
|            | >                                                       |
|            | > 1,000                                                 |
|            | >                                                       |
|            | > The difference between this maximum initial loan      |
|            | > amount and the initial reasonable value of the        |
|            | > property is the amount of down payment required.      |
|            | >                                                       |
|            | > ***New construction or existing homes not previously  |
|            | > occupied***:                                          |
|            | >                                                       |
|            | > The initial loan amount may not exceed the lesser of  |
|            | > the purchase price or 97.50% of the initial           |
|            | > reasonable value of the property.                     |
|            |                                                         |
|            | -   A down payment will be required to cover the        |
|            |     difference between the reasonable value and the     |
|            |     initial loan amount.                                |
|            |                                                         |
|            | > The principal amount of the loan thereafter           |
|            | > (including the amount of all interest deferred and    |
|            | > added to principal, but not including any amount      |
|            | > attributable to the funding fee or energy efficiency  |
|            | > improvements) may not be scheduled to exceed the      |
|            | > projected value of the property at any time.          |
+------------+---------------------------------------------------------+

Continued on next page

7.06 Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| ###        | > Calculate the projected value of the property by      |
| ## Maximum | > increasing the reasonable value of the property from  |
|  Loan Amou | > the time the loan is made at a rate not in excess of  |
| nt and Dow | > 2.5% per year, but never to exceed 115% of the        |
| n Payment  | > initial reasonable value.                             |
| Required ( | >                                                       |
| continued) | > ***Downpayment***:                                    |
|            |                                                         |
|            | -   The amount required depends upon whether the        |
|            |     dwelling is new or existing. (See above.)           |
|            |                                                         |
|            | -   The veteran may choose to pay a higher down payment |
|            |     to offset the negative amortization.                |
|            |                                                         |
|            | > The downpayment must be paid in cash from the         |
|            | > veteran's own resources.                              |
|            | >                                                       |
|            | > ***Impact of interest rate increase on loans in       |
|            | > process***:                                           |
|            | >                                                       |
|            | > Any increase in the interest rate requires            |
|            | > recalculation of the maximum loan amount, down        |
|            | > payment, and payment schedule.                        |
|            | >                                                       |
|            | > ***Funding fee and energy efficiency improvements***: |
|            | >                                                       |
|            | > The initial loan amount may be increased by the       |
|            | > amount of the VA funding fee, if financed in the      |
|            | > loan, and the cost of any energy efficiency           |
|            | > improvements.                                         |
+------------+---------------------------------------------------------+

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

Continued on next page

7.06 Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| ###        | > Perform the necessary calculations using HUD tables   |
| ## How to  | > for Plan III Section 245 GPMs showing outstanding     |
| Calculate  | > principal balance factors and monthly installment     |
| Monthly In | > amounts per \$1,000 of original loan proceeds. The    |
| stallments | > factors vary according to the interest rate on the    |
|            | > loan.                                                 |
|            | >                                                       |
|            | > ***Note***: These tables are available on diskette to |
|            | > lenders through HUD offices.                          |
|            | >                                                       |
|            | > Determine the monthly installment amounts as follows: |
|            | >                                                       |
|            | > Number of thousands of dollars in the original loan   |
|            | > amount (including the VA funding fee, if financed,    |
|            | > and the cost of any energy efficiency improvements)   |
|            | >                                                       |
|            | > x                                                     |
|            | >                                                       |
|            | > Monthly installment factor per \$1,000 of original    |
|            | > loan proceeds for the particular interest rate from   |
|            | > the HUD tables (Different factors are                 |
|            | >                                                       |
|            | > provided for each of years 1 through 5, and year 6    |
|            | > and beyond.)                                          |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | > HUD's GPM Annual Percentage Rate (APR) tables may     |
| #### APR C | > **not** be used for VA purposes because they include  |
| alculation | > an adjustment for the HUD mortgage insurance premium. |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > If there are strong indications that the applicant's  |
| ## Underwr | > income can reasonably be expected to keep pace with   |
| iting Cons | > the increases in the monthly mortgage payment         |
| iderations | >                                                       |
|            | > then                                                  |
|            |                                                         |
|            | -   analyze the adequacy of the applicant's income, and |
|            |                                                         |
|            | -   complete [VA Form 26-6393, Loan                     |
|            |     Analysis]{.underline}, using only the first year's  |
|            |     mortgage payment in monthly shelter expenses.       |
|            |                                                         |
|            | > However, if such strong indications are absent then   |
|            |                                                         |
|            | -   analyze the adequacy of the applicant's income, and |
|            |                                                         |
|            | -   complete [VA Form 26-6393, Loan                     |
|            |     Analysis]{.underline}, using the payment which      |
|            |     would apply if the loan was under the standard      |
|            |     amortization plan.                                  |
|            |                                                         |
|            | > The lower initial payments of the GPM can be          |
|            | > considered a compensating factor, if appropriate.     |
+------------+---------------------------------------------------------+

Continued on next page

7.06 Graduated Payment Mortgages (GPMs), Continued

+------------+---------------------------------------------------------+
| #####      | > The following statement must be signed by the veteran |
|  Veteran's | > and submitted with each prior approval application or |
|  Statement | > automatic loan report involving a VA GPM:             |
|            | >                                                       |
|            | > "I fully understand that because of the               |
|            | > graduated-payment loan obligation I am undertaking,   |
|            | > my mortgage payment excluding taxes and insurance     |
|            | > will start at \$\_\_\_\_\_\_\_\_ and will increase by |
|            | > 7.5% each year for five years to a maximum payment of |
|            | > \$\_\_\_\_\_\_\_\_\_ , and the mortgage balance will  |
|            | > increase to no more than \$\_\_\_\_\_\_\_\_\_ at the  |
|            | > end of the \_\_\_\_\_ year. The maximum total amount  |
|            | > by which the deferred interest will increase the      |
|            | > principal is \$\_\_\_\_\_\_\_\_. Monthly installments |
|            | > will be due according to the following schedule:      |
|            |                                                         |
|            | -   \$\_\_\_\_\_\_\_\_\_\_ during the first year of the |
|            |     loan                                                |
|            |                                                         |
|            | -   \$\_\_\_\_\_\_\_\_\_\_ during the second year of    |
|            |     the loan                                            |
|            |                                                         |
|            | -   \$\_\_\_\_\_\_\_\_\_\_ during the third year of the |
|            |     loan                                                |
|            |                                                         |
|            | -   \$\_\_\_\_\_\_\_\_\_\_ during the fourth year of    |
|            |     the loan                                            |
|            |                                                         |
|            | -   \$\_\_\_\_\_\_\_\_\_\_ during the fifth year of the |
|            |     loan                                                |
|            |                                                         |
|            | -   \$\_\_\_\_\_\_\_\_\_\_ during the sixth year of the |
|            |     loan and every year thereafter."                    |
|            |                                                         |
|            | > If the interest rate increases after the veteran has  |
|            | > signed the initial statement, an amended statement    |
|            | > must be prepared and signed by the veteran before     |
|            | > loan closing, and included with the loan closing      |
|            | > package.                                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > The property securing the loan must have a remaining  |
| # Other Re | > economic life of at least 30 years, as shown on the   |
| quirements | > CRV or NOV.                                           |
|            | >                                                       |
|            | > While a GPM cannot be used to refinance another loan, |
|            | > a GPM can be refinanced by a fixed rate VA-guaranteed |
|            | > refinancing loan.                                     |
+------------+---------------------------------------------------------+

#### 7.07 Growing Equity Mortgages (GEMs)

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

+------------+---------------------------------------------------------+
| ##### A    | > The initial payment on a GEM is typically based on    |
| mortizatio | > what the payment would be for a 30-year mortgage      |
| n Examples | > under the standard amortization plan. Payment         |
|            | > increases can be fixed or tied to an index.           |
|            | >                                                       |
|            | > ***Example* 1**: Monthly payments are increased by 3% |
|            | > each year for the first 10 years. The payments level  |
|            | > off in the 11^th^ year and remain constant through    |
|            | > loan payoff. Loan payoff may occur within a few years |
|            | > of the leveling off of the payment, depending upon    |
|            | > interest rate.                                        |
|            | >                                                       |
|            | > ***Example* 2**: The increases in the monthly         |
|            | > payments are based on a percentage of a Commerce      |
|            | > Department index that measures per capita, after-tax  |
|            | > disposable personal income in the United States.      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### Un   | > The lender must determine that the applicant's income |
| derwriting | > can reasonably be expected to keep pace with the      |
|            | > increases in the monthly mortgage payment.            |
+------------+---------------------------------------------------------+

#### 7.08 Loans Involving Temporary Interest Rate Buydowns

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

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

Continued on next page

7.08 Loans Involving Temporary Interest Rate Buydowns, Continued

+------------+---------------------------------------------------------+
| ####       | > The loan application may be underwritten based on the |
| # If Borro | > first year's payment amount if there are strong       |
| wer's Inco | > indications that the income used to support the       |
| me is Expe | > application will increase to cover the yearly         |
| cted to Ke | > increases in loan payments.                           |
| ep Pace wi |                                                         |
| th Payment | -   Routine cost of living increases **cannot** be used |
|  Increases |     for this purpose.                                   |
|            |                                                         |
|            | -   Increases resulting from confirmed future           |
|            |     promotions or wage percentage increases guaranteed  |
|            |     by labor contracts (for example, teachers, auto     |
|            |     workers) may be given favorable consideration.      |
|            |                                                         |
|            | > The assistance payments must run for a minimum of one |
|            | > year. Scheduled reductions in the assistance payments |
|            | > must occur annually on the anniversary of the first   |
|            | > mortgage payment.                                     |
|            | >                                                       |
|            | > The reduction in the assistance payments may be       |
|            | > accomplished through                                  |
|            |                                                         |
|            | -   annual payment increases in equal or approximately  |
|            |     equal amounts, or                                   |
|            |                                                         |
|            | -   equal annual increases in the interest rate.        |
+------------+---------------------------------------------------------+

Continued on next page

7.08 Loans Involving Temporary Interest Rate Buydowns, Continued

+------------+---------------------------------------------------------+
| ##### I    | > The loan application must be underwritten based on    |
| f it is Un | > the **full** payment amount if there are no strong    |
| clear Whet | > indications that the income used to support the       |
| her Borrow | > application can reasonable be expected to keep pace   |
| er's Incom | > with the increases in loan payments.                  |
| e Can Keep | >                                                       |
|  Pace with | > The buydown arrangement can be considered a           |
|  Increases | > compensating factor.                                  |
|            | >                                                       |
|            | > If the residual income and/or debt-to-income ratio is |
|            | > marginal, the buydown plan (used to offset a          |
|            | > short-term debts), along with other compensating      |
|            | > factors, may support approval of the loan. See        |
|            | > "Compensating Factors" in Section 4.10.               |
|            | >                                                       |
|            | > Provide a statement signed by the underwriter giving  |
|            | > reasons for approval.                                 |
|            | >                                                       |
|            | > The terms of the buydown arrangement are **not**      |
|            | > limited to specific criteria such as a minimum or     |
|            | > maximum number of years for application of the        |
|            | > assistance payments.                                  |
|            | >                                                       |
|            | > It is the lender's responsibility to review and       |
|            | > determine the acceptability of the buydown.           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ####       | > Lenders must provide the veteran-borrower with a      |
| # Other Re | > clear, written explanation of the buydown agreement.  |
| quirements | >                                                       |
|            | > A copy of the buydown and escrow agreements must      |
|            | > accompany the loan submission.                        |
+------------+---------------------------------------------------------+

#### 7.09 Farm Residence Loans

+------------+---------------------------------------------------------+
| ##### E    | > A loan for the purchase, construction, repair,        |
| ligibility | > alteration, or improvement of a farm residence which  |
|            | > is occupied or will be occupied by the veteran as a   |
|            | > home is eligible for guaranty.                        |
|            | >                                                       |
|            | > The loan cannot cover                                 |
|            |                                                         |
|            | -   the nonresidential value of farm land in excess of  |
|            |     the homesite                                        |
|            |                                                         |
|            | -   the barn, silo, or other outbuildings necessary to  |
|            |     the operation of the farm, or                       |
|            |                                                         |
|            | -   farm equipment or livestock.                        |
|            |                                                         |
|            | > A portion of the proceeds of a loan to construct a    |
|            | > farm residence on encumbered land owned by the        |
|            | > veteran may be used to pay off the lien or liens on   |
|            | > the land **only if** the reasonable value of the land |
|            | > is at least equal to the amount of the lien(s).       |
+------------+---------------------------------------------------------+

Continued on next page

7.09 Farm Residence Loans, Continued

+------------+---------------------------------------------------------+
| ##### Un   | > If some or all of the income necessary to support the |
| derwriting | > loan payments comes from farming operations, the      |
|            | > veteran's ability and experience as a farm operator   |
|            | > must be established. The procedures and analysis      |
|            | > provided under "Self-Employment Income" in Section    |
|            | > 4.02 apply generally. In addition, apply the          |
|            | > following:                                            |
|            | >                                                       |
|            | > ***New farmer or new farm operation***:               |
|            | >                                                       |
|            | > Obtain the following:                                 |
|            |                                                         |
|            | -   The veteran's proposed plan of operation of the     |
|            |     farm, showing the number of acres for each crop,    |
|            |     amount of livestock, etc., upon which an estimate   |
|            |     of income and expenses may be made.                 |
|            |                                                         |
|            | -   The veteran's statement that he or she owns or      |
|            |     proposes purchasing the farm equipment required to  |
|            |     operate the farm. If additional indebtedness is to  |
|            |     be incurred in the purchase of this equipment, the  |
|            |     statement should contain full details as to         |
|            |     repayment terms, etc.                               |
|            |                                                         |
|            | -   An estimate of farm income and expenses by a local  |
|            |     farm appraiser designated by VA or another          |
|            |     qualified person, or the estimate used by a lender  |
|            |     that has agreed to carry an operating line of       |
|            |     credit for the veteran. The estimate should be      |
|            |     based on the veteran's proposed plan of operation,  |
|            |     his or her ability and experience, and the nature   |
|            |     and condition of the farm to be sold, including     |
|            |     livestock and livestock products. The expense       |
|            |     estimate must detail labor, seed, fertilizer, taxes |
|            |     and insurance, repairs, machinery, fuel, etc.       |
|            |                                                         |
|            | -   A copy of a commitment from a lender for an         |
|            |     operating line of credit or evidence of the         |
|            |     resources to be used to cover operating expenses    |
|            |                                                         |
|            | > ***Experienced farmer continuing same farm            |
|            | > operation***:                                         |
|            | >                                                       |
|            | > If the veteran finances operations out of an          |
|            | > operating line of credit, obtain records of advances  |
|            | > from, payments to, and carryover balances on the      |
|            | > operating line of credit for the last three years (or |
|            | > additional periods if needed to demonstrate stability |
|            | > of veteran's operation). Analyze the reasons for any  |
|            | > build-up of operating debt.                           |
+------------+---------------------------------------------------------+

#### 7.10 Cooperative Home Loans

+------------+---------------------------------------------------------+
| #####      | > Before a CRV is issued in any case involving a        |
| Procedures | > cooperative plan of ownership, the details of the     |
|            | > case must be referred by the local VA office to VA    |
|            | > Central Office for specific processing instructions.  |
+------------+---------------------------------------------------------+

#### 7.11 Loans for Manufactured Homes Classified as Real Estate

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

+------------+---------------------------------------------------------+
| ##### Al   | > Permanently affixed manufactured home loans can be    |
| lowable Lo | > made for any of the allowable loan purposes listed in |
| an Purpose | > the table below. Loan specifications and treatment of |
| s and Calc | > these loans are virtually the same as for any other   |
| ulation of | > VA-guaranteed home loans from a loan processing       |
|  Maximum L | > standpoint, except for calculation of the maximum     |
| oan Amount | > loan amount.                                          |
|            | >                                                       |
|            | > The following table provides the methods for          |
|            | > calculating maximum loan amount.                      |
+------------+---------------------------------------------------------+

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

Continued on next page

7.11 Loans for Manufactured Homes Classified as Real Estate, Continued

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

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

+--------------------+-------------------------------------------------+
| Allowable Loan     | Maximum Loan                                    |
| Purpose            |                                                 |
|                    | The loan amount is limited to:                  |
+--------------------+-------------------------------------------------+
| To purchase a      | The lesser of                                   |
| manufactured home  |                                                 |
| and a lot to which | -   the total purchase price of the             |
| it will be affixed |     manufactured home unit and the lot plus the |
|                    |     cost of all other real property             |
|                    |     improvements, or                            |
|                    |                                                 |
|                    | -   the purchase price of the manufactured home |
|                    |     unit plus the cost of all other real        |
|                    |     property improvements plus the balance owed |
|                    |     by the veteran on a deferred purchase money |
|                    |     mortgage or contract given for the purchase |
|                    |     of the lot, or                              |
|                    |                                                 |
|                    | -   the total reasonable value of the unit,     |
|                    |     lot, and property improvements, plus        |
|                    |                                                 |
|                    | -   the VA funding fee.                         |
+--------------------+-------------------------------------------------+
| To refinance an    | The lesser of                                   |
| existing loan on a |                                                 |
| manufactured home  | -   the sum of the balance of the loan being    |
| and purchase the   |     refinanced plus the purchase price of the   |
| lot to which the   |     lot, not to exceed its reasonable value     |
| home will be       |     plus the costs of the necessary site        |
| affixed            |     preparation as determined by VA plus a      |
|                    |     reasonable discount on that portion of the  |
|                    |     loan used to refinance the existing loan on |
|                    |     the manufactured home plus authorized       |
|                    |     closing costs, or                           |
|                    |                                                 |
|                    | -   the total reasonable value of the unit,     |
|                    |     lot, and real property improvements, plus   |
|                    |                                                 |
|                    | -   the VA funding fee.                         |
+--------------------+-------------------------------------------------+

Continued on next page

7.11 Loans for Manufactured Homes Classified as Real Estate, Continued

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

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

+--------------------+-------------------------------------------------+
| Allowable Loan     | Maximum Loan                                    |
| Purpose            |                                                 |
|                    | The loan amount is limited to:                  |
+--------------------+-------------------------------------------------+
| > An IRRRL to      | The sum of                                      |
| > refinance an     |                                                 |
| > existing         | -   the balance of the VA loan being            |
|                    |     refinanced, plus                            |
| VA loan on a       |                                                 |
| permanently        | -   allowable closing costs, plus               |
| affixed            |                                                 |
| manufactured home  | -   up to 2 discount points, plus               |
| and lot            |                                                 |
|                    | -   the VA funding fee.                         |
|                    |                                                 |
|                    | ***Note***: This is the only type of            |
|                    | permanently affixed manufactured home loan that |
|                    | does not require full underwriting and an       |
|                    | appraisal. The provisions applicable to IRRRLs  |
|                    | apply (See Section 6.01) except the term of the |
|                    | loan may be as long as 30 years and 32 days.    |
+--------------------+-------------------------------------------------+

#### 7.12 Loans to Native American Veterans on Trust Lands

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

2 Veteran Joint Loan, 7-3

Acceptable Use of GPMs, 7-27

Additional Supplemental Loan Requirements, 7-23

Allowable Loan Purposes, 7-39

Amortization, 7-13, 7-29

APR Calculation, 7-30

Borrower Notice on the CRV/NOV, 7-16

Builder Responsibilities, 7-14

Calculating EEM Funding Fee, 7-19

Calculating EEM Guaranty and Entitlement Use, 7-19

Calculating Guaranty and Entitlement Use on 2 Veteran Joint Loans, 7-8

Calculating Joint Loan Guaranty and Entitlement, 7-6

Calculating Monthly Installments, 7-30

Certificate of Commitment, 7-10

Construction/Permanent Home Loans, 7-13

Cooperative Home Loans, 7-38

Cost of the Repairs, Alterations, or Improvements does not Exceed
\$3,500, 7-24

Cost of theRrepairs, Alterations, or Improvements Exceeds \$3,500, 7-24

Documentation Required with Closed Loan, 7-18

Down Payment Required, 7-28

Downpayment, 7-12

ECOA Considerations, 7-11

EEM Requirements, 7-15

EEMs Definition, 7-15

Energy efficiency improvements in conjunction with an IRRRL, 7-17

Energy efficiency improvements more than \$3,000, up to \$6,000, 7-17

Energy efficiency improvements over \$6,000, 7-17

Energy efficiency improvements up to \$3,000, 7-7

Energy Efficient Mortgages (EEMs). *See* 7-15 thru 7-20

Escrow Requirements, 7-33

Establishing an Escrow or Earmarked Account, 7-20

Existing Properties, 7-28

Experienced Farmer Continuing Same Farm Operation, 7-37

Farm Residence Loan Eligibility, 7-36

Farm Residence Loans, 7-36

First Year Payment Amount, 7-34

Full Payment Amount, 7-35

Funding fee and energy efficiency improvements, 7-29

Funding Fee and Loan Reporting, 7-14

Funding Fee Calculation, 7-12

GEM Description, 7-32

GPMs Description, 7-27

Graduated Payment Mortgages (GPMs), 7-27

Growing Equity Mortgages (GEMs), 7-32

Guaranty and Entitlement, 7-25

Impact of interest rate increase on loans in process, 7-29

Joint Loan Definition, 7-2

Joint Loan Quick Reference For Calculation, 7-7

Joint Loans. *See* 7-2 thru 7-12

Joint Loans for Prior Approval, 7-4

Loan Guaranty Certificate, 7-10, 7-14

Loan Proceeds not Fully Disbursed, 7-14

Loans for Alteration and Repair, 7-21

Loans to Native American Veterans on Trust Lands, 7-42

Maximum Loan Amount, 7-28

New construction or existing homes not previously occupied, 7-28

New Farmer or New Farm Operation, 7-37

Number of Joint Loan Units, 7-4

Occupancy, 7-4

Prior Approval or Automatic Loan Closing, 7-23

Quick Reference For Calculation of 2 Veteran on Joint Loans, 7-9

Reimbursement out of IRRRL Proceeds, 7-20

Required Lien and Maximum Loan Term, 7-23

Supplemental Loan Definition, 7-22

Supplemental Loans. *See* 7-22 thru 7-26

Temporary Interest Rate Buydowns, 7-33

Underwriting a Joint Loan, 7-5

Underwriting Considerations, 7-30

VA Regulations for Joint Loans, 7-2

Veteran Fees, 17-4

Veteran/Nonveteran Joint Loan, 7-3

Veteran's Statement, 7-31