Deciphering the VA Lender’s Handbook Chapter 5 Part 10
In the previous article, we discussed applying for a release of liability in the event of a divorce or a loan that was transferred without prior approval from the VA or the loan servicer. In both cases, the servicer or holder of the loan can process the request if they have automatic authority. If not, they must submit the application to the VA for processing. For divorce cases, no funding fee is assessed for the release of liability, but for loans that were transferred without approval, a funding fee may be assessed for the new borrower. In this article, we’ll be going over how substitutions of entitlement factor in loan assumptions, as well as what is meant by “unrestricted transfers”.
It catches a great deal of VA borrowers by surprise to discover that their VA loan entitlement will likely not be available to them after they conduct an assumption on their existing VA loan. In fact, it is not uncommon for veterans to expect to be able to obtain another VA loan after an assumption, and, therefore, decide to allow an assumption to take place. For veterans who wish to restore their entitlement after an assumption, the VA will have to evaluate their eligibility after the servicer has issued the release of liability after the assumption. There are very specific circumstances that must be the case in order for the VA to restore a veteran’s entitlement after he or she has allowed another borrower to assume their old loan.
First, the new borrower that has taken over the loan must be an eligible veteran who has enough entitlement to fully cover the loan that has been assumed.Second, the new borrower must also fulfill the occupancy requirement; which means that he or she will be occupying the property as their primary residence. Lastly, the new borrower must agree to use his or her entitlement to cover the loan. Put in the context of the VA loan program, all of these conditions make perfect sense and are very reasonable to allow the original veteran borrower to purchase another home with their VA benefits. The first step for the new borrower to use his or her entitlement to assume the loan is for them to fill out the VA Form 26-8106, Statement of Veteran Assuming GI Loan.
Once the ownership transfer approval process is complete, the form will be sent to the VA to update their records on whose entitlement is being used where. The servicer is instructed to attach the COE for both the old borrower and the new borrower to the form, which may require first requesting a COE for the new borrower. All of these things should accompany the credit package that is used to approve the transfer of ownership of the property.
There are a number of situations which amount to a transfer of ownership that are considered “unrestricted transfers”. In these cases, the servicer should update the account records and is permitted to charge a “reasonable” fee of up to $50 to do so. Other than that, there is not much involvement required on the part of the loan servicer. The servicer reports the unrestricted transfer to the VA, and the VA’s system usually automatically updates. The Handbook lists all of the circumstances that allow for an unrestricted transfer, here is the list shown:
- The creation of a lien or other encumbrance subordinate to the lender’s security instrument that does not relate to a transfer of rights of occupancy in the property.
- The creation of a purchase money security interest for household appliances.
- A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety.
- The granting of a leasehold interest of 3 years or less not containing an option to purchase.
- A transfer to a relative resulting from the death of a borrower.
- A transfer when the spouse or child of the borrower becomes a joint owner of the property with the borrower.
- A transfer into an inter-vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.
- A transfer resulting from a decree to dissolve a marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse of the borrower becomes the sole owner of the property.