Deciphering the VA Lender’s Handbook Chapter 7 Part 12
This is the second of two articles that cover everything the VA Lender’s Handbook has to say about supplemental VA loans. In the first article, we covered the definition of a supplemental loan and what it can be used for. We also covered all of the requirements for using a supplemental loan, including maximum loan term and lien requirements. In this article, we’ll be continuing on and talking about when a supplemental loan will need to be submitted to the VA for prior approval, and the procedures for handling a supplemental VA loan depending on how much money the supplemental loan is to be made for. We’ll finish up by talking about some specific points concerning your VA loan entitlement and supplemental VA loans.
There are some cases where a supplemental loan must be submitted by the lender to the VA for prior approval before the lender can close on it. If the supplemental loan is being made by a lender other than the one who is currently the holder of the main VA loan, if the supplemental loan is being made by a lender who does not have authority to close loans on an automatic basis, or if one of the obligors on the main loan is going to be released from liability on the loan. If your situation does not fit at least one of those three scenarios, you are probably safe to assume that you won’t have to wait for the VA to approve the loan before you can close with your lender.
There are differing procedures depending on how much the supplemental loan is to be made for. If the loan must be submitted for prior approval by the VA, these procedures must be followed before that. If the loan can be automatically closed, then the information gathered from these procedures are submitted to the VA when the loan is reported by the lender. Regardless of how much money the loan was for, the lender must submit a statement describing what is being done with the funds, as well as the amount still outstanding on the original loan as of closing on the supplemental loan. If the cost of the changes being made with the loan exceed $3,500, a new Notice of Value (NOV) and a compliance inspection are required.
If the loan is being made for less than $3,500, then the NOV and compliance inspection are not required, but a statement of reasonable value is submitted instead. The lender should take care of having that statement written, but you should be aware of the process and may need to provide information to the VA-designated appraiser that the lender nominates to write the statement. The statement will include details on the work to be done, how much the work will cost to get done (labor and materials combined), and a statement that the cost is not greater than the reasonable value of the work. Instead of conducting a compliance inspection on the home, the lender submits a certification with specific wording to the VA. The wording is as follows:
“The undersigned lender certifies to the Department of Veterans Affairs that the property as repaired, altered, or improved has been inspected by a qualified individual designated by the undersigned, and based on the inspection report, the undersigned has determined that the repairs, alterations, or improvements financed with the proceeds of the loan described in the attached VA Form 26-1820, appear to have been completed in substantial conformance with related contracts.”
One little-known aspect of the supplemental VA loan program is that borrowers can get one even if they’ve used up all of their VA loan entitlement on the original loan – as long as the two loans are going to be consolidated. If the supplemental loan is not going to be consolidated with the original loan, then the borrower must have sufficient remaining entitlement in order to qualify for the VA guaranty. This means that there is a good likelihood that you will be able to get a supplemental VA loan if your home is financed through the VA loan program.