VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-1
Chapter 9. Legal Instruments, Liens, Escrows and Related
Issues
Overview
Introduction
This chapter contains information about legal instruments, liens, escrows, and
related issues.
In this Chapter
This chapter contains the following topics.
Topic Topic Description See
Page
1 Security Instruments 9-2
2 Title Limitations 9-5
3 Land Sale Contracts and Option Contracts 9-8
4 Secondary Borrowing 9-9
5 Purchase of Property with Encumbrances 9-11
6 Liens Covering Community-Type Services and Facilities 9-12
7 Powers of Attorney 9-14
8 Lender Review of Sales Contracts on Proposed Construction 9-17
9 Escrow for Postponed Completion of Improvements 9-20
10 Hazard Insurance 9-24
11 Escrow for Taxes and Insurance 9-27
12 Homebuyer Assistance Programs 9-28
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-2
1. Security Instruments
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a.
Requirements
Lenders may use any note and mortgage forms they wish for VA loans.
VA regulations at 38 CFR 36.4337 provide that security instruments used by
a lender which are inconsistent with VA regulations in effect on the date the
loan is closed will be considered amended and supplemented to conform to
the regulations.
Lenders must ensure that the security instruments they use:
Establish the required lien
Comply with the laws and regulations governing VA’s home loan program
Comply with applicable state laws, and
Contain the following VA clauses:
Assumption Approval clause
Acceleration clause
Funding Fee clause
Processing Charge clause, and
Indemnity Liability Assumption clause.
If a lender fails to obtain the required lien or otherwise comply with
applicable law, VA may reduce or deny liability under its guaranty to the
extent that such failure might have prejudiced the rights of the Secretary.
b. Assumption
Approval
Clause
The instruments evidencing the loan must read substantially as follows:
“THIS LOAN IS NOT ASSUMABLE WITHOUT THE APPROVAL OF
THE DEPARTMENT OF VETERANS AFFAIRS OR ITS AUTHORIZED
AGENT.”
The loan assumption notice must appear conspicuously on at least one of the
security instruments for the loan.
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VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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1. Security Instruments, Continued
c. Other
Clauses
The mortgage or deed of trust must contain four additional clauses related to
the assumption of the loan. VA does not specifically require that these
clauses also be included in the note, unless this is required under state law to
make them enforceable. Due to variations in local laws, the lender should
obtain legal guidance as to any minor changes in these sample clauses which
may be necessary to ensure that they have the effect required by the law and
regulations; that is, the lender does not have to use the exact language
provided for these four clauses.
Acceleration Clause
“This loan may be declared immediately due and payable upon transfer of
the property securing such loan to any transferee, unless the acceptability of
the assumption of the loan is established pursuant to Section 3714 of Chapter
37, Title 38, United States Code.”
Funding Fee Clause
“A fee equal to one-half of 1 percent of the balance of this loan as of the date
of transfer of the property shall be payable at the time of transfer to the loan
holder or its authorized agent, as trustee for the Department of Veterans
Affairs. If the assumer fails to pay this fee at the time of transfer, the fee
shall constitute an additional debt to that already secured by this instrument,
shall bear interest at the rate herein provided, and at the option of the payee
of the indebtedness hereby secured or any transferee thereof, shall be
immediately due and payable. This fee is automatically waived if the
assumer is exempt under the provisions of 38 U.S.C. 3729(c).”
Processing Charge Clause
“Upon application for approval to allow assumption of this loan, a
processing fee may be charged by the loan holder or its authorized agent for
determining the creditworthiness of the assumer and subsequently revising
the holder’s ownership records when an approved transfer is completed. The
amount of this charge shall not exceed the maximum established by the
Department of Veterans Affairs for a loan to which Section 3714 of
Chapter 37, Title 38, United States Code applies.”
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-4
1. Security Instruments, Continued
c. Other
Clauses
(continued)
Indemnity Liability Assumption Clause
“If this obligation is assumed, then the assumer hereby agrees to assume all of
the obligations of the veteran under the terms of the instruments creating and
securing the loan. The assumer further agrees to indemnify the Department
of Veterans Affairs to the extent of any claim payment arising from the
guaranty or insurance of the indebtedness created by this instrument.”
d. Escape
Clause For the
Sales Contract
Escape Clause
If the sales contract was signed by the veteran prior to receipt of the Notice of
Value (NOV), the contract must include, or be amended to include, the clause
below.
“It is expressly agreed that, notwithstanding any other provisions of this
contract, the purchaser shall not incur any penalty by forfeiture of earnest
money or otherwise or be obligated to complete the purchase of the property
described herein, if the contract purchase price or cost exceeds the reasonable
value of the property established by the Department of Veterans Affairs. The
purchaser shall, however, have the privilege and option of proceeding with
the consummation of this contract without regard to the amount of the
reasonable value established by the Department of Veterans Affairs.
(Authority: 38 U.S.C. 501, 3703(c)(1))”
This clause may be found at 38 CFR 4303(k)(4)
in its entirety.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-5
2. Title Limitations
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. Estate of the
Veteran in the
Property
VA regulations at 38 CFR 36.4354 provide the parameters for the required
estate of a veteran in real property securing a VA-guaranteed loan. The
lender is responsible for ensuring the loan conforms to these parameters.
Generally, title to the estate shall be that which is acceptable to informed
buyers, title companies, and attorneys in the community in which the property
is situated.
b. Title
Insurance
VA does not require a lender making a VA loan or the veteran-borrower to
obtain title insurance. The lender may apply its own title insurance
requirements to VA loan transactions. VA requires only that title to the
property meet the standards described above in “Estate of the Veteran in the
Property.”
c. Restrictions
on the Purchase
or Resale of
Properties
Restrictions on the purchase or resale of the property are unacceptable to VA,
with certain exceptions. The lender must:
ensure any restrictions fall within the exceptions provided by VA
regulations at 38 CFR 36.4308 and 38 CFR 36.4354
consult VA where doubt exists
obtain VA approval where appropriate, and
fully inform the veteran and obtain his or her consent to the restrictions in
writing at the time of loan application.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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2. Title Limitations, Continued
d. Examples of
Restrictions
that Require
VA Approval
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 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.
VA may guarantee a loan made through a state or local government program,
designed to assist low- or moderate-income individuals, which imposes resale
and price restrictions on purchasers.
Under such a program, if the property is resold within a period established by
local law or ordinance, certain restrictions as set forth in 38 CFR
36.4354(b)(5)(iv)(A) on to whom the property may be sold, the resale price,
and other restrictions approved by the Secretary may be applied.
VA may guarantee a loan on which a title restriction limits the sale, lease, or
occupancy of the dwelling to persons based on age, including a prohibition
against the permanent occupancy of the dwelling by children, provided such
restriction complies with applicable Federal law.
VA may refuse to approve a property with an age restriction if its operation
would work an undue hardship upon the owner in the case of sudden,
unforeseen events or be likely to result in an increased risk of loan default.
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VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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2. Title Limitations, Continued
e. Examples of
Restrictions
That Do Not
Require VA
Approval
Title to property involving reasonable encroachments, easements, servitudes,
and reservations for water, timber, or subsurface rights, generally do not
require VA approval. However, they must be taken into consideration in
determining reasonable value.
If any of these restrictions impact the basic livability of the property, VA
approval is required.
f. Effect of Title
Limitations on
Reasonable
Value
Title conditions or limitations must be shown on the NOV and considered by
the appraiser in determining the reasonable value of the property.
If the lender discovers, prior to loan closing, title conditions or limitations not
shown on the NOV, the lender must have VA review the conditions and
determine whether the value assigned to the property is materially affected.
Without such a determination by VA, the lender risks a later finding that 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.
When VA reasonable value is based on the Department of Housing and Urban
Development (HUD) Form 92800.5B, Conditional Commitment, Direct
Endorsement, Statement of Appraised Value, lenders must contact HUD to
process requests for review of title conditions or limitations.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-8
3. Land Sale Contracts and Option Contracts
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. Eligibility of
Land Sale
Contracts
VA may guarantee an obligation secured by a land sale contract for the
purchase of improved residential property in the same manner as any
obligation secured by a mortgage or deed of trust.
The land sale contract must contain the mandatory clauses provided in
section 1 of this chapter.
The contract must be recorded.
VA may also guarantee a loan to refinance the unpaid balance under a land
sale contract for the purchase of improved residential property, provided:
the veteran will obtain title to the property described in the contract upon
closing of the loan, and
the obligation to be guaranteed is in the form of a note or bond secured by a
mortgage or other acceptable form of security instrument other than the
existing land sale contract.
b. Eligibility of
Option
Contracts
Option contracts are not eligible for guaranty, however, VA may guarantee a
loan made for the unpaid purchase price of residential property when the
option is exercised.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-9
4. Secondary Borrowing
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. What is
Secondary
Borrowing?
For purposes of this topic, secondary borrowing refers to the veteran
obtaining a second mortgage simultaneously with a VA-guaranteed first
mortgage, both secured by the same property.
b. Policy
Secondary borrowing is acceptable as long as:
the veteran is not placed in a substantially worse position than if the entire
amount borrowed had been guaranteed by VA, and
the requirements detailed below are met.
c.
Requirements
The second mortgage must meet the following requirements:
Factor Requirement
Documentation The lender must submit documentation disclosing the
source, amount, and repayment terms of the second
mortgage and agreement to such terms by the veteran and
any co-obligors.
Lien Position The second mortgage must be subordinated to the VA-
guaranteed loan, that is, the second mortgage must be in a
junior lien position relative to the VA loan.
Allowable
Purposes
Proceeds of the second mortgage may be used for a variety
of purposes, including but not limited to:
closing costs, or
a downpayment to meet secondary market requirements
of the lender.
But may not 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.
Continued on next page
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Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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4. Secondary Borrowing, Continued
c. Requirements (continued)
Factor Requirement
Cash back There can be no cash back to the veteran from the VA first
mortgage or a second mortgage obtained simultaneously.
Underwriting The veteran must qualify for the second mortgage which is
underwritten as an additional recurring monthly obligation.
Reference: See section 5 of chapter 4.
Interest Rate The rate on the second mortgage may exceed the rate on
the VA-guaranteed first, however, it may not exceed
industry standards for second mortgages.
Assumability The second mortgage should not restrict the veteran’s
ability to sell the property any more than the VA first
mortgage. That is, it should be assumable by creditworthy
purchasers.
Grace Period There should be a reasonable grace period before:
a late charge comes due, or
commencement of foreclosure proceedings in the event
of default.
d. Unusual
Terms
Second mortgages bearing unusual terms, interest rates, etc., are sometimes
offered by parties such as:
Federal, state, or local government agencies
non-profit organizations
private individuals
a builder, or
the seller.
Consult VA if it is unclear whether the terms of the second mortgage meet
VA standards or if there may be a reasonable basis for VA to make an
exception to the standards detailed in this topic.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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5. Purchase of Property with Encumbrances
Change Date
September 15, 2004, Change 4
This section has been changed to create subsection lettering.
a. Policy
Generally, VA-guaranteed loans must be first liens. Any existing liens on the
property must be paid off or subordinated to the VA loan.
A loan to purchase property subject to unpaid delinquent taxes, special
assessments, prior mortgage indebtedness, or other obligations secured by
effective liens that the veteran agrees to pay or which constitute
encumbrances on the property is not eligible for guaranty if the loan amount
plus these unpaid obligations exceeds VA’s reasonable value of the property.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-12
6. Liens Covering Community-Type Services and Facilities
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. Policy
Generally, loans for the purchase and construction of homes will be first liens,
subject only to taxes, special assessments, and ground rents.
VA will not approve superior liens in favor of private entities unless they:
are legally or practically necessary, and
result in no prejudice to veterans or the Government.
b.
Requirements
The lender must obtain VA approval of liens held by private parties which are
superior to VA home mortgage liens.
Liens held by mandatory membership home associations in planned unit
developments are not addressed in this topic.
The lender must demonstrate that:
it is not legal or practical to subordinate the superior lien to the VA mortgage
there is a viable rationale for not subordinating the superior lien
the superior lien will not prejudice veterans or the Government, and
if periodic charges or assessments are involved, the amounts are reasonable
and limits on the amounts have been established.
Always obtain VA approval before the lien is recorded. Builders and
developers should be aware that if they plan to market properties through VA
financing, covenants creating superior liens should not be recorded without VA
approval.
Continued on next page
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Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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6. Liens Covering Community-Type Services and Facilities,
Continued
c. Examples
VA may find the following types of superior liens acceptable:
Liens for taxes, assessments, and ground rents.
Liens by private entities to secure assessments or charges for municipal-
type services and facilities which:
are clearly governmental in nature
a municipality could support out of public tax revenue if it provided the
service, but
the municipality does not provide them.
Liens to implement or augment a service or facility if the government’s
provision of such service or facility is inadequate.
Liens for services or facilities in locations where the services or facilities
are adequately supplied by local government generally will not be approved
by VA.
Liens created by recorded covenants in favor of private entities to secure the
homeowner’s share of the costs of the management, operation,
maintenance, services or programs for the benefit of a development.
Liens (on existing properties) previously retained by trustees, improvement
associations or other nongovernmental entities for community-type services
and facilities in a given area or subdivision, such as maintenance of streets,
parkways, playgrounds, water systems, sewage systems, police and fire
protection, or street lighting.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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7. Powers of Attorney
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. Policy
VA will allow a veteran to use an attorney-in-fact to execute any documents
necessary to obtain a VA-guaranteed loan. This enables active duty
servicepersons stationed overseas, and other veterans who cannot be present
to execute loan documents, to obtain VA loans.
b.
Requirements
The veteran must execute a general or specific power of attorney which is
valid and legally adequate. The veteran’s attorney-in-fact may use this power
of attorney to apply for a Certificate of Eligibility
and initiate processing of a
loan on behalf of the veteran.
To complete the loan transaction using an attorney-in-fact, ensure that the
general or specific power of attorney complies with state law to the extent
that:
the mortgage can be legally enforced in that jurisdiction, and
clear title can be conveyed in the event of foreclosure.
To complete the loan transaction using an attorney-in-fact, VA also requires
the veteran’s written consent to the specifics of the transaction. This
requirement can be satisfied by either:
the veteran’s signature on both the sales contract and the Uniform
Residential Loan Application, as long as the veteran’s intention to obtain a
VA loan on the particular property is expressed somewhere in those
documents, or
a specific power of attorney or other document(s) signed by the veteran,
which encompasses the following elements:
Entitlement—A clear intention to use all or a specified amount of
entitlement.
Purpose—A clear intention to obtain a loan for purchase, construction,
repair, alteration, improvement, or refinancing.
Property Identification—Identification of the specific property.
Price and Terms—The sales price, if applicable, and other relevant terms
of the transaction.
Occupancy—The veteran’s intention to use the property as a home to be
occupied by the veteran (or other applicable VA occupancy requirement).
Continued on next page
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Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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7. Powers of Attorney, Continued
b.
Requirements
(continued)
In addition, at the time of loan closing, the lender must:
verify that the veteran is alive, and, if on active military duty, not missing in
action (MIA), and
make the following certification:
“The undersigned lender certifies that written evidence in the form of
correspondence from the veteran or, if on active military duty, statement of his
or her commanding officer (including statement of person authorized to act for
said officer), affirmatively indicating that the veteran was alive and, if the
veteran is on active military duty, not missing in action status on (date), was
examined by the undersigned and that the said date is subsequent to the date the
note and security instruments were executed on the veteran’s behalf by the
attorney-in-fact.”
c. Veteran’s
Status as Alive
and not MIA
The lender must always verify that the veteran is alive at the time of loan
closing, whether or not the veteran is still in the military.
If the lender has difficulty obtaining verification that a service person in a
combat area is alive and not in MIA status, the lender may request that VA
obtain the necessary information on its behalf.
VA may deny guaranty on a loan if the lender failed to properly verify the
veteran’s status and the veteran was deceased (or MIA) at the time the loan
was closed.
d. Prior
Approval
Loans
VA will issue a Certificate of Commitment only if the veteran has executed a
valid and legally adequate power of attorney and consented to the specific
transaction (as described under the “Requirement” heading). If VA has
information that the veteran is MIA or deceased, VA will not issue a
commitment.
The Certificate of Commitment issued in power of attorney cases contains the
condition indicated under “Conditional Commitments” in section 4 of chapter
5.
Continued on next page
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Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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7. Powers of Attorney, Continued
e. Hardship
Exceptions
VA may relax the requirements in an exceptional case if 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 VA for a determination.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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8. Lender Review of Sales Contracts on Proposed
Construction
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. Procedures
Prior to requesting an appraisal of proposed construction, the lender must
review the sales contract or purchase agreement on the property. The lender
must determine whether the contract:
is acceptable, and
does not contain unfair contractual provisions.
The lender may request revision of an unacceptable contract by the parties to
the transaction.
The lender should report unacceptable contract practices by a VA program
participant (such as a builder) to VA if:
the program participant is engaged in practices which seriously prejudice
the interests of veterans or the Government, or
the program participant repeatedly uses unacceptable contracts or contracts
containing unfair contractual provisions, and is uncooperative in changing
such practices.
The closing of the loan indicates that the lender has determined the contract is
acceptable.
Continued on next page
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Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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8. Lender Review of Sales Contracts on Proposed
Construction,
Continued
b. Examples of
Unfair Contract
Provisions or
Features
Unfair contractual provisions or features include, but are not limited to, the
information in the table below.
Example Unfair Contract Provisions or Features
1 Provisions allowing the downpayment or earnest money of the
purchaser to be forfeited or retained as liquidated damages if the
purchaser cannot obtain VA financing.
2 Inclusion in a lump-sum contract of an “escalator clause” which
obligates the purchaser to pay a higher price in the event of
increased costs for labor, material, or other items prior to delivery
of title unless accompanied by a proviso which gives the purchaser
the option of canceling the contract and obtaining a refund of the
moneys paid if the increased price is not acceptable to the veteran.
3 Provisions which infringe upon the usual or customary freedom or
right of an owner to sell a property, except as allowed under 38
CFR 36.4308(e) and 36.4354(b)(5). For example, a provision that
the purchaser will give a stated real estate agency an exclusive
listing if he or she resells the property within 2 years after
acquisition, or will give the seller or another a first option to buy
other than in a cooperative housing project or as provided in
38 CFR 36.4354(b)(5).
Continued on next page
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Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
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8. Lender Review of Sales Contracts on Proposed
Construction,
Continued
b. Examples of Unfair Contract Provisions or Features (continued)
Example Unfair Contract Provisions or Features
4 A requirement that purchasers waive or release any claim or right
for nonperformance by the builder under the contract.
This does not prevent a builder from obtaining a statement from the
purchaser at closing that he or she has inspected the house and has
not observed any unsatisfactory construction, nor does it prevent
the builder from obtaining a release from the purchaser in
settlement of a bona fide dispute.
5 Omission of a description sufficient to identify accurately the
property sold.
6 Omission of a provision specifying whether the builder or the
veteran is to be charged with any special assessments or
improvement bonds. This includes those assessments or bonds
which are payable in the future, for improvements included in the
plans and specifications or commenced or completed at the time of
closing, such as streets, sidewalks, curbs, gutters, and sewers.
7 Omission of a date for completion of proposed construction or
failure to give the veteran the option of canceling the contract and
obtaining a refund of the deposit if the dwelling is not completed
on a specified date or within a reasonable time afterwards.
8 Failure of a contract covering proposed construction to obligate the
seller to complete the dwelling in substantial accordance with
identified and definite plans and specifications.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-20
9. Escrow for Postponed Completion of Improvements
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. General
In some instances, it may not be possible to complete certain items before the
veteran wishes to move into the property. The escrow of funds can permit the
veteran-purchaser to gain occupancy of the dwelling prior to completion of
certain items which must be postponed due to weather conditions or other
circumstances. Such items include, but are not limited to:
walkways, driveways, and retaining walls
exterior painting
landscaping
garages
VA may permit the escrow of funds necessary to complete the unfinished
work later, and still issue evidence of guaranty.
b. What is an
Escrow?
An escrow involves the following:
withholding 1 1/2 times the dollar amount necessary to complete the
postponed items (as estimated by a third party) from the proceeds due the
seller at closing
holding the escrowing funds in a proper, secure manner, and
releasing the funds once the postponed items have been satisfactorily
completed
Continued on next page
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9. Escrow for Postponed Completion of Improvements,
Continued
c. What is
Required to
Establish an
Escrow?
To establish an escrow, the following must apply:
construction of the dwelling must be complete and the house must be
suitable for immediate occupancy
postponement of the improvements must be beyond the control of the
builder/seller
the duration of the postponement must not be unreasonable (usually 90 to
120 days)
the amount escrowed must be at least 1 1/2 times an estimate of the amount
needed to complete the work
d. When is an
Escrow Not
Required?
Lender’s are not required to escrow funds when:
the incomplete work is limited to the installation of landscaping features
(lawns, shrubbery, etc.)
the estimate of the cost to complete the work is not greater than $500, and
there is adequate assurance that the work will be completed timely and
satisfactorily (usually 90 to 120 days).
e. General
Procedures
No prior approval of VA is required to escrow funds. Lenders are responsible
for establishing escrows in accordance with the guidelines presented in this
topic. Lenders are also responsible for assuring that the postponed work is
completed. Once the loan closes, VA will randomly monitor cases to ensure
completion of escrowed items.
Lenders escrowing funds should follow the procedures below:
Step Action
1 Close loan and escrow the required funds.
2 Submit closed loan package for issuance of guaranty with:
lender evidence of escrow agreement, or
a completed VA Form 26-1849, Escrow Agreement for
Postponed Exterior Onsite Improvements.
Continued on next page
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9. Escrow for Postponed Completion of Improvements,
Continued
e. General Procedures (continued)
Step Action
3 Release escrowed funds when work is satisfactorily completed, as
evidenced by doing the following:
Complete VA Form 26-1839, Compliance Inspection Report,
indicating the postponed work has been satisfactorily completed,
or
if the postponed work is minor, uncomplicated, and not
involving structural issues, provide written certification from the
lender indicating the work has been completed, and a
statement from the veteran-purchaser that he or she is satisfied
with the work.
Note: In cases involving postponed improvements which affect more than
one loan by a lender in a tract development, VA Form 26-1849 will only be
required for the initial loan to a veteran in the development.
f. Letters of
Credit
A commercial letter of credit may be used in lieu of a cash escrow provided:
the dollar amount of available credit is at least 1 1/2 times the estimated
cost of the postponed work
a trust agreement describing the duties, obligations, and responsibilities is
submitted (VA Form 26-1849 may be used)
the letter of credit is irrevocable and a valid and binding obligation on the
issuing bank and extends at least six months beyond the date for
completion of improvements
a copy of the letter of credit and trust agreement is furnished to the
appropriate VA office so a control can be maintained on the available credit
Note: A letter of credit acceptable to HUD which conforms to the standards
above is also acceptable to VA. In such cases, the escrow agent or trustee
must agree to keep VA informed of charges against the letter of credit.
Continued on next page
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9. Escrow for Postponed Completion of Improvements,
Continued
g. Surety Bonds
Cash escrows are not required when the offsite improvements are to be
installed by the builder, provided that:
A surety bond acceptable to the local government authority provides
assurance of the builder’s obligation to install the offsite improvements.
The amount of the bond is at least equal to the estimated cost of installing
the offsite improvements.
The local government provides VA evidence:
that the offsite improvements will be installed without cost or assessment
to the purchasers of the abutting properties, and
if the builder does not complete the improvements by a specified date, the
local government authority will be responsible for their completion, with
no cost or assessment to the purchasers of properties affected by the
improvements.
The local government has provided evidence that it will be responsible for
continuous maintenance of the completed offsite improvements.
The principal law officer of the local authority advises VA that the local
authority is legally empowered to assume these obligations.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-24
10. Hazard Insurance
Change Date
April 5, 2012, Change 18
This section has been updated to make minor grammatical edits.
a. General
Requirements
The lender is responsible for ensuring that hazard insurance is obtained prior
to loan closing, and maintained for the term of the loan. It must be of a type
or types and in an amount sufficient to protect the property against risks or
hazards to which it may be subjected in the locality.
Generally, the type(s) and amount of insurance coverage customary in the
locality will satisfy this requirement.
Policies must provide that all amounts payable, including unearned
premiums, shall be payable to the holder, or to a trustee or other person for
the holder. All policy payments received for insured losses must be applied
to the restoration of the security or to the loan balance.
b. Flood
Insurance
Requirements
The lender is responsible for ensuring that flood insurance is obtained and
maintained on any building or personal property that secures a VA loan if the
property is located in a special flood hazard area (SFHA), as identified by the
Federal Emergency Management Agency (FEMA).
The lender/holder’s responsibility extends through the entire term of the
loan, and includes insuring any secured property that becomes newly
located in a SFHA due to FEMA remapping.
The VA appraiser’s opinion on whether the property is located in a SFHA
does not relieve the lender from responsibility for ensuring flood insurance
coverage on a property which is in fact located in a SFHA.
Personal property requiring coverage can include a manufactured home and
its appliances, carpet, etc. if they secure the loan.
The amount of flood insurance must be equal to the lesser of the
outstanding principal balance of the loan or the maximum limit of coverage
available for the particular type(s) of property under the National Flood
Insurance Act.
Contact local property insurance agents or brokers, or FEMA regional
offices, for current information on maximum available coverage.
Note: VA cannot guarantee a loan if the security is located in a SFHA and
flood insurance is not available.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-25
10. Hazard Insurance, Continued
c. Unavailable
or Terminated
Insurance
If it is not possible to obtain and maintain insurance on the property, contact
VA. VA will determine whether to waive the requirement or declare the
(existing) loan to be in default.
d.
Consequences
of Uninsured
Losses
VA may reduce a future guaranty claim based on the lender’s noncompliance
with VA hazard/flood insurance requirements which results in uninsured
losses (unless a waiver has been granted).
e. VA
Determination
of the Amount
of Insurance
Required
The lender may request VA to determine the minimum insurance coverage
needed to meet the requirements of 38 CFR 36.4326 for a specific loan.
If the required amount of coverage is maintained, no future guaranty claim
can be reduced due to inadequate coverage provided there has been no change
in the nature, value, or use of the security that would require new or
additional coverage (based on what is customary in the locality) since VA’s
determination was made.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-26
10. Hazard Insurance, Continued
f. Special
Considerations
with
Homeowners
Associations
Condominiums and many townhouse homeowners associations (HOAs)
maintain blanket or master policies on common areas, including common
mechanical and structural elements. The limits of coverage should be
described in the policy, and may also be referred to in the organizational
documents.
Lenders should be aware that policies maintained by some HOAs may not
provide adequate coverage. They may protect only the shell of the structure.
These “studs out” policies do not cover:
interior walls
flooring
plumbing or electrical fixtures
cabinets
Heating, Ventilation, and Air Conditioning (HVAC) equipment
appliances, and
other items considered part of the real property
Carefully review the terms of each blanket policy, or confirm with the HOA
that adequate coverage is in effect (and check periodically for any changes in
coverage). If coverage is inadequate, the homeowner can be held responsible
through the terms of the loan instruments, for maintaining coverage on the
portions of the real property not covered by the master policy.
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-27
11. Escrow for Taxes and Insurance
Change Date
September 15, 2004, Change 4
This section has been changed to create subsection lettering.
a.
Requirements
VA does not require the lender to establish escrow accounts for the collection
and payment of property taxes, hazard insurance premiums, and similar items.
However, it is the lender’s responsibility to ensure that these items are paid
timely.
A lender who chooses to escrow for taxes and insurance must comply with
applicable laws, including the Real Estate Settlement Procedures Act
(RESPA).
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-28
12. Homebuyer Assistance Program
Change Date
April 5, 2012, Change 18
This section has been added to provide homebuyer assistance program
information.
a. General
Information
VA permits veteran purchasers to utilize homebuyer assistance program
services when obtaining a VA home loan. Both government and private
entities administer homebuyer assistance programs. Homebuyer assistance
programs that are administered by a state, county, or municipal government
entity have blanket approval for use with VA loans. Lenders are not required
to obtain VA approval of such programs before closing the loan. These state
and local programs are not to be confused with the Department of Defense
homebuyer assistance program.
b.
Requirements
Lenders making VA loans involving homebuyer assistance programs must
ensure the following:
The borrower(s) must meet VA credit standards.
The lender must obtain a VA appraisal and the property must meet VA
minimum property standards.
If the sale price of the property exceeds the VA reasonable value of the
property, VA will only allow homebuyer assistance program assistance in
the form of a grant to pay the difference. Otherwise the veteran must pay
the difference of price over value from his or her own funds without
borrowing.
Homebuyer assistance programs often require buyers to occupy the
property for a specified period of time. The lender must, at closing,
obtain the borrower’s acknowledgement of this requirement, and provide
a copy of the signed acknowledgement if VA requests the loan file for
review.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 9: Legal Instruments, Liens, Escrows and Related Issues
9-29
12. Homebuyer Assistance Program, Continued
c. HAP Fees
Generally, veterans may pay homebuyer assistance program required fees;
however, lenders should contact their Regional Loan Center of jurisdiction
for approval of any individual HAP fee to the buyer that exceeds $250.
Note: Chapter 8
of the VA Lenders Handbook lists closing charges that
veterans are not allowed to pay when a one-percent loan origination fee is
charged. Since homebuyer assistance programs are designed to assist low to
moderate income buyers, lenders may not charge veteran-borrowers
unallowed fees and use homebuyer assistance program funds to offset these
charges since this practice dilutes the assistance that the HAP was intended to
provide.
