Legal Instruments & Escrows – VA Lender’s Handbook Chapter 9 Summary
Chapter 9 of the Handbook covers a lot of important information. It’s all about legal instruments that are acceptable to use on the loan, limitations on the title, land sale contracts, encumbrances, liens, escrows, insurance, and taxes. There’s a lot of stuff in there, and we’re only going to cover the portions that are
This is the first thing we’ll talk about. The VA has some restrictions and requirements when it comes to the title of the home that is being purchased. The VA does not require either the borrower or the lender to obtain title insurance but does allow lenders to require it if they wish. For the most part, the title is not allowed to come with any restrictions on the purchase or resale of the property. There are only two exceptions that fall under specific government regulations. If the title to your home falls under one of these exceptions, the lender is required to obtain VA approval and fully inform you and get your consent on the restrictions when you are applying for the loan. There will never be a situation where your title is under this restriction and you don’t know about it.
Other Loans Secured by the Property
This can happen in two ways: secondary borrowing, or the purchase of a property with encumbrances. The VA does not prohibit secondary borrowing but does have some requirements in order for it to be approved. 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 their list of requirements are met. The notable requirements are that the VA loan must maintain the first lien on the home, the new loan must be documented properly, no cash back can be given to the borrower, and a grace period must be in place. For the most part, any properties with existing liens on it must be paid off before the VA loan can take place. Otherwise, they must be subordinated to it.
Taxes and Insurance
The VA does require that the borrower obtain hazard insurance (also known as homeowners’ insurance). This insurance needs to be maintained throughout the life of the loan, and whatever policy coverage that is generally appropriate in the locality is approved by the VA. The payment of this insurance is usually done through escrow. The VA also requires that the borrower purchase flood insurance if the property is located in a special flood hazard area. In case of an HOA or condo project maintaining their own insurance policy for all of the homes in the association, the lender must look at the policy to make sure it satisfies the VA’s minimum coverage requirements. If it does not, additional coverage must be purchased. Taxes and insurance are usually paid through escrow, but the VA does not require it be done this way. If you are paying into an escrow, it is the loan holder’s responsibility to make sure that these are paid on time.
The Handbook also talks about Homebuyer Assistance Programs, which can help veterans with lower income purchase homes. These programs (HAPs) are usually offered by the state, county, or municipal governments, but can also be offered by private entities. Most HAPs are given blanket approval by the VA, but they are only allowed to do so much. For example, the borrower must still meet credit standards, the property must meet the VA’s MPRs, and the borrower must acknowledge that they understand if the HAP imposes a minimum amount of time they must occupy the property. If you want more detail on these programs, you can check out our articles on Chapter 9 or look at the last section of Chapter 9 in the Handbook. Feel free to reach out to us with any questions via our website or give us a call. Our loan officers are happy to help answer any of your questions.