Deciphering the VA Lender’s Handbook Chapter 9 Part 1
When it comes to the treatment of VA borrowers and the safety and security of our veterans’ finances, the VA doesn’t mess around; the VA holds its approved lenders on a tight leash as to the security instruments they use to document the mortgage. A ‘security instrument’ is simply a document that outlines something that either the borrower or the lender agree to as part of the mortgage. Therefore, when the Lender’s Handbook refers to ‘security instruments’, they’re not referring to padlocks, safes, and home-defense firearms. They’re referring to all the documents the lender has you sign before and at closing.
The very first thing the Handbook has in Chapter 9 is the following paragraph:
Lenders may use any note and mortgage forms they wish for VA loans. VA regulations at 38 CFR 36.4337 provide that security instruments used by a lender which are inconsistent with VA regulations in effect on the date the loan is closed will be considered amended and supplemented to conform to the regulations.
In other words, the VA is saying that the lender can use whatever forms and notes that they want, but if they differ with the VA regulations in any way then they’re meaningless. That provides a huge amount of security to the borrower since they can know that even if the lender has slipped a clause in about giving up your first-born child that the VA will not uphold the agreement. Lenders are required to make sure their documentation established the required lien on the home (first lien), complies with the VA laws and regulations, complies with state laws, and contains a number of VA-specific clauses. These clauses are as follows: the Assumption Approval clause, the Acceleration clause, the Funding Fee clause, the Processing Charge clause, the Indemnity Liability Assumption clause, and the Escape clause. These clauses detail things that the borrower must agree to as part of getting a VA loan. It’s essentially the VA clarifying their expectations going into the future.
In this article, we’re only going to cover the Assumption Approval clause and the Escape clause, and in the next article we’ll cover the other four clauses mentioned. The Assumption Approval clause is in place to keep veteran borrowers from conducting loan assumptions without the VA’s approval. The VA requires that the following clause (or something with the same meaning) be included conspicuously on at least one of the security instruments (documents) on the loan: “THIS LOAN IS NOT ASSUMABLE WITHOUT THE APPROVAL OF THE DEPARTMENT OF VETERANS AFFAIRS OR ITS AUTHORIZED AGENT.” In other words, you can’t let someone else assume your VA loan without getting approval from the VA. If you’re working through a VA-approved lender to get your loan assumed, then you shouldn’t have to worry about the VA’s approval since your lender should take care of that for you.
The Escape Clause is a bit different from the Assumption Approval clause in that it’s one of those things that ruffles feathers. In fact, the Escape clause singlehandedly prevents some sellers from being willing to sell their home to a borrower intending to use a VA loan. Why? Because the Escape clause allows the borrower to back out of the loan with no penalty of the VA appraisal determines that the property’s reasonable value is less than the contract purchase price. Here is the actual clause:
“It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs. (Authority: 38 U.S.C. 501, 3703(c)(1))”
This clause is an essential part of the VA loan program since the VA will not guarantee a loan for more than the reasonable value of the property. To prevent a veteran borrower from getting forced into a home purchase that they cannot afford if they have to make a down payment to get the loan amount down enough for the VA to cover the full loan amount, the VA must have something in place to protect such a scenario. However, many sellers are unwilling to sign a sales contract that allows the borrower to walk penalty-free if the VA appraiser determines that the reasonable value is less than the contract purchase price.