Deciphering the VA Lender’s Handbook Chapter 9 Part 5
The great majority of the time, the VA loan on a property must have the first lien on the home, with any other liens subordinate to the VA loan. The only things that supersede the VA loan lien on the home are taxes, special assessments, and ground rents (all of which are government functions). The only cases where the VA will approve a private entity having a lien superior to the VA’s own are when such a lien is legally or practically necessary, and when the lien doesn’t result in a prejudice to veterans or to the government. In other words, the lien must either be required by law or living conditions, and must be present on the home irrespective of whether the home is financed with a VA loan. Important note: what we’re talking about in this article is different from liens held by mandatory membership home associations in planned unit developments. That will be covered in a future article.
In cases where a private entity requires a first lien on the home, it becomes primarily the lender’s responsibility (with the borrower’s help), to show the following:
- 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.
In no cases where a private entity is requiring to have the first lien on the home can the lien be recorded without prior approval from the VA. What this means for you as the borrower is that you can expect a lien conflict like this to cause your VA loan to take longer to be approved. Chances are, though, at this point, you’re still not 100% clear on what cases a private entity might require a first lien on the home. That is exactly why the VA Lender’s Handbook provides a list of several common examples to paint the picture a little bit more clearly. Here is the list from the Handbook that details the most common scenarios that require a first lien on the home superior to that of the VA loan:
- 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.
Essentially, the only scenarios where a private entity might have a superior lien on the home is when a utility service that is normally provided by a government body is only available from a private company. There are other situations detailed in the examples above, but the best bet is to consult with your lender if you think you may have a situation where there will be a superior lien on the home. In most cases this lien issue doesn’t come up and all is well, but there are occasional circumstances that cause problems, and it’s a problem you want to be aware of and have resolved early on so it doesn’t cause a lot more grief later on in the process. Your lender should be aware of what the VA needs to see in order to make a decision on whether the lien can be approved, and any help he or she needs from you will be made clear.