In this series, we will be comprehensively covering everything that is discussed in the VA lender’s handbook, but we’ll be doing it in plain-speak so anyone can understand it. For anyone looking for an in-depth understanding of the VA loan program, this series is for you. Be prepared, this is going to be a very long series of articles, with 18 chapters to cover and likely 2-3 posts per chapter, there’s a lot of material to cover. Be patient, though, and know that knowledge is power, and you want as much knowledge as you can get your hands on when you’re considering a mortgage, especially through the VA loan program. The VA loan program offers such a great deal of benefit that it’s worth maximizing your knowledge so you can maximize your benefit.
The first chapter of the VA Lender’s Handbook is entitled, “The Lender”. This chapter primarily explains to lenders the steps they need to go through in order to become VA-approved. It discusses the paperwork that must be filled out and submitted to the VA and the business practices that a lender must incorporate in order to be considered for approval. This is very valuable information for a VA borrower to know because it will raise your confidence in any lender that is VA-approved and you’ll have a window of understanding into the lender’s perspective on the VA loan program. Only lenders who truly want to offer VA loans bother to go through the process to become VA-approved.
First, a VA lender is defined as: “Any person or entity (private sector or government) that originates, holds, services, funds, buys, sells or otherwise transfers a loan guaranteed by VA.” The handbook then differentiates between two different types of lenders: supervised and nonsupervised. A supervised lender is one who is subject to examination and supervision by either the federal or a state government. The examinations generally happen periodically and have to meet the VA requirements for supervision in order for a lender to be considered “supervised”. Supervised lenders include federal savings banks, national banks, farm credit system institutions, state banks, insurance companies, credit unions, and private banks. In other words, most lenders are considered supervised. In fact, under “nonsupervised lender”, the Handbook simply says any lender that’s not a supervised lender.
There is one more type of lender, called a nonsupervised automatic lender. This type of lender has applied for and been granted authority from the VA to approve VA loans on an automatic basis, without the usual manual process of approval for each loan that normally takes place.
In the context of the loan process, the word ‘agent’ refers to the person (or sometimes an ‘entity’) that does any work on behalf of a sponsoring lender. This can be confusing for the borrower because they’re also dealing with real estate agents. Knowing which agent is being referenced depends on context, but now that you know that it could be referring to the representative of the lender, you’ll be able to understand which ‘agent’ is being referenced. The sponsoring lender is one who uses an agent to conduct any work related to originating or closing a VA loan. You’ll usually deal with an agent and a sponsoring lender unless you’re working with a small, private lender that works directly with his/her clients.
The handbook then lists all of the loans that require prior approval from the VA before they can be closed, even if the lender has automatic authority. Those loan types are the following:
- Joint loans.
- Loans to veterans in receipt of VA nonservice-connected pension.
- Loans to veterans rated incompetent by VA.
- Interest Rate Reduction Refinancing Loans (IRRRLs) made to refinance delinquentVA loans.
- Manufactured home loans (except when the manufactured home is permanently affixed to the lot and considered real estate under state law) unless the lender has been separately approved for this purpose.
- Cooperative loans.
- Unsecured loans or loans secured by less than a first lien.
- Supplemental loans.
For a lender without automatic approval authority, every single VA loan they wish to close on must first be submitted for approval by the VA. Lenders with automatic authority are permitted to submit any loan for approval if there are issues with the loan that the lender cannot resolve on its own. For the lender to submit these loans, the application needs to be accompanied by the underwriter’s analysis and an explanation of why the loan is being submitted for prior approval. The Handbook clearly states that lenders are not to use this provision to shift the burden of loan rejection to the VA.