Chapter 7 Other Considerations with a VA Loan

**CONTENTS**

  ------------- -------------------------------------------------------- ----------
  **Section**   **Title**                                                **Page**

                How to Use This Chapter                                  7-ii

  7.01          Title Limitations                                        7-1

  7.02          Secondary Borrowing                                      7-2

  7.03          Liens Covering Community-Type Services and Facilities    7-4

  7.04          Powers of Attorney                                       7-5

  7.05          Escrow for Postponed Completion of Improvements          7-5

  7.06          Seller Concessions                                       7-6

  7.07          Hazard Insurance                                         7-6
  ------------- -------------------------------------------------------- ----------

How to Use This Chapter

+------------+---------------------------------------------------------+
| In         | > This chapter provides information on a variety of VA  |
| troduction | > loan-related subjects which do not fit within the     |
|            | > subject matter of the other chapters of this manual.  |
|            | >                                                       |
|            | > Use in conjunction with related material in the       |
|            | > Lender\'s Handbook, which includes:                   |
|            | >                                                       |
|            | > [Chapter 3]{.underline}                               |
|            | >                                                       |
|            | > • Seller Concessions                                  |
|            | >                                                       |
|            | > [Chapter 5]{.underline}                               |
|            | >                                                       |
|            | > • Hazard Insurance                                    |
|            | >                                                       |
|            | > [Chapter 6]{.underline}                               |
|            | >                                                       |
|            | > • Postponed Exterior Improvements - Escrow            |
|            | >                                                       |
|            | > • Title Limitations                                   |
|            | >                                                       |
|            | > [Chapter 7]{.underline}                               |
|            | >                                                       |
|            | > • Liens Covering Community-Type Services and          |
|            | > Facilities                                            |
|            | >                                                       |
|            | > • Powers of Attorney - Use of Veteran\'s Loan         |
|            | > Guaranty Entitlement by Attorney-In-Fact              |
+------------+---------------------------------------------------------+

+------------+---------------------+-----------------------------------+
|            | **Section**         | **Heading**                       |
+------------+---------------------+-----------------------------------+
| **Subjects | **7.01** Title      | • Restrictions on the Purchase or |
| in this    | Limitations         | Resale of Properties              |
| Chapter**  |                     |                                   |
|            |                     | • Effect of Title Limitations on  |
|            |                     | Reasonable Value                  |
+------------+---------------------+-----------------------------------+
|            | **7.02** Secondary  | • What is Secondary Borrowing?    |
|            | Borrowing           |                                   |
|            |                     | • Policy                          |
|            |                     |                                   |
|            |                     | • Requirements                    |
|            |                     |                                   |
|            |                     | • Prior Approval Processing       |
|            |                     |                                   |
|            |                     | • Loans Closed Automatically      |
|            |                     |                                   |
|            |                     | • Unusual Terms                   |
+------------+---------------------+-----------------------------------+
|            | **7.03** Liens      | • Where to Find Information       |
|            | Covering            |                                   |
|            | Community-Type      | • Station Authority               |
|            | Services and        |                                   |
|            | Facilities          | • Central Office Determinations   |
+------------+---------------------+-----------------------------------+
|            | **7.04** Powers of  | • General                         |
|            | Attorney            |                                   |
+------------+---------------------+-----------------------------------+
|            | **7.05** Escrow for | • Procedures                      |
|            | Postponed           |                                   |
|            | Completion of       |                                   |
|            | Improvements        |                                   |
+------------+---------------------+-----------------------------------+
|            | **7.06** Seller     | • Where to Find Information       |
|            | Concessions         |                                   |
+------------+---------------------+-----------------------------------+
|            | **7.07** Hazard     | • Requirements                    |
|            | Insurance           |                                   |
+------------+---------------------+-----------------------------------+

7.01 Title Limitations

+------------+---------------------------------------------------------+
| Re         | > When reviewing a loan involving restrictions on the   |
| strictions | > purchase or resale of the property to determine if    |
| on the     | > such restrictions are acceptable to VA:               |
| Purchase   | >                                                       |
| or Resale  | > • Refer to the regulations at 38 CFR 36.4308 and 38   |
| of         | > CFR 36.4350                                           |
| Properties | >                                                       |
|            | > • Consult Central Office (264) where doubt exists or  |
|            | > when approval of the Secretary is required            |
|            | >                                                       |
|            | > • Determine whether the veteran was fully informed    |
|            | > and consented in writing to the restrictions at the   |
|            | > time of loan application.                             |
|            | >                                                       |
|            | > A lender may not accelerate a loan based on the sale  |
|            | > of the secured property unless the acceptability of   |
|            | > the assumption of the loan has **[not]{.underline}**  |
|            | > been established pursuant to section 3714 of chapter  |
|            | > 37, title 38, U.S.C., except that:                    |
|            | >                                                       |
|            | > • Under 38 CFR 36.4308(b), VA may guarantee a loan    |
|            | > made through a State, Territorial or local government |
|            | > program where restrictions in the legal instruments   |
|            | > require acceleration of the loan if it is assumed by  |
|            | > a party ineligible for assistance under the program.  |
|            |                                                         |
|            | ♦ Such acceleration must be mandated by Federal, State, |
|            | Territorial or local law or regulation.                 |
|            |                                                         |
|            | > Also, VA may guarantee a loan made through a State or |
|            | > local government program, designed to assist low- or  |
|            | > moderate-income individuals, which imposes resale and |
|            | > price restrictions on purchasers.                     |
|            | >                                                       |
|            | > • If the property is resold within a period           |
|            | > established by local law or ordinance, certain        |
|            | > restrictions as set forth in 38 CFR                   |
|            | > 36.4350(b)(5)(iv)(A) on who the property may be sold  |
|            | > to, the resale price, and other restrictions approved |
|            | > by the Secretary may be applied.                      |
|            | >                                                       |
|            | > VA may guarantee a loan on which a title restriction  |
|            | > limits the sale, lease, or occupancy of the dwelling  |
|            | > to persons based on [age]{.underline}, including a    |
|            | > prohibition against the permanent occupancy of the    |
|            | > dwelling by children, provided such restriction       |
|            | > complies with applicable Federal law.                 |
|            | >                                                       |
|            | > • VA may refuse to approve a property with an age     |
|            | > restriction if its operation would work an undue      |
|            | > hardship upon the owner in the case of sudden,        |
|            | > unforeseen events or be likely to result in an        |
|            | > increased risk of loan default.                       |
+------------+---------------------------------------------------------+

Continued on next page

7.01 Title Limitations, Continued

+------------+---------------------------------------------------------+
| Effect of  | > Paragraph 6.17 of the Lender\'s Handbook provides     |
| Title      | > information on this subject.                          |
| L          | >                                                       |
| imitations | > If the lender discovers, prior to loan closing, title |
| on         | > conditions or limitations not shown on the CRV or     |
| Reasonable | > NOV, there must be evidence that the lender had VA    |
| Value      | > Construction and Valuation review the conditions and  |
|            | > determine whether the value assigned to the property  |
|            | > is materially affected.                               |
|            | >                                                       |
|            | > • Ensure reasonable value is adjusted where           |
|            | > appropriate.                                          |
|            | >                                                       |
|            | > If a lender requests that VA issue a waiver of title  |
|            | > limitations or conditions other than those allowable  |
|            | > under 38 CFR 36.4350, consult Construction and        |
|            | > Valuation to determine whether the condition or       |
|            | > limitation affects the reasonable value of the        |
|            | > property to the extent that                           |
|            | >                                                       |
|            | > • The loan will be ineligible for guaranty            |
|            | >                                                       |
|            | > OR                                                    |
|            | >                                                       |
|            | > • A claim on the guaranty will be subject to          |
|            | > reduction under 38 CFR 36.4325(b)(10).                |
|            | >                                                       |
|            | > Issue the waiver or denial as appropriate.            |
+------------+---------------------------------------------------------+

7.02 Secondary Borrowing

+------------+---------------------------------------------------------+
| What is    | > For purposes of this section, secondary borrowing     |
| Secondary  | > refers to the veteran obtaining a second mortgage     |
| Borrowing? | > simultaneously with a VA-guaranteed first mortgage,   |
|            | > both secured by the same property.                    |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Policy     | > Secondary borrowing is acceptable as long as:         |
|            | >                                                       |
|            | > • The [veteran is not placed in a substantially worse |
|            | > position]{.underline} than if the entire amount       |
|            | > borrowed had been guaranteed by VA                    |
|            | >                                                       |
|            | > **AND**                                               |
|            | >                                                       |
|            | > • The requirements detailed below are met.            |
+------------+---------------------------------------------------------+

Continued on next page

7.02 Secondary Borrowing, Continued

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

+---------+------------------------------------------------------------+
| **F     | **Requirement**                                            |
| actor** |                                                            |
+---------+------------------------------------------------------------+
| Docu-me | Documentation must be submitted disclosing the source,     |
| ntation | amount, and repayment terms of the second mortgage and     |
|         | agreement to such terms by the veteran and any             |
|         | co-obligors.                                               |
+---------+------------------------------------------------------------+
| Lien    | The second mortgage must be [subordinated]{.underline} to  |
| P       | the VA-guaranteed loan, i.e., the second mortgage must be  |
| osition | in a junior lien position relative to the VA loan.         |
+---------+------------------------------------------------------------+
| Al      | > Proceeds of the second mortgage may be used for a        |
| lowable | > variety of purposes, including but not limited to:       |
| P       | >                                                          |
| urposes | > • Closing Costs                                          |
|         | >                                                          |
|         | > • A downpayment to meet secondary market requirements of |
|         | > the lender,                                              |
|         | >                                                          |
|         | > BUT MAY **[NOT]{.underline}** BE USED TO COVER           |
|         |                                                            |
|         | • Any portion of a downpayment required by VA to cover the |
|         | excess of the purchase price over VA\'s reasonable value.  |
+---------+------------------------------------------------------------+
| Cash    | > There can be [no cash back]{.underline} to the veteran   |
| back    | > from the VA first mortgage or a second mortgage obtained |
|         | > simultaneously.                                          |
+---------+------------------------------------------------------------+
| Under-  | > The veteran must qualify for the second mortgage which   |
| writing | > is underwritten as an additional recurring monthly       |
|         | > obligation.                                              |
|         | >                                                          |
|         | > • See paragraph 5.15 of the Lender\'s Handbook.          |
+---------+------------------------------------------------------------+
| I       | > The rate on the second mortgage [may]{.underline} exceed |
| nterest | > the rate on the VA-guaranteed first, however, it may     |
| Rate    | > [not]{.underline} exceed industry standards for second   |
|         | > mortgages                                                |
|         | >                                                          |
|         | > • \"Rule of thumb\" is that second mortgages are one or  |
|         | > two percent above the market interest rates for first    |
|         | > mortgages.                                               |
+---------+------------------------------------------------------------+
| Assuma  | > The second mortgage should not restrict the veteran\'s   |
| -bility | > ability to sell the property any more than the VA first  |
|         | > mortgage.                                                |
|         | >                                                          |
|         | > • e.g., it should be assumable by creditworthy           |
|         | > purchasers.                                              |
+---------+------------------------------------------------------------+
| Grace   | > There should be a reasonable grace period before:        |
| Period  | >                                                          |
|         | > • A late charge comes due                                |
|         | >                                                          |
|         | > OR                                                       |
|         | >                                                          |
|         | > • Commencement of foreclosure proceedings in the event   |
|         | > of default.                                              |
+---------+------------------------------------------------------------+

Continued on next page

7.02 Secondary Borrowing, Continued

+------------+---------------------------------------------------------+
| Prior      | > If the VA-guaranteed first mortgage is submitted for  |
| Approval   | > prior approval:                                       |
| Processing | >                                                       |
|            | > • Review the documentation on the second mortgage for |
|            | > acceptability of the terms of that mortgage           |
|            | >                                                       |
|            | > • Include the second mortgage payment in the income   |
|            | > and debt evaluation                                   |
|            |                                                         |
|            | ♦ Contact the lender if the veteran is marginal due to  |
|            | the second mortgage payment.                            |
|            |                                                         |
|            | ♦ Suggest modification of the terms of the second       |
|            | mortgage if possible.                                   |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Loans      | > Accept the lender\'s determination that the veteran   |
| Closed     | > qualifies for the loan, including the second          |
| Aut        | > mortgage.                                             |
| omatically | >                                                       |
|            | > • On loans selected for full review, review the       |
|            | > second mortgage terms for acceptability and the       |
|            | > underwriting for consideration of the second mortgage |
|            | > payment.                                              |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Unusual    | > A station may encounter proposed second mortgages     |
| Terms      | > bearing unusual terms, interest rates, etc. Most      |
|            | > often these mortgages are being offered by one of the |
|            | > following parties:                                    |
|            | >                                                       |
|            | > • Federal, state, or local government agencies        |
|            | >                                                       |
|            | > • Non-profit organizations                            |
|            | >                                                       |
|            | > • Private individuals                                 |
|            | >                                                       |
|            | > • A builder                                           |
|            | >                                                       |
|            | > • The seller                                          |
|            | >                                                       |
|            | > Consult Central Office (264) if it is unclear whether |
|            | > the terms of the second mortgage meet VA standards or |
|            | > if there may be a reasonable basis for making an      |
|            | > exception to the standards detailed in this section.  |
+------------+---------------------------------------------------------+

7.03 Liens Covering Community-Type Services and Facilities

+------------+---------------------------------------------------------+
| Where to   | > Paragraph 7.02 of the Lender\'s Handbook provides     |
| Find       | > detailed information on VA\'s policy.                 |
| I          |                                                         |
| nformation |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

7.03 Liens Covering Community-Type Services and Facilities, Continued

+------------+---------------------------------------------------------+
| Station    | > Stations have the authority to disregard:             |
| Authority  | >                                                       |
|            | > • Liens for taxes, assessments, and ground rents      |
|            | >                                                       |
|            | > • Liens (on existing properties) previously retained  |
|            | > by trustees, improvement associations or other        |
|            | > nongovernment entities for community-type services    |
|            | > and facilities in a given area or subdivision.        |
|            |                                                         |
|            | ♦ Use the guidelines provided in paragraphs 7.02e and f |
|            | of the Lender\'s Handbook to make a determination.      |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Central    | > Superior liens to be retained by private entities on  |
| Office     | > new and proposed construction must be approved by VA  |
| Dete       | > Central Office.                                       |
| rminations | >                                                       |
|            | > Submit fully developed information to Central Office  |
|            | > (264) as to whether it is legal or practical to       |
|            | > subordinate the superior liens to the home mortgage,  |
|            | > and, if so, why they should not be subordinated.      |
+------------+---------------------------------------------------------+

7.04 Powers of Attorney

+------------+---------------------------------------------------------+
| General    | > VA will honor the use of guaranty entitlement by a    |
|            | > veteran\'s attorney-in-fact with an adequate and      |
|            | > valid power of attorney when the conditions described |
|            | > in paragraph 7.08 of the Lender\'s Handbook are met.  |
|            | >                                                       |
|            | > If relaxation of the requirements may be warranted in |
|            | > an exceptional case because serious hardship may      |
|            | > result due to the time or other pertinent factors     |
|            | > involved in obtaining the veteran\'s consent to the   |
|            | > specific transaction:                                 |
|            | >                                                       |
|            | > • Submit the facts of the case to Central Office      |
|            | > (264) for a determination.                            |
+------------+---------------------------------------------------------+

7.05 Escrow for Postponed Completion of Improvements

+------------+---------------------------------------------------------+
| Procedures | > Chapter 6, section III, of the Lender\'s Handbook     |
|            | > explains the requirements to escrow for postponed     |
|            | > onsite and offsite improvements. Loan Processing and  |
|            | > C & V personnel share the responsibility for          |
|            | > approving escrow                                      |
+------------+---------------------------------------------------------+

Continued on next page

7.05 Escrow for Postponed Completion of Improvements, Continued

  -----------------------------------------------------------------------
  Procedures (continued)

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

+------------+---------------------------------------------------------+
|            | > arrangements and verifying completion of improvements |
|            | > as needed.                                            |
|            | >                                                       |
|            | > Because weather conditions and local practices        |
|            | > impacting the use of these escrows differ between     |
|            | > geographic areas, procedures may vary from station to |
|            | > station. For stations which encounter these escrows   |
|            | > on a regular basis, station management should develop |
|            | > procedures which make efficient use of VA staff time  |
|            | > while safeguarding against any potential abuses by    |
|            | > parties to the transaction.                           |
|            | >                                                       |
|            | > • Blanket authorizations for use of escrows during    |
|            | > certain months of the year in northern climates or    |
|            | > under other recurring conditions are acceptable.      |
|            | >                                                       |
|            | > • Stations must ensure program participants are aware |
|            | > of the escrow procedures through training sessions    |
|            | > and/or adequate written materials.                    |
+------------+---------------------------------------------------------+

7.06 Seller Concessions

+------------+---------------------------------------------------------+
| Where to   | > See paragraph 3.19 of the Lender\'s Handbook.         |
| Find       | >                                                       |
| I          | > Refer to M26-2, paragraph 2.23(d)6, for appraisal     |
| nformation | > information related to seller concessions.            |
+------------+---------------------------------------------------------+

+------------+---------------------------------------------------------+
| Seller     | > For instances in which a concession or combination of |
| C          | > concessions exceed 4 percent of the reasonable value  |
| oncessions | > of the property:                                      |
| Exceeding  | >                                                       |
| 4%         | > • Discuss with the lender and builder/seller.         |
|            | >                                                       |
|            | > • Repetitive violations may be the basis for imposing |
|            | > program sanctions.                                    |
+------------+---------------------------------------------------------+

7.07 Hazard Insurance

+------------+---------------------------------------------------------+
| Re         | > See paragraph 5.06 of the Lender\'s Handbook.         |
| quirements |                                                         |
+------------+---------------------------------------------------------+

Continued on next page

7.07 Hazard Insurance, Continued

  -----------------------------------------------------------------------
  Requirements (continued)

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

+------------+---------------------------------------------------------+
|            | > If requested, station management may determine the    |
|            | > minimum insurance coverage needed to meet the         |
|            | > requirements of 38 CFR 36.4326 for a specific loan.   |
|            | >                                                       |
|            | > • The determination is binding on VA.                 |
|            | >                                                       |
|            | > • If the required amount of coverage is maintained,   |
|            | > no future guaranty claim can be reduced due to        |
|            | > inadequate coverage provided there has been no change |
|            | > in the nature, value, or use of the security that     |
|            | > would require new or additional coverage (based on    |
|            | > what is customary in the locality) since VA\'s        |
|            | > determination was made.                               |
+------------+---------------------------------------------------------+