**Veterans Benefits Administration**

**Department of Veterans Affairs**

**Washington, D.C. 20420**

#### To: Lenders and Other Participants in the VA Loan Guaranty Program

**Subject: Transmittal of VA Pamphlet 26-7, Revised, VA Lender's
Handbook**

+------------+---------------------------------------------------------+
| ###        | Enclosed is revised VA Pamphlet 26-7, VA Lender's       |
| ## Purpose | Handbook, Guaranty of Loans to Veterans. The new        |
|            | Lender's Handbook generally contains the same           |
|            | information as the edition it replaces. However, the    |
|            | information has been reorganized and reformatted in a   |
|            | manner intended to make it easier to find specific      |
|            | material.                                               |
|            |                                                         |
|            | This handbook should be used by all lenders making VA   |
|            | loans, including their branch offices and agents, and   |
|            | any other program participant for whom it is important  |
|            | to know the loan processing and construction and        |
|            | valuation aspects of VA lending.                        |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ###        | > Additional copies may be downloaded off the Internet  |
| ## Additio | > (see section CI.01).                                  |
| nal Copies |                                                         |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| #          | Handbook chapters are broken down into numbered and     |
| #### Expla | titled sections, which are further broken down into     |
| nation of  | subject headings. The subject headings appear as        |
| New Format | captions to the left of the text they describe,         |
|            | enabling the reader to find desired material faster.    |
|            | Detailed tables of contents and a subject matter index  |
|            | have been added to further assist in the search for     |
|            | specific material.                                      |
|            |                                                         |
|            | > The use of bullets and shortening of sentences and    |
|            | > paragraphs are features of the new format intended to |
|            | > simplify the material and enhance understanding. They |
|            | > should not be interpreted as conveying a more rigid   |
|            | > approach to VA loanmaking. For example, the intent of |
|            | > chapter 4 on underwriting is still to provide mere    |
|            | > guidance, while emphasizing the reasonable judgment   |
|            | > and flexibility of lenders in underwriting VA loans.  |
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Continued on next page

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| #####      | The material behind the "Current Issues" tab at the     |
|  Current I | beginning of the handbook is intended to call the       |
| ssues and  | attention of program participants to evolving issues.   |
| Appendices | These issues may have only temporary impact or may      |
|            | ultimately be incorporated into the main text of this   |
|            | handbook.                                               |
|            |                                                         |
|            | > There are three appendices after the main body of the |
|            | > handbook. Appendix A lists the address and phone      |
|            | > number of each VA loan guaranty office by VA function |
|            | > and geographic area. Appendix B is an updated list of |
|            | > VA forms and their uses. Appendix C contains          |
|            | > instructions for transmitting the VA funding fee      |
|            | > electronically.                                       |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### Sign | > Please note the following areas where substantive     |
| ificant Ch | > policy changes have been incorporated into the new    |
| anges to b | > Lender's Handbook **OR** new clarifying material has  |
| e Aware of | > been added:                                           |
|            | >                                                       |
|            | > [Chapter 1]{.underline}                               |
|            |                                                         |
|            | -   Section 1.02 revises the information that any       |
|            |     lender who begins originating loans in a particular |
|            |     jurisdiction must submit to the appropriate VA      |
|            |     office.                                             |
|            |                                                         |
|            | -   Section 1.04 clarifies which lenders VA considers   |
|            |     "supervised."                                       |
|            |                                                         |
|            | -   Section 1.09 describes the information VA needs to  |
|            |     evaluate the merger, acquisition or other           |
|            |     restructuring of a lender with automatic authority, |
|            |     and the impact of the restructuring on the lender's |
|            |     automatic authority.                                |
|            |                                                         |
|            | -   Section 1.12 explains the requirements for record   |
|            |     retention by lenders.                               |
|            |                                                         |
|            | -   Section 1.13 explains VA ID codes for lenders.      |
|            |                                                         |
|            | -   Section 1.14 describes how lenders can access       |
|            |     training and information pertinent to the VA Home   |
|            |     Loan Program, including electronic documents and    |
|            |     files.                                              |
|            |                                                         |
|            |     [Chapter 2]{.underline}                             |
|            |                                                         |
|            | -   Section 2.02 describes the information on the       |
|            |     Certificate of Eligibility and how the lender       |
|            |     should interpret that information.                  |
|            |                                                         |
|            | -   Section 2.03 explains how to apply for Certificate  |
|            |     of Eligibility through the VA Home Loan Eligibility |
|            |     Centers.                                            |
|            |                                                         |
|            |     [Chapter 3]{.underline}                             |
|            |                                                         |
|            | -   Section 3.11 describes what a VA guaranty means to  |
|            |     the lender, when the guaranty is effective, and     |
|            |     what the lender's responsibilities are with respect |
|            |     to VA-guaranteed loans.                             |
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Continued on next page

+------------+---------------------------------------------------------+
| ##         | [Chapter 4]{.underline}                                 |
| ### Signif |                                                         |
| icant Chan | -   Section 4.08 discusses the required documentation   |
| ges to be  |     for Automated Underwriting.                         |
| Aware of ( |                                                         |
| continued) |     [Chapter 5]{.underline}                             |
|            |                                                         |
|            | -   Section 5.03 contains procedures for lenders to     |
|            |     request approval to use imaged documents.           |
|            |                                                         |
|            |     [Chapter 6]{.underline}                             |
|            |                                                         |
|            | -   Section 6.01 clarifies who can get an Interest Rate |
|            |     Reduction Refinancing Loan (IRRRL) and procedures   |
|            |     the lender should follow if the new obligor(s) are  |
|            |     different than the obligor(s) on the loan being     |
|            |     refinanced.                                         |
|            |                                                         |
|            | -   Section 6.01 explains the circumstances under which |
|            |     the borrower can receive cash at closing of an      |
|            |     IRRRL.                                              |
|            |                                                         |
|            | -   Section 6.02 clarifies procedures for processing an |
|            |     IRRRL made to refinance a delinquent loan.          |
|            |                                                         |
|            |     [Chapter 7]{.underline}                             |
|            |                                                         |
|            | -   Section 7.01 provides details on VA joint loans.    |
|            |                                                         |
|            | -   Section 7.05 provides details on supplemental       |
|            |     loans.                                              |
|            |                                                         |
|            | -   Section 7.11 provides details on loans for          |
|            |     manufactured homes classified as real estate.       |
|            |                                                         |
|            |     [Chapter 8]{.underline}                             |
|            |                                                         |
|            | -   Section 8.03 clarifies fees and charges that the    |
|            |     borrower cannot pay, as well as the treatment of    |
|            |     attorney's fees.                                    |
|            |                                                         |
|            | -   Section 8.04 explains that anyone can pay fees and  |
|            |     charges on behalf of the borrower.                  |
|            |                                                         |
|            | -   Section 8.06 explains what happens to fees and      |
|            |     charges already incurred if the loan never closes.  |
|            |                                                         |
|            | -   Section 8.07 identifies which fees and charges may  |
|            |     be included in the loan amount.                     |
|            |                                                         |
|            |     [Chapter 9]{.underline}                             |
|            |                                                         |
|            | -   Section 9.04 addresses secondary borrowing.         |
|            |                                                         |
|            | -   Section 9.09 establishes procedures for setting up  |
|            |     escrows for postponed completion of improvements.   |
|            |                                                         |
|            | -   Section 9.10 explains VA's policy on flood          |
|            |     insurance for properties located in a special flood |
|            |     hazard area.                                        |
|            |                                                         |
|            | -   Section 9.11 explains VA's policy on escrows for    |
|            |     taxes and insurance.                                |
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Continued on next page

+------------+---------------------------------------------------------+
| ##         | [Chapters 10-14, generally]{.underline}                 |
| ### Signif |                                                         |
| icant Chan | These chapters have been revised to clarify and expand  |
| ges to be  | upon VA policy for manufactured homes on a permanent    |
| Aware of ( | foundation regarding appraisal requests, construction   |
| continued) | exhibits, appraisal procedures, minimum property        |
|            | requirements, notices of value and compliance           |
|            | inspections.                                            |
|            |                                                         |
|            | [Chapter 10]{.underline}                                |
|            |                                                         |
|            | -   Sections 10.03 and 10.04 describe updated appraisal |
|            |     request procedures and encourage the use of the     |
|            |     Internet and electronic mail.                       |
|            |                                                         |
|            | -   Section 10.05 eliminates the "Special Exemption"    |
|            |     processing requirement. This section also specifies |
|            |     that a property that is less than one year old must |
|            |     be owner occupied (not just occupied) in order to   |
|            |     be considered existing construction.                |
|            |                                                         |
|            | -   Sections 10.05 and 10.08 clarify the distinction    |
|            |     between "proposed construction", "under             |
|            |     construction", and "new construction." These        |
|            |     sections also explain that a one-year builder's     |
|            |     warranty is acceptable in new construction case, as |
|            |     an option to the ten-year protection plan coverage. |
|            |     The number of veterans who are eligible for VA      |
|            |     assistance with construction complaints is          |
|            |     increased.                                          |
|            |                                                         |
|            | -   Section 10.07 explains the streamlining of the      |
|            |     builder approval process. The burden of determining |
|            |     that proposed construction contracts are acceptable |
|            |     is shifted from the lender to the builder. This     |
|            |     eliminates the need for VA to provide the builder   |
|            |     with certain construction exhibit-related           |
|            |     information in every proposed construction cases    |
|            |     and eliminates the need for a separate VA Form      |
|            |     Letter 26-312, Builders and Sponsors Connected With |
|            |     the VA Loan Guaranty Program. (see also Section     |
|            |     10.07, Figure 1).                                   |
|            |                                                         |
|            | -   Section 10.08 clarifies the definition of "customer |
|            |     preference items" for new construction cases.       |
|            |                                                         |
|            | -   Section 10.10:                                      |
|            |                                                         |
|            | -   Reduces construction exhibit requirements. The      |
|            |     requirements for grade levels on plot plans and for |
|            |     heating and cooling load calculations and layout,   |
|            |     and for certain information required on the         |
|            |     Building Program Statement for "masters" are all    |
|            |     eliminated.                                         |
|            |                                                         |
|            | -   Allows plan certifications to be made by            |
|            |     technically qualified builders and eliminates the   |
|            |     requirement that plan certifiers be approved by VA. |
|            |                                                         |
|            | -   Explains that builders are allowed to submit their  |
|            |     own form for specifications if the form is          |
|            |     substantially the same as [VA Form                  |
|            |     26-1852](http://www.hud/gov/utilities/inte          |
|            | rcept.cfm?/offices/adm/hudclips/forms/files/92005.pdf), |
|            |     and that builders are permitted to submit HUD Form  |
|            |     924 in lieu of a separate construction exhibit      |
|            |     certification.                                      |
|            |                                                         |
|            | -   Encourages the use of reduced-size construction     |
|            |     exhibits.                                           |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##         | [Chapter 10]{.underline} (continued)                    |
| ### Signif |                                                         |
| icant Chan | -   Section 10.10 (continued):                          |
| ges to be  |                                                         |
| Aware of ( | ```{=html}                                              |
| continued) | <!-- -->                                                |
|            | ```                                                     |
|            | -   Changes the plan certification language to          |
|            |     eliminate the need for a separate certification     |
|            |     regarding energy efficient construction and lead in |
|            |     the water distribution system (see also Section     |
|            |     13.07).                                             |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 10.11 clarifies that HUD value              |
|            |     determinations are acceptable for conversion for VA |
|            |     use under certain circumstances.                    |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 10.12 explains that VA offices may give fee |
|            |     appraisers permission to collect appraisal fees in  |
|            |     advance from appraisal requesters with long-        |
|            |     standing, well-documented appraisal payment         |
|            |     problems. This section also prohibits fee           |
|            |     appraisers from charging veterans more than their   |
|            |     customary fee for similar services and permits the  |
|            |     fee appraisers to require payment in advance under  |
|            |     certain circumstances.                              |
|            |                                                         |
|            |     [Chapter 11]{.underline}                            |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 11.03 establishes that fee appraisers are   |
|            |     required to complete VA appraisals as quickly as    |
|            |     appraisers for convention loans are completed in    |
|            |     the area where the properly is located, but not     |
|            |     more than five (5) business days.                   |
|            |                                                         |
|            | -   Section 11.05 updates appraisal request procedures  |
|            |     and encourages the use of telefax and electronic    |
|            |     mail (email), as appropriate (see also Sections     |
|            |     10.03 and 10.04).                                   |
|            |                                                         |
|            | -   Section 11.12 eliminates the excess land "penalty"  |
|            |     for farm residences and explains the new policy for |
|            |     unvented space heaters. (see also Section 13.06).   |
|            |                                                         |
|            |     [Chapter 13]{.underline}                            |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 13.06                                       |
|            |                                                         |
|            | -   Establishes a 90-day validity period for            |
|            |     wood-destroying insect infestation report forms.    |
|            |                                                         |
|            | -   Limits lead-based paint-related considerations to   |
|            |     properties built prior to 1978.                     |
|            |                                                         |
|            | -   Adds language to promote consistency in the         |
|            |     application of VA requirements by VA field          |
|            |     stations.                                           |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 13.07 discourages the unnecessary           |
|            |     assignment of a fee compliance inspector to inspect |
|            |     existing construction repairs and further explains  |
|            |     the new policy for unvented space heaters (see      |
|            |     Section 11.12). This section also clarifies that    |
|            |     plan certification language is changed to eliminate |
|            |     the need for a separate certification regarding     |
|            |     energy efficient construction and lead in the water |
|            |     distribution system see Section 10.10).             |
+------------+---------------------------------------------------------+
| ##         | [Chapter 13]{.underline}, (continued)                   |
| ### Signif |                                                         |
| icant Chan | -   Section 13.08 clarifies that the validity period    |
| ges to be  |     for all proposed construction cases is one year,    |
| Aware of ( |     unless there are extenuating real estate            |
| continued) |     market-based circumstances.                         |
|            |                                                         |
|            | -   Section 13.09 streamlines the processing of         |
|            |     reconsideration of value requests by allowing       |
|            |     lenders to make the request directly to the fee     |
|            |     appraiser in every case and allowing the SAR to     |
|            |     receive any fee appraiser recommendation regarding  |
|            |     the request if an increase in value of not more     |
|            |     than two percent is warranted.                      |
|            |                                                         |
|            |     [Chapter 15]{.underline}                            |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 15.04 explains the reduced requirements for |
|            |     an experienced LAPP SAR to train a new SAR and new  |
|            |     quality control-related measures added to the       |
|            |     process. Under these reduced requirements, the      |
|            |     experienced SAR must no longer be located in the    |
|            |     same office as the new SAR. Both SARs must now sing |
|            |     the SAR certification for the new SAR's initial     |
|            |     cases, and the letter to VA regarding completion of |
|            |     the new SARs training requirements must include the |
|            |     VA case number for at least five of those initial   |
|            |     cases.                                              |
|            |                                                         |
|            | -   Section 15.07 expands LAPP authority to include all |
|            |     VA appraisals except those involving masters,       |
|            |     foreclosures, partial release of security, and      |
|            |     conversion of HUD value determinations.             |
|            |                                                         |
|            |     [Chapter 16]{.underline}                            |
|            |                                                         |
|            |     This chapter:                                       |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Eliminates VA approval of PUDs.                     |
|            |                                                         |
|            | -   Explains that VA approval of condominiums can be    |
|            |     expedited with an attorney certification that the   |
|            |     project's organization al documents meet VA         |
|            |     requirements.                                       |
|            |                                                         |
|            | > [Chapter 17]{.underline}                              |
|            |                                                         |
|            | -   Section 17.01 explains the impact of VA sanctions   |
|            |     on program participants and how to identify parties |
|            |     subject to VA sanctions.                            |
|            |                                                         |
|            | -   Section 17.05 provides basic information on         |
|            |     debarment and suspension.                           |
|            |                                                         |
|            | -   Section 17.06 provides basic information on limited |
|            |     denial of participation.                            |
|            |                                                         |
|            | -   Section 17.07 provides basic information on         |
|            |     sanctions based on unfair sales contract provisions |
|            |     or marketing practices.                             |
|            |                                                         |
|            | ```{=html}                                              |
|            | <!-- -->                                                |
|            | ```                                                     |
|            | -   Section 17.08 provides basic information on         |
|            |     sanctions based on violations of equal housing      |
|            |     opportunity laws.                                   |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| ##### R    | VA Pamphlet 26-7, (Revised), dated March 1991, and      |
| escissions | changes 1 through 33 to that edition                    |
|            |                                                         |
|            | **AND**                                                 |
|            |                                                         |
|            | Related Circulars: 26-69-31; 26-74-24; 26-77-26;        |
|            | 26-80-34 and changes 1, 2, 3 and 4; 26-83-45; 26-83-50; |
|            | 26-85-2 and change 1; 26-85-27; 26-85-36; 26-86-17;     |
|            | 26-90-13; 26-91-7: 26-92-14 and change 1; 26-92-26;     |
|            | 26-93-17; 26-93-25; and 26-95-3                         |
+------------+---------------------------------------------------------+

Sincerely yours,

Director, Loan Guaranty Service