VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-1
Chapter 7. Loans Requiring Special Underwriting, Guaranty
and Other Considerations
Overview
Introduction
This chapter contains information about loans requiring special
underwriting, guaranty, and other considerations.
In this Chapter
This chapter contains the following topics.
Topic Topic See
Page
1 Joint Loans 7-2
2 Construction/Permanent Home Loans 7-13
3 Energy Efficient Mortgages (EEMs) 7-16
4 Loans for Alteration and Repair 7-22
5 Supplemental Loans 7-23
6 Adjustable Rate Mortgages (ARMs) 7-27
7 Graduated Payment Mortgages (GPMs) 7-29
8 Growing Equity Mortgages (GEMs) 7-34
9 Loans Involving Temporary Interest Rate Buydowns 7-35
10 Farm Residence Loans 7-38
11 Loans for Manufactured Homes Classified as Real Estate 7-40
12 Loans to Native American Veterans on Trust Lands 7-43
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-2
1. Joint Loans
Change Date
April 1, 2010, Change 12
• This section has been updated to correct hyperlinks and to make minor
grammatical edits.
a. What is a VA
Joint Loan?
“Joint loan” generally refers to a loan for which:
• a veteran and another person(s) are liable, and
• the veteran and the other obligor(s) own the security.
A joint loan is a loan made to:
• the veteran and one or more nonveterans (not spouse),
• the veteran and one or more veterans (not spouse) who will not be using
their entitlement,
• the veteran and the veteran’s spouse who is also a veteran, and both
entitlements will be used, or
• the veteran and one or more other veterans (not spouse), all of who will
use their entitlement.
A loan involving a veteran and his or her spouse will not be treated as a
“joint loan” if the spouse:
• is not a veteran, or
• is a veteran who will not be using his or her entitlement on the loan.
A loan to a veteran and fiancé who intend to marry prior to loan closing and
take title as veteran and spouse will be treated as a loan to a veteran and
spouse (conditioned upon their marriage), and not a joint loan.
b. VA
Regulations
The regulations in 38 CFR 36.4307 address joint loans.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-3
1. Joint Loans, Continued
c. Terminology
Used in this
Section
To avoid confusion, the terms “veteran/nonveteran joint loan” and “two
veteran joint loan” will be used throughout this section to include the
various types of joint loans.
Veteran/nonveteran joint loan:
Common meaning: A loan involving one veteran and one nonveteran (not
spouse).
For purposes of applying the principles explained in this section, this term
will also be used to represent any other type of joint loan involving at least
one veteran using his or her entitlement and at least one other person not
using entitlement (can be a veteran or nonveteran, but not a spouse).
Examples:
• Three veterans using entitlement and one nonveteran.
• One veteran using entitlement and four nonveterans.
• Two veterans using entitlement and two veterans not using entitlement.
Two veteran joint loan:
Common meaning: A loan involving two veterans who are not married to
each other, and both using their entitlement.
For purposes of applying the principles explained in this section, this term
will also be used to represent any other type of joint loan involving only
veterans, each of whom uses his or her entitlement.
It can include loans to:
• the veteran and the veteran’s spouse who is also a veteran, if both
entitlements will be used, or
• three, four, or more veterans, all of whom will use their entitlement.
d. Occupancy
Any person who uses entitlement on a joint loan must certify intent to
personally occupy the property as his or her home.
Any borrower on a joint loan who does not use entitlement for the loan
(such as a nonveteran), does not have to intend to occupy the property.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-4
1. Joint Loans, Continued
e. How Many
Units Can the
Property Have?
If a property is to be owned by two or more eligible veterans, it may consist
of four family units and one business unit, plus one additional unit for each
veteran participating in the ownership.
Thus, two veterans may purchase or construct residential property
consisting of up to six family units (the basic four units plus one unit for
each of the two veterans), and one business unit.
If the property contains more than four family units plus one family unit for
each veteran participating in the ownership and/or more than one business
unit, the loan is not eligible for guaranty.
f. Which Joint
Loans Require
Prior
Approval?
Any joint loan for which the veteran will hold title to the property and any
person other than the veteran’s spouse must be submitted for prior
approval.
Any loan for which the veteran and the veteran’s spouse will hold title to
the property, whether or not the spouse also uses entitlement, may be closed
automatically by a lender with automatic authority.
g. How to
Underwrite a
Joint Loan
The following underwriting considerations apply:
Part Type of
Joint Loan
Underwriting Considerations Function
Two veteran joint
loan
Consider the credit and combined income and assets of
both parties. Strengths of one veteran related to income
and/or assets may compensate for income/asset
weaknesses of the other. However, satisfactory credit
of one veteran cannot compensate for the other’s poor
credit.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-5
1. Joint Loans, Continued
g. How to Underwrite a Joint Loan (continued)
Part Type of Joint
Loan
Underwriting Considerations Function
Veteran/nonveteran
joint loan
Veteran’s credit must be satisfactory and veteran’s
income must be sufficient to repay that portion of the
loan allocable to the veteran’s interest in the property.
A different analysis applies to the portion of the loan
allocable to the nonveteran. The credit of the
nonveteran must be satisfactory. However, the
combined income of both borrowers can be
considered in evaluating repayment ability.
In other words:
• income strength of the veteran may compensate for
income weakness of the nonveteran, but
• income strength of the nonveteran cannot
compensate for income weakness of the veteran in
analyzing the veteran’s ability to repay his or her
allocable portion of the loan.
h. How to
Calculate
Guaranty and
Entitlement Use
on Veteran/
Nonveteran Joint
Loans
Guaranty is limited to that portion of the loan allocable to the veteran’s
interest in the property.
The lender must satisfy itself that the requirements of its investor or the
secondary market can be met with this limited guaranty.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-6
1. Joint Loans, Continued
i. Procedure
VA calculates the guaranty as described in the table below.
Step Action
1 Divide the total loan amount by the number of borrowers.
2 Multiply the result by the number of veteran-borrowers who will be
using entitlement on the loan.
There is usually only one veteran borrower, in which case the result
of this Step is the same as the result of Step 1.
3 Calculate the maximum potential guaranty on the portion of the loan
arrived at in Step 2 (as if that portion was the total loan).
Use the maximum guaranty table in section 4 of chapter 3 of this
handbook.
4 VA will guarantee the lesser of:
• the maximum potential guaranty amount arrived at in Step 3, or
• the combined available entitlement of all veteran-borrowers.
5 VA makes a charge to the veteran-borrower’s available entitlement
in the amount of the guaranty.
If more than one veteran is involved, VA divides the entitlement
charge equally between them if possible. If only unequal entitlement
is available, unequal charges may be made with the written
agreement of the veterans.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-7
1. Joint Loans, Continued
j. Examples
Veteran/Nonveteran Loans
Borrowers
and Available
Entitlement
Total
Loan
Amount
Vet’s
Portion
Maximum Potential
Guaranty on Vet’s
Portion
Entitlement
Charge
------------
T=Total
Vet $36,000
Nonvet $0
$100,000 $ 50,000 $22,500 $22,500
Vet $36,000
Nonvet $0
$290,000 $145,000 $36,250 $36,250
Vet $27,500
Vet $36,000
Nonvet $0
$108,000 Total for
both vets
$72,000
Total for both vets
$28,800
$14,400
$14,400
T=$28,800
Vet $25,000
Vet $11,000
Nonvet $0
$201,000 Total for
both vets
$134,000
$36,000 $25,000
$11,000
T=$36,000
Note: The last example would require a written agreement from the veterans
to make unequal charges to their entitlement.
Quick Reference For Calculation Used
Step Action
1 Divide the total loan amount by the number of borrowers.
2 Multiply the result by the number of veterans using entitlement.
3 Calculate the maximum potential guaranty on the portion of the loan
arrived at in Step 2, using the maximum guaranty table in chapter 3.
4 VA will make a charge to entitlement up to the amount arrived at in
Step 3.
• VA will divide the charge equally between multiple veterans if
possible.
• If Step 2 is greater than $144,000, additional entitlement may be
added to each veteran’s entitlement.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-8
1. Joint Loans, Continued
k. How to
Calculate
Guaranty and
Entitlement Use
on Two
Veteran Joint
Loans
As with a non-joint loan, the potential maximum guaranty on a joint loan is
calculated based on the total loan amount.
l. Procedure
VA calculates the guaranty as described in the following table.
Step Action
1 Calculate the maximum potential guaranty on the total loan amount.
Use the maximum guaranty table in chapter 3.
2 VA will guarantee the lesser of:
• the maximum potential guaranty amount arrived at in Step 1, or
• the combined available entitlement of all veteran-borrowers.
If the loan amount is greater than $144,000, additional entitlement
may be added to each veteran’s entitlement.
If possible, VA will use this additional entitlement to arrive at equal
entitlement charges for the veterans involved.
3 VA will make charges to the veterans’ available entitlement which
total the maximum guaranty arrived at in Step 1, or the total of their
available entitlement if less than the maximum potential guaranty.
VA will divide the entitlement charge equally between the veterans if
possible, or, if only unequal entitlement is available, unequal charges
may be made with the veterans’ written agreement.
Exception: VA will make the entitlement charge for husband and
wife veterans according to their preference.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-9
1. Joint Loans, Continued
m. Examples
Two Veteran Joint Loans
Veterans and
Available
Entitlement
Total
Loan
Amount
Maximum
Potential
Guaranty
Total
Entitlement
Charge Per
Vet
Vet 1 $36,000
Vet 2 $36,000
$100,000
$36,000 $18,000
$18,000
Vet 1 $23,500
Vet 2 $ 8,500
$ 80,000
$32,000 $23,500
$ 8,500
Vet 1 $36,000
Vet 2 $36,000
$300,000
$75,000 $37,500
$37,500
Vet 1 $15,000
Vet 2 $20,000
$203,000
$50,750 $25,375
$25,375
Vet 1 $0
Vet 2 $0
Vet 3 $ 6,500
$300,000 $75,000 $25,000
$25,000
$25,000
Note: A written agreement from the veterans is required whenever there is
unequal entitlement usage.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-10
1. Joint Loans, Continued
n. Certificate of
Commitment
For joint loans involving one or more nonveterans:
• the loan amount shown on the commitment is limited to the veteran’s
portion of the loan, and
• the percent of guaranty is based on the ratio of the amount of entitlement
the veteran has available to the veteran’s portion of the loan.
VA will issue the Certificate of Commitment with a reminder that:
• no part of the guaranty applies to the portion of the loan allocated to the
nonveteran, and
• in the event of foreclosure where a loss is sustained, the holder must
absorb any loss attributable to the nonveteran’s portion of the loan.
o. Loan
Guaranty
Certificate
(LGC)
The “Amount of Loan” reflects only the veteran’s portion of the loan.
If more than one veteran used entitlement on the loan, it will reflect the total
of all portions allocable to those veterans.
For veteran/nonveteran joint loans, the LGC will contain the statement,
“The amount of guaranty on this loan is limited to the veteran’s portion of
the loan.”
The lender must satisfy itself that the requirements of its investor or the
secondary market can be met with this limited guaranty.
Whereas the whole loan amount will appear on the mortgage security
documents; that is, mortgage note or deed of trust, only the veteran’s
portion is shown on the Certificate of Commitment and the LGC.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-11
1. Joint Loans, Continued
p. Equal Credit
Opportunity
Act
Considerations
(ECOA)
The applicability of the guaranty to only a portion of the loan in the case of
a veteran/nonveteran joint loan may cause a lender to refuse to accept an
application for such loan.
This may appear to conflict with the ECOA prohibition against
discrimination based on marital status, however, the lender may refuse the
application under these circumstances without violating ECOA.
This is based on an exemption for VA being a special purpose credit
program.
q. Calculation
of the Funding
Fee
Apply the appropriate funding fee percentage to any portion of the loan
allocable to a veteran using his or her entitlement who is not exempt from
the funding fee. Determine the appropriate percentage for the type of
veteran involved from the funding fee tables in section 8 of chapter 8.
Example: On a no-downpayment loan to three veterans; one a first-time
homebuyer, one a subsequent user, and one a first-time reservist; funding
fee percentages of 2.15 percent, 3.3 percent, and 2.4 percent, respectively,
would each be applied to one-third of the loan amount.
No funding fee will be assessed on any portion of a joint loan allocable to:
• a nonveteran,
• a veteran who did not use his or her entitlement, or
• a veteran who used his or her entitlement, but is exempt from the funding
fee.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-12
1. Joint Loans, Continued
q. Calculation
of the Funding
Fee (continued)
Downpayment: The actual loan amount is allocated equally between the
borrowers for purposes of calculating the funding fee, whether or not a
downpayment is made, and regardless of where the funds for such a
downpayment come from.
Example: On a veteran/nonveteran loan, the nonveteran makes a $5,000
(five percent) downpayment out of his cash resources, to purchase a $100,000
property, resulting in a $95,000 loan amount. The veteran is a first-time
homebuyer. The veteran must pay a funding fee of $712.50, based on
1.5 percent of his/her $47,500 portion.
If situations arise which are not addressed here, contact VA for assistance.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-13
2. Construction/Permanent Home Loans
Change Date
November 8, 2012, Change 21
• This section has been updated to make minor grammatical edits.
a. The Basics
VA will guarantee a “construction/permanent home loan,” that is, a loan to
finance the construction/purchase of a residence. The loan is closed prior to
the start of construction with proceeds disbursed to cover the cost of, or
balance owed on, the land, and the balance into escrow. The escrowed
monies are paid out to the builder during construction.
The lender must obtain written approval from the borrower before each
draw payment is provided to the builder.
This section does not address other construction loans guaranteed by VA;
that is, those for the purchase of a residence newly constructed for the
veteran by a builder who financed the construction from his or her own
resources.
b. Amortization
The veteran begins making payments on a construction/permanent home
loan only after construction is complete. Therefore, the initial payment on
principal may be postponed up to 1 year if necessary. The loan must be
amortized to achieve full repayment within its remaining term.
Example: If it takes 6 months to complete construction, the payment
schedule for the veteran obtaining a 30-year mortgage must provide for full
repayment of the loan in 29 years and 6 months.
Rather than requiring a balloon payment, it may be preferable to set up
equal payments (beginning after construction is complete) which are large
enough to repay the loan within the original maturity without a balloon
payment.
The VA requirement that loans be amortized with approximately equal
payments and the principal must be reduced at least once annually, also
applies to construction loans. However, the final installment may be for an
amount up to five percent of the original principal amount of the loan.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-14
2. Construction/Permanent Home Loans, Continued
c. What the
Builder Must
Pay
On a construction/permanent home loan, the builder is responsible for:
• interest payments during the construction period, and
• all fees normally paid by a builder who obtains an interim construction
loan including, but not limited to:
− inspection fees,
− commitment fees,
− title update fees, and
− hazard insurance during construction.
d. Interest Rate
The permanent mortgage loan interest rate is established at closing.
Lender’s may offer a “ceiling-floor” where the veteran “floats” the interest
rate during construction. The agreement must provide that at lock-in, the
permanent interest rate will not exceed a specific maximum interest rate yet
also permit the borrower to lock-in at a lower rate based on market
fluctuations.
Note: The borrower must qualify for the mortgage at the maximum rate.
e. What Fees
the Veteran
Can Pay
The veteran may not pay any fees that are the builder’s responsibility. Fees
the veteran can pay are described in chapter 8.
f. Funding Fee
and Loan
Reporting
The funding fee is due and payable to VA within 15 days of loan closing;
that is, it is not tied to the commencement or completion of construction.
The loan must be reported to VA within 60 days of receipt of a clear final
compliance inspection report.
g. LGC
Although the loan will normally be considered guaranteed upon closing, the
LGC on a construction/permanent home loan will not be issued until a clear
final compliance inspection report has been received by VA.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-15
2. Construction/Permanent Home Loans, Continued
h. If Loan
Proceeds Are
Not Fully
Disbursed
If construction is not fully completed and loan proceeds are not fully
disbursed, guaranty will apply only to the proper pro rata part of the loan.
To calculate the proper pro rata part of the loan:
• take loan proceeds disbursed for construction purposes,
• add any other payments made to the builder by or on behalf of the
veteran,
• take the lesser of the above total or 80 percent of the value of that portion
of the construction actually completed, and
• add any loan disbursements made for the purchase of the land on which
the construction is situated.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-16
3. Energy Efficient Mortgages (EEMs)
Change Date
November 8, 2012, Change 21
• This section has been updated to make minor grammatical edits.
a. What are
EEMs?
EEMs are loans to cover the cost of making energy efficiency
improvements to a dwelling. They can be made in conjunction with:
• a VA loan for the purchase of an existing dwelling, or
• a VA refinancing loan secured by the dwelling.
Acceptable energy efficiency improvements include, but are not limited to:
• solar heating systems, including solar systems for heating water for
domestic use,
• solar heating and cooling systems,
• caulking and weather-stripping,
• furnace efficiency modifications limited to replacement burners, boilers,
or furnaces designed to reduce the firing rate or to achieve a reduction in
the amount of fuel consumed as a result of increased combustion
efficiency, devices for modifying flue openings which will increase the
efficiency of the heating system, and electrical or mechanical furnace
ignition systems which replace standing gas pilot lights,
• clock thermostats,
• new or additional ceiling, attic, wall and floor insulation,
• water heater insulation,
• storm windows and/or doors, including thermal windows and/or doors,
• heat pumps, and
• vapor barriers.
b.
Requirements
Funds for energy efficiency improvements are considered part of the total
loan, which must be secured by a first lien.
If the labor is to be performed by the veteran, the loan increase will be
limited to the amount necessary to pay for materials.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-17
3. Energy Efficient Mortgages (EEMs), Continued
b.
Requirements
(continued)
A loan for an existing property may be increased by up to $6,000 for energy
efficiency improvements at the option of the lender and veteran at any time
up to loan closing without VA’s prior approval.
The lender must determine that the proposed weatherization and/or energy
conservation improvements are reasonable for the particular property.
The lender must evaluate the veteran’s ability to pay the increased loan
payments caused by the addition of energy efficiency improvements.
For energy efficiency improvements that will increase a loan amount by
more than $6,000, the amount of the increase must be supported by an
increased valuation in an equal amount.
c. Borrower
Notice on the
Notice of Value
(NOV)
Information on EEMs is provided to a veteran who applies for a loan which
requires an NOV (a loan for a home purchase or cash-out refinance). The
NOV includes the following notice to the veteran:
“The buyer may wish to contact a qualified person/firm for a home energy
audit to identify needed energy efficiency improvements to the property. In
some localities, the utility company may perform this service. The
mortgage amount may be increased as a result of making energy efficiency
improvements such as: Solar or conventional heating/cooling systems,
water heaters, insulation, weather-stripping/caulking, and storm
windows/doors. Other energy related improvements may also be
considered.”
The mortgage may be increased by:
• up to $3,000 based solely on the documented costs,
• up to $6,000 provided the increase in monthly mortgage payment does not
exceed the likely reduction in monthly utility costs, or
• more than $6,000 subject to a value determination by VA.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-18
3. Energy Efficient Mortgages (EEMs), Continued
d.
Underwriting
Considerations
Energy efficiency improvements up to $3,000:
The resulting increase in loan payments will normally be offset by a
reduction in utility costs.
Energy efficiency improvements more than $3,000, up to $6,000:
The lender must make a determination that the increase in monthly
mortgage payments does not exceed the likely reduction in monthly utility
costs. Rely on locally available information provided by utility companies,
municipalities, state agencies or other reliable sources, and document the
determination.
Energy efficiency improvements over $6,000:
Lenders should exercise discretion and consider:
• whether the increase in monthly mortgage payments exceeds the likely
reduction in monthly utility costs, and
• whether the veteran’s income is sufficient to cover the higher loan
payment.
A VA Certificate of Commitment issued before the decision to make energy
efficiency improvements over $6,000 must be returned to VA for a
determination that the applicant still qualifies.
Energy efficiency improvements in conjunction with an Interest Rate
Reduction Refinancing Loan (IRRRL):
If the monthly payment (Principal, Interest, Taxes, and Insurance (PITI)) for
the new loan exceeds the PITI of the loan being refinanced by 20 percent or
more, the lender must certify to having determined that the veteran
qualified for the higher payment.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-19
3. Energy Efficient Mortgages (EEMs), Continued
e.
Documentation
Required with
Closed Loan
Package
Energy efficiency improvements up to $3,000:
Evidence of the cost of improvements such as a copy of the bid(s) or
contract itemizing the improvements and their cost.
Improvements more than $3,000, up to $6,000:
Evidence of the cost of improvements such as a copy of the bid(s) or
contract itemizing the improvements and their cost, and the lender’s
determination that the increase in monthly mortgage payments does not
exceed the likely reduction in monthly utility costs.
Improvements over $6,000:
Documentation of VA’s valuation of the energy efficiency improvements,
and for prior approval loans, the Certificate of Commitment must reflect the
additional amount.
IRRRL with significant increase in payments:
If the cost of the improvements causes the new loan payment (PITI) to be
20 percent or more higher than the old payment (on the loan being
refinanced), then include the lender’s certification that it has determined
that the veteran qualified for the higher payment.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-20
3. Energy Efficient Mortgages (EEMs), Continued
f. How to
Calculate
Guaranty and
Entitlement Use
Guaranty is calculated on an energy efficient mortgage as described in the
following table.
Step Action
1 Calculate guaranty on the loan without the portion attributable to
the energy efficiency improvements.
2 Calculate guaranty on the energy efficiency improvements
portion by applying the same percentage used in Step 1.
3 Add the results of Steps 1 and 2 to arrive at guaranty on the entire
loan.
However, the veteran’s entitlement will only be charged the amount arrived
at in Step 1; it is based upon the loan amount before adding the cost of the
energy efficiency improvements.
Example 1: If a veteran has full entitlement and applies for a loan of
$80,000, plus $6,000 in energy efficiency improvements, VA will guarantee
40 percent of the full loan amount of $86,000. Thus, the dollar amount of
the guaranty will be $34,400, even though the charge to the veteran’s
entitlement is only $32,000.
Example 2: If a veteran with full entitlement applies for a $144,000 loan to
purchase a home, and adds $6,000 in energy efficiency improvements, the
25 percent guaranty on the loan will only require the use of $36,000
entitlement, but the dollar amount of guaranty will be $37,500.
g. How to
Calculate the
Funding Fee
Calculate the funding fee based on the full loan amount including the cost
of the energy efficiency improvements.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-21
3. Energy Efficient Mortgages (EEMs), Continued
h.
Improvements
Not Completed
Before Closing
If the energy efficiency improvements are not completed before closing, the
lender may establish an escrow or earmarked account and close the loan.
• A formal escrow is not required.
• Only the amount needed to complete the improvements must be withheld.
• Check the appropriate block in item 23, VA Form 26-1820, Report and
Certification of Loan Disbursement.
• No additional documentation concerning the escrowed/earmarked funds
must be submitted when reporting the closed loan.
Generally, the improvements should be completed within 6 months from the
date of loan closing.
• Provide written notification to VA when improvements are completed and
the escrow funds are disbursed, and
• assure the funds are properly applied to the costs of improvements.
If, after a reasonable time, the lender determines that the improvements will
not be completed:
• apply the balance of the escrowed/earmarked funds to reduce the principal
balance on the loan, and
• provide written notification to VA that this has been done.
i.
Reimbursement
to the Veteran
out of IRRRL
Proceeds
The veteran generally may not obtain cash proceeds from an IRRRL.
Note: There is one exception. Up to $6,000 of IRRRL loan proceeds may
be used to reimburse the veteran for the cost of energy efficiency
improvements completed within the 90 days immediately preceding the date
of the loan.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-22
4. Loans for Alteration and Repair
Change Date
April 1, 2010, Change 12
• This section has been updated to make minor grammatical edits.
a. Description
VA may guarantee a loan for alteration and repair:
• of a residence already owned by the veteran and occupied as a home, or
• made in conjunction with a purchase loan on the property.
The alterations and repairs must be those ordinarily found on similar
property of comparable value in the community.
b. Value
Considerations
The cost of alterations and repairs to structures may be included in a loan
for the purchase of improved property to the extent that their value supports
the loan amount.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-23
5. Supplemental Loans
Change Date
November 8, 2012, Change 21
• This section has been updated to make minor grammatical edits.
a. What is a
Supplemental
Loan?
A supplemental loan is a loan for the alteration, improvement, or repair of a
residential property. The residential property must:
• secure an existing VA-guaranteed loan, and
• be owned and occupied by the veteran, or the veteran will reoccupy upon
completion of major alterations, repairs, or improvements.
The alterations, improvements, or repairs must:
• be for the purpose of substantially protecting or improving the basic
livability or utility of the property, and
• be restricted primarily to the maintenance, replacement, improvement or
acquisition of real property, including fixtures.
Installation of features such as barbecue pits, swimming pools, etc., does
not meet this requirement.
No more than 30 percent of the loan proceeds may be used for the
maintenance, replacement, improvement, repair, or acquisition of
nonfixtures or quasi-fixtures such as refrigeration, cooking, washing, and
heating equipment. The equipment must be related to or supplement the
principal alteration for which the loan is proposed.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-24
5. Supplemental Loans, Continued
b. Required
Lien and
Maximum
Loan Term
It is the lender’s responsibility to obtain an effective lien of the required
dignity.
Possible methods to secure a supplemental loan are:
• through an open end provision of the instrument securing the existing
loan,
• through an amendment of the existing loan security instrument,
• by taking a new lien to cover both the existing and the supplemental
loans, or
• by taking a separate lien immediately junior to the existing lien.
The maximum loan term is:
• 30 years if amortized, or
• 5 years if not amortized.
c. Other
Requirements
The existing loan must be current with respect to taxes, insurance, and
amortized payments, and must not otherwise be in default unless a primary
purpose of the supplemental loan is to improve the ability of the borrower to
maintain the loan obligation.
The making of a supplemental loan can never result in any increase in the
rate of interest on the existing loan.
A supplemental loan to be written at a higher rate of interest than that
payable on the existing loan must be evidenced by a separate note from the
existing loan.
d. Prior
Approval or
Automatic
Loan Closing
A supplemental loan will require the prior approval of VA if:
• the loan will be made by a lender who is not the holder of the currently
guaranteed obligation,
• the loan is to be made by a lender that does not have authority to close
loans on an automatic basis, or
• an obligor liable on the currently outstanding obligation will be released
from personal liability by operation of law or otherwise.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-25
5. Supplemental Loans, Continued
e. Procedures
Submit a statement describing the alterations, improvements, or repairs
made or to be made with the prior approval application (or loan closing
package, if closed automatically). In addition, report the amount
outstanding on the existing loan as of the date of closing of the
supplemental loan in the loan closing package.
If the cost of the repairs, alterations, or improvements exceeds $3,500:
A NOV and compliance inspections are required.
If the cost of the repairs, alterations, or improvements does not exceed
$3,500:
An NOV and compliance inspections are not required. Instead, a statement
of reasonable value may be submitted. The statement must be completed
and signed by a VA-designated appraiser. A VA-designated appraiser is an
individual nominated by the lender (who may be an officer, trustee, or
employee of the lender or its agent) who has been approved by the local VA
office. The statement must specify:
• the work done or to be done,
• the purchase price or cost of the work and material, and
• that the purchase price or cost does not exceed the reasonable value.
In lieu of VA compliance inspections, the lender must submit a certification
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.”
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-26
5. Supplemental Loans, Continued
f. Guaranty and
Entitlement
If the supplemental loan will not be consolidated with a related outstanding
guaranteed loan:
• the veteran must have sufficient entitlement for the new loan, and
• VA will issue a new LGC solely for supplemental loans.
If the supplemental loan will be consolidated with a related outstanding
guaranteed loan, VA will issue a new modified guaranty certificate.
g. Procedure
If the veteran has no available entitlement, VA can still guarantee the
supplemental loan provided the lender is the holder of the veteran’s existing
loan and the loans are to be consolidated.
The amount of the modified guaranty will be the maximum guaranty
effective on the existing loan at the time the supplemental loan is closed.
To calculate the percentage of guaranty applicable to the combined
indebtedness take the result of Step 1, and divide by the result of Step 3.
Follow the steps in the table below to calculate the percentage of guaranty
applicable to the combined indebtedness.
Step Action
1 Take the balance of the existing loan at the time of closing of the
supplemental loan and multiply by the percentage of guaranty for
the existing loan, as shown on the guaranty certificate.
2 Calculate the amount of guaranty that would be issued on the
supplemental loan as an independent loan (do not exceed the
amount of entitlement available to the veteran).
3 Take the balance of the existing loan and add the amount of the
supplemental loan.
4 Take the result of Step 1 above and add the result of Step 2 above.
5 Divide by the result of Step 3 above.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-27
6. Adjustable Rate Mortgages (ARMs)
Change Date
November 8, 2012, Change 21
• This section has been updated to note that VA’s authority to guarantee
ARMs and Hybrid ARMs is now permanent.
a. Definition of
ARMs
The Honoring America’s Veterans and Caring for Camp Lejeune Families
Act of 2012 made permanent VA’s authority to guarantee ARMs and Hybrid
ARMs.
An ARM loan offers more flexible interest rates based on negotiated initial
fixed interest rates coupled with periodic adjustments to the interest rate over
time. Hybrid ARMs have longer initial fixed rates of 3, 5, 7, or 10 years,
while a “traditional” ARM allows for an annual adjustment after 1 year.
b. Interest Rate
Adjustments
Traditional ARMs:
Interest rate adjustments occur on an annual basis. The annual interest rate
adjustments are limited to a maximum increase or decrease of one percentage
point. Additionally, interest rate increases are limited to a maximum of five
percentage points over the life of the loan.
Hybrid ARMs:
If the initial contract interest rate remains fixed for less than 5 years, the
initial adjustment is limited to a maximum increase or decrease of one
percentage point and the interest rate increase over the life of the loan is
limited to five percentage points.
If the initial contract interest rate remains fixed for 5 years or more, the initial
adjustment will be limited to a maximum increase or decrease of two
percentage points and the interest rate increase over the life of the loan will be
limited to six percentage points.
Note: After the initial interest rate adjustment, annual adjustments may be up
to two percentage points.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-28
6. Adjustable Rate Mortgages (ARMs), Continued
c. Underwriting
an ARM
ARM loans that may adjust after 1 year MUST be underwritten at one
percentage point above the initial rate.
Hybrid ARMs with a fixed period of 3 or more years may be underwritten at
the initial interest rate.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-29
7. Graduated Payment Mortgages (GPMs)
Change Date
November 8, 2012, Change 21
• This section has been updated to make minor grammatical edits.
a. Description
A GPM is a mortgage with the following amortization features:
• lower initial monthly payments than payments on a comparable mortgage
under the standard amortization plan,
• periodic (normally annual) increases in the monthly payment by a fixed
percentage for a stated “graduation period,” and
• monthly payments that level off after the graduation period and remain
the same for the duration of the loan.
Note: The payments after the leveling off period are higher than payments
on a comparable mortgage under the standard amortization plan.
The method used to achieve this involves deferring a portion of the interest
due on the loan each month during the graduation period and adding that
interest to the principal balance. This decreases the monthly payments
during the graduation period, and increases the outstanding principal
balance during the graduation period, creating “negative amortization.”
b. Acceptable
Use of GPMs
GPMs should be used as an alternative for qualified veterans whose income:
•
is expected to increase at a rate which can accommodate the increase in
monthly payments, or
• is currently sufficient to accommodate the higher GPM payments after the
leveling off period.
GPMs should not be used as a tool to qualify veterans who cannot qualify
for loans under the standard amortization plan unless their income can
reasonably be expected to increase at a rate which can accommodate the
increase in monthly payments.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-30
7. Graduated Payment Mortgages (GPMs), Continued
b. Acceptable
Use of GPMs
(continued)
A GPM may be used only to acquire a single-family dwelling unit (but not
a manufactured home) and can include funds for energy efficiency
improvements.
A GPM may not be used for a refinancing loan, alteration, repair, or
improvement only purposes, or to acquire a multiple unit dwelling.
c. Maximum
Loan Amount
and
Downpayment
Required
Existing properties:
The principal amount of the loan may never exceed the initial reasonable
value of the property (the value indicated on the NOV used for loan
closing).
•
Since the principal balance increases during the initial years of the loan, a
loan made for the full amount of reasonable value would violate this
provision.
• Therefore, a downpayment is required to keep the principal balance from
ever exceeding the initial reasonable value of the property.
To calculate the maximum initial loan amount and the required
downpayment, use the Department of Housing and Urban Development’s
(HUD) tables for Plan III Section 245 GPMs showing outstanding principal
balance factors and monthly installment amounts per $1,000 of original loan
proceeds. The factors vary according to the interest rate on the loan.
Note: These tables are available on diskette through HUD offices.
Determine the maximum initial loan amount as follows:
Initial reasonable value of the property
÷
Highest outstanding principal balance factor per $1,000 of original loan
proceeds for the particular interest rate (from the HUD tables)
x
1,000
The difference between this maximum initial loan amount and the initial
reasonable value of the property is the amount of downpayment required.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-31
7. Graduated Payment Mortgages (GPMs), Continued
c. Maximum
Loan Amount
and
Downpayment
Required
(continued)
New construction or existing homes not previously occupied:
The initial loan amount may not exceed the lesser of the purchase price or
97.50 percent of the initial reasonable value of the property. A
downpayment will be required to cover the difference between the
reasonable value and the initial loan amount.
The principal amount of the loan thereafter (including the amount of all
interest deferred and added to principal, but not including any amount
attributable to the funding fee or energy efficiency improvements) may not
be scheduled to exceed the projected value of the property at any time.
Calculate the projected value of the property by increasing the reasonable
value of the property from the time the loan is made at a rate not in excess
of 2.5 percent per year, but never to exceed 115 percent of the initial
reasonable value.
Downpayment:
• The amount required depends upon whether the dwelling is new or
existing. (See above.)
• The veteran may choose to pay a higher downpayment to offset the
negative amortization.
• The downpayment must be paid in cash from the veteran’s own resources.
Impact of interest rate increase on loans in process:
Any increase in the interest rate requires recalculation of the maximum loan
amount, downpayment, and payment schedule.
Funding fee and energy efficiency improvements:
The initial loan amount may be increased by the amount of the VA funding
fee, if financed in the loan, and the cost of any energy efficiency
improvements.
d. Amortization
Loan payments increase each year at a rate of 7.5 percent per year for the
first 5 years. At the beginning of the sixth year, the payments become level
for the remaining term. This amortization plan is similar (except for the
“minimum cash investment” requirement) to HUD’s GPM Plan III under
Section 245 of the National Housing Act.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-32
7. Graduated Payment Mortgages (GPMs), Continued
e. How to
Calculate
Monthly
Installments
Perform the necessary calculations using HUD tables for Plan III Section
245 GPMs showing outstanding principal balance factors and monthly
installment amounts per $1,000 of original loan proceeds. The factors vary
according to the interest rate on the loan.
Determine the monthly installment amounts as follows:
Number of thousands of dollars in the original loan amount (including the
VA funding fee, if financed, and the cost of any energy efficiency
improvements)
x
Monthly installment factor per $1,000 of original loan proceeds for the
particular interest rate from the HUD tables (Different factors are
provided for each of years 1 through 5, and year 6 and beyond.)
f. Annual
Percentage
Rate (APR)
Calculation
HUD’s GPM APR tables may not be used for VA purposes because they
include an adjustment for the HUD mortgage insurance premium.
g. Underwriting
Considerations
If there are strong indications that the applicant’s income can reasonably be
expected to keep pace with the increases in the monthly mortgage payment
then:
• analyze the adequacy of the applicant’s income, and
• complete VA Form 26-6393, Loan Analysis, using only the first year’s
mortgage payment in monthly shelter expenses.
However, if such strong indications are absent then:
• analyze the adequacy of the applicant’s income, and
• complete VA Form 26-6393 using the payment which would apply if the
loan was under the standard amortization plan.
The lower initial payments of the GPM can be considered a compensating
factor, if appropriate.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-33
7. Graduated Payment Mortgages (GPMs), Continued
h. Veteran’s
Statement
The following statement must be signed by the veteran and submitted with
each prior approval application or automatic loan report involving a VA
GPM:
“I fully understand that because of the graduated-payment loan obligation I
am undertaking, my mortgage payment excluding taxes and insurance will
start at $________ and will increase by 7.5 percent each year for 5 years to
a maximum payment of $_________ , and the mortgage balance will
increase to no more than $_________ at the end of the _____ year. The
maximum total amount by which the deferred interest will increase the
principal is $________. Monthly installments will be due according to the
following schedule:
• $__________ during the first year of the loan
• $__________ during the second year of the loan
• $__________ during the third year of the loan
• $__________ during the fourth year of the loan
• $__________ during the fifth year of the loan
• $__________ during the sixth year of the loan and every year thereafter.”
If the interest rate increases after the veteran has signed the initial statement,
an amended statement must be prepared and signed by the veteran before
loan closing, and included with the loan closing package.
i. Other
Requirements
The property securing the loan must have a remaining economic life of at
least 30 years, as shown on the NOV.
While a GPM cannot be used to refinance another loan, a GPM can be
refinanced by a fixed rate VA-guaranteed refinancing loan.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-34
8. Growing Equity Mortgages (GEMs)
Change Date
April 1, 2010, Change 12
• This section has been updated to make minor grammatical edits.
a. Description
A GEM has gradually increasing monthly payments, with all of the increase
applied to the principal balance. Compared to the standard amortization
plan, GEMs have a faster accumulation of equity and earlier loan payoff.
GEM amortization plans are generally acceptable for VA loan purposes.
b. Amortization
Examples
The initial payment on a GEM is typically based on what the payment
would be for a 30-year mortgage under the standard amortization plan.
Payment increases can be fixed or tied to an index.
Example 1: Monthly payments are increased by three percent each year for
the first 10 years. The payments level off in the eleventh year and remain
constant through loan payoff. Loan payoff may occur within a few years of
the leveling off of the payment, depending upon interest rate.
Example 2: The increases in the monthly payments are based on a
percentage of a Department of Commerce index that measures per capita,
after-tax disposable personal income in the United States.
c. Underwriting
The lender must determine that the applicant’s income can reasonably be
expected to keep pace with the increases in the monthly mortgage payment.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-35
9. Loans Involving Temporary Interest Rate Buydowns
Change Date
April 1, 2010, Change 12
• This section has been updated to correct hyperlinks and to make minor
grammatical edits.
a. Description
As a marketing tool, builders, sellers, or lenders will sometimes establish
and fund escrows to temporarily reduce a borrower’s loan payments during
the initial years of the mortgage. The borrower may also fund such an
escrow for herself/himself as a financial management tool.
VA will guaranty loans involving temporary interest rate buydowns, if
otherwise eligible.
A temporary interest rate buydown can be used in conjunction with any
type of VA-guaranteed loan except a GPM.
b. Escrow
Requirements
Funds must be safely escrowed with an independent third-party escrow
agent beyond the reach of prospective creditors of the builder, seller, lender,
and the borrower.
Exception: If the Federal National Mortgage Association is the holder, it
may take custody of the funds.
The escrow agent must make payments directly to the lender or servicer.
The funds may be used only for payments due on the note. The funds may
not be used to pay past due monthly loan payments. If the loan is
foreclosed or prepaid, the funds must be credited against the veteran’s
indebtedness.
Escrowed funds may not revert to the party that established the escrow. If
the property is sold subject to, or on an assumption of the loan, the escrow
must continue to pay out on behalf of the new owner.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-36
9. Loans Involving Temporary Interest Rate Buydowns,
Continued
c. If Borrower’s
Income is
Expected to
Keep Pace with
Payment
Increases
The loan application may be underwritten based on the first year’s payment
amount if there are strong indications that the income used to support the
application will increase to cover the yearly increases in loan payments.
• Routine cost of living increases cannot be used for this purpose.
• Increases resulting from confirmed future promotions or wage percentage
increases guaranteed by labor contracts (for example, teachers, auto
workers) may be given favorable consideration.
The assistance payments must run for a minimum of 1 year. Scheduled
reductions in the assistance payments must occur annually on the
anniversary of the first mortgage payment.
The reduction in the assistance payments may be accomplished through
annual payment increases in equal or approximately equal amounts, or
equal annual increases in the interest rate.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-37
9. Loans Involving Temporary Interest Rate Buydowns,
Continued
d. If it is
Unclear
Whether
Borrower’s
Income Can
Keep Pace with
Increases
The loan application must be underwritten based on the full payment
amount if there are no strong indications that the income used to support the
application can reasonably be expected to keep pace with the increases in
loan payments.
The buydown arrangement can be considered a compensating factor.
If the residual income and/or debt-to-income ratio is marginal, the buydown
plan (used to offset a short-term debts), along with other compensating
factors, may support approval of the loan. See “Compensating Factors” in
section 10 of chapter 4.
Provide a statement signed by the underwriter giving reasons for approval.
The terms of the buydown arrangement are not limited to specific criteria
such as a minimum or maximum number of years for application of the
assistance payments.
It is the lender’s responsibility to review and determine the acceptability of
the buydown.
e. Other
Requirements
Lenders must provide the veteran-borrower with a clear, written explanation
of the buydown agreement.
A copy of the buydown and escrow agreements must accompany the loan
submission.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-38
10. Farm Residence Loans
Change Date
May 21, 2012, Change 20
• This section has been updated to make minor grammatical edits.
a. Eligibility
A loan for the purchase, construction, repair, alteration, or improvement of
a farm residence which is occupied or will be occupied by the veteran as a
home is eligible for guaranty.
The loan cannot cover:
• the nonresidential value of farm land in excess of the homesite,
• the barn, silo, or other outbuildings necessary to the operation of the farm,
or
• farm equipment or livestock.
A portion of the proceeds of a loan to construct a farm residence on
encumbered land owned by the veteran may be used to pay off the lien or
liens on the land only if the reasonable value of the land is at least equal to
the amount of the lien(s).
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-39
10. Farm Residence Loans, Continued
b.
Underwriting
If some or all of the income necessary to support the loan payments comes
from farming operations, the veteran’s ability and experience as a farm
operator must be established. The procedures and analysis provided under
“Self-Employment Income” in section 2 of chapter 4 apply generally. In
addition, apply the following:
New farmer or new farm operation:
Obtain the following:
• The veteran’s proposed plan of operation of the farm, showing the
number of acres for each crop, amount of livestock, etc., upon which an
estimate of income and expenses may be made.
• The veteran’s statement that he or she owns or proposes purchasing the
farm equipment required to operate the farm. If additional indebtedness is
to be incurred in the purchase of this equipment, the statement should
contain full details as to repayment terms, etc.
• An estimate of farm income and expenses by a local farm appraiser
designated by VA or another qualified person, or the estimate used by a
lender that has agreed to carry an operating line of credit for the veteran.
The estimate should be based on the veteran’s proposed plan of operation,
his or her ability and experience, and the nature and condition of the farm
to be sold, including livestock and livestock products. The expense
estimate must detail labor, seed, fertilizer, taxes and insurance, repairs,
machinery, fuel, etc.
• A copy of a commitment from a lender for an operating line of credit or
evidence of the resources to be used to cover operating expenses.
Experienced farmer continuing same farm operation:
If the veteran finances operations out of an operating line of credit, obtain
records of advances from, payments to, and carryover balances on the
operating line of credit for the last 3 years (or additional periods if needed
to demonstrate stability of veteran’s operation). Analyze the reasons for
any build-up of operating debt.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-40
11. Loans for Manufactured Homes Classified as Real
Estate
Change Date
May 21, 2012, Change 20
• This section has been updated to make minor grammatical edits.
a. How to Begin
This section only addresses manufactured homes which are, or will be,
permanently affixed to a lot and considered real estate under state law.
Lenders considering making a loan involving a manufactured home that is
not permanently affixed should contact the local VA office for processing
instructions.
b. Allowable
Loan Purposes
and Calculation
of Maximum
Loan Amount
Permanently affixed manufactured home loans can be made for any of the
allowable loan purposes listed in the table below. Loan specifications and
treatment of these loans are virtually the same as for any other VA-
guaranteed home loans from a loan processing standpoint, except for
calculation of the maximum loan amount.
The following table provides the methods for calculating maximum loan
amount.
Allowable Loan
Purpose
Maximum Loan
The loan amount is limited to:
To purchase a
manufactured home
to be affixed to a lot
already owned by the
veteran.
The lesser of:
• the sum of the purchase price plus the cost of all
other real property improvements, or
• the total reasonable value of the unit, lot, and real
property improvements, plus
• the VA funding fee.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-41
11. Loans for Manufactured Homes Classified as Real
Estate,
Continued
b. Allowable Loan Purposes and Calculation of Maximum Loan Amount (continued)
Allowable Loan
Purpose
Maximum Loan
The loan amount is limited to:
To purchase a
manufactured home
and a lot to which it
will be affixed.
The lesser of:
• the total purchase price of the manufactured home
unit and the lot plus the cost of all other real
property improvements, or
• the purchase price of the manufactured home unit
plus the cost of all other real property
improvements plus the balance owed by the
veteran on a deferred purchase money mortgage
or contract given for the purchase of the lot, or
• the total reasonable value of the unit, lot, and
property improvements, plus
• the VA funding fee.
To refinance an
existing loan on a
manufactured home
and purchase the lot
to which the home
will be affixed.
The lesser of:
• the sum of the balance of the loan being
refinanced plus the purchase price of the lot, not
to exceed its reasonable value plus the costs of the
necessary site preparation as determined by VA
plus a reasonable discount on that portion of the
loan used to refinance the existing loan on the
manufactured home plus authorized closing costs,
or
• the total reasonable value of the unit, lot, and real
property improvements, plus
• the VA funding fee.
Continued on next page
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-42
11. Loans for Manufactured Homes Classified as Real
Estate,
Continued
b. Allowable Loan Purposes and Calculation of Maximum Loan Amount (continued)
Allowable Loan
Purpose
Maximum Loan
The loan amount is limited to:
An IRRRL to
refinance an existing
VA loan on a
permanently affixed
manufactured home
and lot.
The sum of:
• the balance of the VA loan being refinanced, plus
• allowable closing costs, plus
• up to two discount points, plus
• the VA funding fee.
Note: This is the only type of permanently affixed
manufactured home loan that does not require full
underwriting and an appraisal. The provisions
applicable to IRRRLs apply (See chapter 6) except
the term of the loan may be as long as 30 years and
32 days.
VA Pamphlet 26-7, Revised
Chapter 7-Loans Requiring Special Underwriting,
Guaranty and Other Considerations
7-43
12. Loans to Native American Veterans on Trust Lands
Change Date
April 1, 2010, Change 12
• This section has been changed to make minor grammatical edits.
a. General
VA can guarantee loans to Native American veterans on trust land. Lenders
have shown little interest in making these loans because of difficulties
obtaining titles to properties on trust land in the event of foreclosure.
VA does have a Native American Direct Loan Program. Lenders should
advise interested Native American veterans to contact the nearest VA office
for information.
