In the last article, we discussed loan maturity and amortization. We established that the VA requires that the maturity date cannot be longer than 30 years and 32 days on an amortizing loan and no longer than 5 years on a non-amortizing loan. We talked about the difference between amortizing and non-amortizing, and the requirements for the monthly payments for each one. The VA has strict requirements on the loans that can be offered to VA borrowers in order to protect the borrower and make sure that they get the best deal they can. The VA also looks out for the lender and provides the lender an incentive to offer VA loans. The largest incentive is the VA guaranty, and in this article, we’re going to cover what the VA guaranty does for the lender.
The primary advantage that the VA guaranty offers the lender is protection against loss. The VA guarantees a portion of the loan amount (between 25-50%). This guaranty is identified on the VA Loan Guaranty Certificate as both a percentage of the loan and the dollar amount. In the event of a default on the loan, the VA will reimburse the lender for all of the loss. In certain cases, the VA will only be able to reimburse the lender for part of the loss. Those cases are when the loss is greater than the stated guaranty percentage or dollar amount, when the loss is greater than VA maximums for reasonable and customary foreclosure expenses, and when the lender is less-than-fully compliant with all applicable laws and regulations. Generally speaking, however, a 25-50% guaranty on the loan is a great deal of protection against loss and provides a powerful incentive.
The last point in the above paragraph mentions that the reimbursement of the lender is conditional on their compliance with VA laws and regulations. It is important to note that the lender is responsible to comply with all laws and regulations related to the VA loan program. Their compliance will prevent the VA from denying or reducing payments on any claims the lender may make. The Handbook advises the lender to do this by making sure that every single employee who works with VA loans understand and fully comply with all of the VA policies relating to their job, and that they direct question to the VA when any issues arise that are not addressed in the Handbook or other official materials.
The loan is automatically guaranteed upon closing as long as it was closed by either a supervised lender or a nonsupervised lender with automatic authority, and the lender complied with all of the applicable laws and regulations. Loans that required prior approval are also guaranteed immediately upon closing, which may be prior to the issuance of the Loan Guaranty Certificate (LGC), as long as the closed amount is the same as the proposed loan and (of course) the lender complied with all applicable laws and regulations. To any potential borrowers out there reading this, you can rest assured that a VA-approved lender is not going to cut any corners with your loan.
There are certain cases where the lender will experience total loss of the VA guaranty. “Willful fraud or material misrepresentation by the lender…” or any agent of the lender, will result in the VA refusing to pay any claim on the loan. The VA will also refuse to pay when there has been forgery on the note or any other loan documents, or a Certificate of Eligibility or discharge papers have been counterfeited. There are other cases where a VA lender may have a partial loss of Guaranty. Generally speaking, these cases are when there has been less-than-full compliance with VA laws and regulations. Below are examples of noncompliance that can lead to only partial guaranty:
• failure to obtain and retain the required lien on the property to secure the loan,
• failure to include the power to substitute trustees,
• failure to procure and maintain insurance coverage,
• failure to advise VA as to default,
• failure to provide notice of intention to begin foreclosure action,
• failure to provide notice to VA in any suit or action, or notice of sale,
• improper release, conveyance, substitution or exchange of security,
• lack of legal capacity of a party to the transaction,
• failure to assure that escrowed/earmarked funds are expended in accordance
with the agreement, and
• failure to take into consideration limitations upon the quantum or quality of
the estate or property.