Deciphering the VA Lender’s Handbook Chapter 12 Part 10
In the last article, we talked about the basic requirements that the VA has for properties using community water supplies and sewage disposal systems. At the end of that article, we mentioned “trust deeds” in regards to the water supply. In this context, a trust deed is simply a document that provides an agreement on the part of the supplier that is normally taken care of through other means. A trust deed is only required if the State Board of Health, Public Utility Commission, or similar State authority does not enforce compliance with its requirements, fix rates, or provide for prompt relief in case of deficient operations or service or exorbitant rates. In these cases, the purpose of the trust deed is to ensure satisfactory control and adequate protective measures in case of noncompliance, exorbitant rates, or deficient operations.
Probably the easiest way to understand what a trust deed does is to read the one found in the HUD Handbook 4075.12, which is what the VA generally requires without modification. The VA does not require a trust deed if the systems are owned and operated by an acceptable homeowners’ association. The VA will not supply the trust deeds because they expect you to use the HUD form linked in this paragraph. The trust deed is going to be acceptable to the VA as long as all the following is true:
- the trustee is a responsible firm
- the description of the property in the trust deed is accurate and complete, and
- the charges set forth and trustee’s fee (normally about 5 percent and in no event in excess of 10 percent of gross receipts) are reasonable
The VA prefers that the trustee of the trust deed be a VA-approved lender or at least an HUD-approved lender, but the trustee can be any responsible, established firm. Usually, this means a title company in the community. If the trustee is a title company, then possible conflicts-of-interest arise depending on the ownership and clientele of the title company, and the VA requires that there be no identity-of-interest between the sponsoring group and the trustee. So how does this affect you? It’s quite simple – you’ll be involved as the trust deed is worked out and agreed upon between the Trustee and the Grantor. This process takes time, and can affect how quickly you are able to get your VA loan approved and move into your new home. Also, if the supplier is not willing to sign the HUD trust deed, you will not be able to purchase your home with a VA loan.
The trust deed also takes into account the possibility that the control and maintenance of the water supply and sewage disposal systems may be transferred to a public utility company sometime in the future. The trust deed needs to establish a couple requirements for when a transfer takes place; the transfer is only allowed to be made to a governmental authority or public utility company that is controlled by a government body, and any funds that are gained from such a transfer must be distributed among the property owners served by the system. These requirements are essential in future-proofing the property’s water supply and sewage disposal systems, which is important in determining the remaining economic life of the property. If there is any lack of assurance that the service will be satisfactory or provided at a reasonable rate, the property will not necessarily be ineligible for a VA loan, but the lack of assurance will at least be reflected in a lower VA valuation of the property.
If the trust deed is amended or the conditions listed above are not met, then the local VA field station needs to review the situation and the trust deed before the VA loan can be closed. If this is the case, you should be prepared to have your VA loan delayed by a few weeks, because the VA field office may have to coordinate with the local HUD office to determine whether the amended trust deed is acceptable. A good rule of thumb, though, is if your water supplier is not willing to assure you of satisfactory service and reasonable rates, they are probably a supplier that you don’t want to work with.