Escrow for Postponed Completion of Improvements Part 2


Deciphering the VA Lender’s Handbook Chapter 9 Part 11


In the last article we started talking about when an escrow can be set up for a borrower who is wanting to move into the house prior to the construction or improvements on the house being completed. We talked about the requirements that the VA has for a situation in order for an escrow to be allowed, as well as situations where the borrower can move in and no escrow is required. We also talked about where the funds are escrowed from and when they are paid out to the builder/seller. In this article we’re going to go over the general procedures that a lender will follow in setting up the escrow and paying it out when the work is completed. We’ll also talk about letters of credit and surety bonds.


One of the nice thing about escrow funds is that the VA does not have to approve them beforehand; as long as it meets the criteria discussed in the previous article, the lender can just go ahead and get the escrow rolling. The lender is also responsible for establishing the escrow according to the VA’s requirements, and assuring that the postponed work is completed. The VA, however, does conduct a random audit to make sure that escrowed items have been completed.

There are three steps that a lender takes in order to establish and follow-up on the escrow.

  1. 3 follow up steps of escrowFirst, they close the loan and escrow the required funds.
  2. Second, they submit the closed loan package to the VA to receive the certificate of commitment. That package needs to include the lender’s evidence of the escrow agreement, or a completed VA Form 26-1849, Escrow Agreement for Postponed Exterior Onsite Improvements.
  3. The third step is for the lender to release the escrowed funds when the work is finished. To document the release of the escrowed funds, the lender completes VA Form 26-1839, Compliance Inspection Report, which indicates that the postponed work has been completed, or if the work is “…minor, uncomplicated, and not involving structural issues…” then a written certification from the lender that states the work has been completed is sufficient if also paired with a statement from the veteran-purchaser that he or she is satisfied with the completed work. That is essentially all you as the borrower need to know about the general procedures that the lender will follow.


The VA allows that the lender can issue a letter of credit in lieu of an escrow account. A letter of credit is a letter issued from one bank to another to be paid out to a specified party under certain conditions (in this case, to be paid to the builder/seller when the work is completed). The VA allows for a letter of credit under the following circumstances: the dollar amount of available credit must be at least 1 and 1/2 times the estimated cost of the postponed work, a trust agreement that describes the obligations of the builder is submitted to the VA, the letter of credit is irrevocable and is a valid and binding obligation on the issuing bank and extends at least six months beyond the expected date of completion of the improvements. A copy of the letter of credit and the trust agreement must be delivered to the appropriate VA office.

Surety Procedures

A surety bond may already be in place which obligates the builder to complete the construction or improvements irrespective of the arrangement with the lender. In cases where a surety bond is in place, an escrow may not be required, depending on the nature of the surety bond and the work being done. The VA has the following requirements on surety bonds:

  • A surety bond acceptable to the local government authority provides the 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 the 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.

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