Microsoft Word - Chapter Lender's Hanbook Chapter 3

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-1

Chapter 3. The VA Loan and Guaranty

Overview

In this Chapter

This chapter contains the following topics.

Topic Topic Name See

Page

1 Basic Elements of a VA-Guaranteed Loan 3-2

2 Eligible Loan Purposes 3-5

3 Maximum Loan 3-7

4 Maximum Guaranty on VA Loans 3-10

5 Occupancy 3-12

6 Interest Rates 3-16

7 Discount Points 3-17

8 Maturity 3-19

9 Amortization 3-20

10 Eligible Geographic Locations for the Secured Property 3-22

11 What Does a VA Guaranty Mean to the Lender? 3-23

12 Post-Guaranty Issues 3-26

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-2

1. Basic Elements of a VA-Guaranteed Loan

Change Date

November 8, 2012, Change 21

• This section has been updated to remove a hyperlink and make minor

grammatical edits.

a. General rules

The following table provides general rules and information critical to

understanding a VA loan guaranty. Exceptions and detailed explanations

have been omitted. Instead, a reference to the section in this handbook that

addresses each subject is provided.

Subject Explanation Section

Maximum Loan

Amount

VA has no specified dollar amount(s) for the “maximum

loan.” The maximum loan amount depends upon:

• the reasonable value of the property indicated on the Notice

of Value (NOV), and

• the lenders needs in terms of secondary market

requirements.

3 of this

chapter

Downpayment No downpayment is required by VA unless the purchase price

exceeds the reasonable value of the property, or the loan is a

Graduated Payment Mortgage (GPM). The lender may

require a downpayment if necessary to meet secondary market

requirements.

3 of this

chapter

Amount of

Guaranty

Guaranty is the amount VA may pay a lender in the event of

loss due to foreclosure.

4 of this

chapter

Occupancy The veteran must certify that he or she intends to personally

occupy the property as his or her home.

5 of this

chapter

Continued on next page

VA Pamphlet 26-7, Revised

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1. Basic Elements of a VA-Guaranteed Loan, Continued

a. General rules (continued)

Subject Explanation Section

Interest Rate

and Points

Interest rate and points are negotiated between the lender and

veteran.

• The veteran and seller may negotiate for the seller to pay all or

some of the points.

• Points must be reasonable.

• Points may not be financed in the loan except with Interest Rate

Reduction Refinancing Loans (IRRRLs).

6 and 7

of this

chapter

Purpose of

Guaranty

To encourage lenders to make VA loans by protecting

lenders/loan holders against loss, up to the amount of guaranty, in

the event of foreclosure.

11 of

this

chapter

Underwriting Flexible standards. The veteran must have:

• satisfactory credit, and

• satisfactory repayment ability

− stable income

− residual income (net effective income minus monthly shelter

expense) in accordance with regional tables, and

− acceptable ratio of total monthly debt payments to gross

monthly income (A ratio in excess of 41% requires closer

scrutiny and compensating factors.).

chapter

IRRRLs

(Streamline

Refinancing

Loans)

Used to refinance an existing VA loan at a lower interest rate.

• No appraisal or underwriting is required.

• Closing costs may be financed in the loan.

• Any reasonable discount points can be charged, but only two

discount points can be financed in the loan.

• No cash to the borrower.

Note: A fixed rate loan to refinance a VA Adjustable Rate

Mortgage (ARM) may be at a higher interest rate.

1 and 2

chapter

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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1. Basic Elements of a VA-Guaranteed Loan, Continued

a. General rules (continued)

Subject Explanation Section

Funding Fee The veteran must pay a funding fee to help defray costs of the VA

Home Loan program.

• Find the percentage appropriate to the veteran’s particular

circumstances on the funding fee table.

• Apply this percentage to the loan amount to arrive at the

funding fee.

• The funding fee may always be financed in the loan.

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Chapter

Closing costs Those payable by the veteran are limited by regulation to a

specific list of items plus a one percent flat charge by the lender.

• Any other party, including the seller, can pay any costs on

behalf of the veteran.

• Closing costs cannot be financed in the loan except on certain

refinancing loans. (See chapter 8.)

2, 4,

and 7

chapter

Security

Instruments

The lender may use any note or mortgage forms they wish as long

as they contain certain VA-required clauses.

1 of

chapter

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-5

2. Eligible Loan Purposes

Change Date

November 8, 2012, Change 21

• This section has been updated to make minor grammatical edits.

• Subsection a has been updated to remove information on cooperative units.

a. List of

Eligible Loan

Purposes

The law authorizes VA to guarantee loans made to eligible veterans only for

the following purposes:

• To purchase or construct a residence, including a condominium unit to be

owned and occupied by the veteran as a home:

− the loan may include simultaneous purchase of the land on which the

residence is situated or will be situated,

− loans may also be guaranteed for the construction of a residence on land

already owned by the veteran (a portion of the loan may be used to

refinance a purchase money mortgage or sales contract for the purchase of

the land, subject to reasonable value requirements), and

− the residential property may not consist of more than four family units

and one business unit except in the case of certain joint loans. (See

section 1 of chapter 7 for this exception.)

• To refinance an existing VA-guaranteed or direct loan for the purpose of a

lower interest rate.

• To refinance an existing mortgage loan or other indebtedness secured by a

lien of record on a residence owned and occupied by the veteran as a home.

• To repair, alter, or improve a residence owned by the veteran and occupied

as a home.

• To simultaneously purchase and improve a home.

• To improve a residence owned and occupied by the veteran as the veteran’s

home through the installation of a solar heating system, a solar heating and

cooling system, or a combined solar heating and cooling system, or through

the application of a residential energy conservation measure. These energy

efficiency improvement loans can be made in conjunction with any type of

VA purchase or refinancing loan.

• To purchase a one-family residential unit in a condominium housing

development approved by VA.

• To purchase a farm residence to be owned and occupied by the veteran as a

home. If the loan includes the purchase of farmland, the farmland is

appraised at its residential value only. (See section 12 of chapter 11).

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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2. Eligible Loan Purposes, Continued

b. Ineligible

Loan Purposes

VA cannot guarantee loans made for ineligible loan purposes. Examples of

ineligible loan purposes include:

• Purchase of unimproved land with the intent to improve it at some future

date (that is, the land purchase is not in conjunction with a construction

loan).

• Purchase or construction of a dwelling for investment purposes.

• Purchase or construction of a combined residential and business property,

unless,

− the property is primarily for residential purposes,

− there is not more than one business unit, and

− the nonresidential area does not exceed 25 percent of the total floor area.

• Purchase of more than one separate residential unit or lot unless the veteran

will occupy one unit and there is evidence that:

− the residential units are unavailable separately,

− the residential units have a common owner,

− the residential units have been treated as one unit in the past, and

− the residential units are assessed as one unit, or

− partition is not practical, as when one unit serves the other(s) in some

respect; for example, common approaches or driveways.

c. Cash to

Veteran

Generally Not

an Eligible

Loan Purpose

Cash to the veteran from loan proceeds is permissible only for certain types of

refinancing loans and under very limited circumstances, as follows:

• For IRRRLs, see section 1 of chapter 6.

• For cash-out refinancing loans, see section 3 of chapter 6.

For other types of refinancing loans and all purchase/acquisition loans, the

veteran generally cannot receive cash from loan proceeds. The only

exception is the refund of items for which the veteran paid cash, which were

subsequently included in the loan amount.

Example: Earnest money can be refunded to the veteran on a no-

downpayment loan.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-7

3. Maximum Loan

Change Date

November 8, 2012, Change 21

• This section has been updated to correct a hyperlink.

• This section has been updated to make minor grammatical edits.

a. Does VA

have Maximum

Loan Amounts?

Unlike other home loan programs, there are no maximum dollar amounts

prescribed for VA-guaranteed loans.

Limitations on VA loan size are primarily attributable to two factors:

1. Lenders who sell their VA loans in the secondary market must limit the

size of those loans to the maximums prescribed by Government National

Mortgage Association (GNMA) or whatever conduit they use to sell the

loans.

2. VA limits the amount of the loan to the reasonable value of the property

shown on the NOV plus the cost of energy efficiency improvements up to

$6,000 plus the VA funding fee, with the following exceptions.

Exception Maximum Loan

IRRRLs • Existing VA loan balance, plus

• The cost of any energy efficiency

improvements up to $6,000, plus

• Allowable fees and charges, plus

• Up to two discount points, plus

• VA funding fee.

(Lenders must use VA Form 26-8923, IRRRL

Worksheet, for the actual calculation.)

Continued on next page

VA Pamphlet 26-7, Revised

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3. Maximum Loan, Continued

a. Does VA have Maximum Loan Amounts? (continued)

Exception Maximum Loan

Regular refinancing

loan (cash-out)

• 100 percent of the VA reasonable value, plus

• the cost of any energy efficiency improvements

up to $6,000, plus

• VA funding fee.

Loans to refinance are:

• a construction loan,

• an installment land

sales contract, or

• a loan assumed by

the veteran at an

interest rate higher

than that for the

proposed refinancing

loan.

The lesser of:

• the VA reasonable value, or

• the sum of the outstanding balance of the loan

plus allowable closing costs and discounts, plus

• For construction loans, “balance of the loan”

includes the balances of construction financing

and lot liens, if any.

• the cost of any energy efficiency improvements

up to $6,000, plus

• VA funding fee.

Graduated Payment

Mortgage (GPM) loan

on existing property

• The VA reasonable value, minus

• the highest amount of negative amortization,

plus

• the cost of any energy efficiency improvements

up to $6,000, plus

• VA funding fee.

Reference: See section 7 of chapter 7.

GPM loan on new home 97.5 percent lesser of:

• the VA reasonable value or

• the purchase price, plus

• the cost of any energy efficiency improvements

up to $6,000, plus

• VA funding fee.

Reference: See section 7 of chapter 7.

Continued on next page

VA Pamphlet 26-7, Revised

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3. Maximum Loan, Continued

Downpayment

Because VA loans can be for the full reasonable value of the property, no

downpayment is required by VA except in the following circumstances:

• If the purchase price exceeds the reasonable value of the property, a

downpayment in the amount of the difference must be made in cash from

the borrower’s own resources, and

• VA requires a downpayment on all GPMs.

If a veteran has less than full entitlement available, a lender may require a

downpayment in order to make the veteran a loan that meets GNMA or other

secondary market requirements. The “rule of thumb” for GNMA is that the

VA guaranty, or a combination of VA guaranty plus downpayment and/or

equity, must cover at least 25 percent of the loan.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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4. Maximum Guaranty on VA Loans

Change Date

November 8, 2012, Change 21

• This section has been updated to note that Public Law 112-154 extended the

temporary guaranty increase from December 31, 2011 to December 31,

2014.

• This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. Maximum

Guaranty Table

Public Law 112-154, the Honoring America's Veterans and Caring for Camp

Lejeune Families Act of 2012, signed August 6, 2012, extended the

temporary increase in the maximum guaranty. The increase expired

December 31, 2011, but Public Law 112-154, extended it through December

31, 2014. The maximum guaranty varies depending on the location of the

property. While VA does not have a maximum loan amount, there are

effective “loan limits” for high-cost counties. The limits are derived by

considering both the median home price for a county and the Freddie Mac

conforming loan limit. To aid lenders in determining the maximum guaranty

in high-cost counties, VA has created a Loan Limit chart, with instructions.

This will be updated yearly.

• In general, maximum guaranty, assuming the veteran has full entitlement, is

as shown in the table below.

Loan Amount Maximum Potential

Guaranty

Special Provisions

Up to $45,000 50 percent of the loan

amount.

Minimum guaranty

of 25 percent on

IRRRLs.

$45,001 to $56,250 $22,500 Minimum guaranty

of 25 percent on

IRRRLs.

$56,251 to $144,000 40 percent of the loan

amount, with a

maximum of $36,000.

Minimum guaranty

of 25 percent on

IRRRLs.

$144,001 to $417,000 25 percent of the loan

amount

Minimum guaranty

of 25 percent on

IRRRLs.

Greater than $417,000 The lesser of:

• 25 percent of the VA

county loan limit, or

• 25 percent of the loan

amount

Minimum guaranty

of 25 percent on

IRRRLs

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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4. Maximum Guaranty on VA Loans, Continued

a. Maximum

Guaranty Table

(continued)

Note: The percentage and amount of guaranty is based on the loan amount

including the funding fee portion when the fee is paid from loan proceeds.

For the maximum guaranty on loans for manufactured homes that are not

permanently affixed (i.e., not considered real estate) see 38 U.S.C. 3712

and/or contact VA.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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5. Occupancy

Change Date

November 8, 2012, Change 21

• Subsection c has been updated to note that Public Law 112-154, the

Honoring America's Veterans and Caring for Camp Lejeune Families Act of

2012, signed August 6, 2012, expands occupancy to include dependent

children.

• This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. The Law on

Occupancy

The law requires a veteran obtaining a VA-guaranteed loan to certify that he

or she intends to personally occupy the property as his or her home. As of the

date of certification, the veteran must either

• personally live in the property as his or her home, or

• intend, upon completion of the loan and acquisition of the dwelling, to

personally move into the property and use it as his or her home within a

reasonable time.

The above requirement applies to all types of VA-guaranteed loans except

IRRRLs. For IRRRLs, the veteran need only certify that he or she previously

occupied the property as his or her home.

Example: A veteran living in a home purchased with a VA loan is transferred

to a duty station overseas. The veteran rents out the home. He/she may

refinance the VA loan with an IRRRL based on previous occupancy of the

home.

b. What is a

“Reasonable

Time?”

Occupancy within a “reasonable time" means within 60 days after the loan

closing. More than 60 days may be considered reasonable if both of the

following conditions are met:

• the veteran certifies that he or she will personally occupy the property as his

or her home at a specific date after loan closing, and

• there is a particular future event that will make it possible for the veteran to

personally occupy the property as his or her home on a specific future date.

Occupancy at a date beyond 12 months after loan closing generally cannot be

considered reasonable by VA.

Continued on next page

VA Pamphlet 26-7, Revised

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5. Occupancy, Continued

c. Occupancy

by Veteran’s

Spouse or

Dependent

Child

Occupancy (or intent to occupy) by the spouse or dependent child satisfies the

occupancy requirement for a veteran who is on active duty and cannot

personally occupy the dwelling within a reasonable time. In the case of a

dependent child, the veteran’s attorney-in-fact or legal guardian of the

dependent child must make the certification and sign VA Form 26-1820,

Report and Certification of Loan Disbursement.

Occupancy by the spouse may also satisfy the requirement if the veteran

cannot personally occupy the dwelling within a reasonable time due to distant

employment other than military service. In these specific cases, consult your

Regional Loan Center (RLC) to determine if this type of occupancy meets

VA requirements.

Note: The cost of maintaining separate living arrangements should be

considered in underwriting the loan.

For an IRRRL, a certification that the spouse or dependent child (or children)

previously occupied the dwelling as a home will satisfy the requirement.

d. Occupancy

Requirements

for Deployed

Active Duty

Servicemembers

Single or married servicemembers, while deployed from their permanent

duty station, are considered to be in a temporary duty status and able to

meet the occupancy requirement. This is true without regard to whether or

not a spouse will be available to occupy the property prior to the veteran’s

return from deployment.

e. Occupancy

After

Retirement

If the veteran states that he or she will retire within 12 months and wants a

loan to purchase a home in the retirement location:

• Verify the veteran’s eligibility for retirement on the specified date.

- Include a copy of the veteran’s application for retirement submitted to his

or her employer.

• Carefully consider the applicant’s income after retirement.

- If retirement income alone is insufficient, obtain firm commitments from

an employer that meet the usual stability of income requirements.

Note: Only retirement on a specific date within 12 months qualifies.

Retirement “within the next few years” or “in the near future” is not

sufficient.

Continued on next page

VA Pamphlet 26-7, Revised

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5. Occupancy, Continued

f. Delayed

Occupancy Due

to Property

Repairs or

Improvements

Home improvements or refinancing loans for extensive changes to the

property which will prevent the veteran from occupying the property while

the work is being completed, constitute exceptions to the “reasonable time”

requirement.

The veteran must certify that he or she intends to occupy or reoccupy the

property as a home upon completion of the substantial improvements or

repairs.

g. Intermittent

Occupancy

The veteran need not maintain a physical presence at the property on a daily

basis. However, occupancy “as the veteran’s home” implies that the home is

located within reasonable proximity of the veteran’s place of employment. If

the veteran’s employment requires the veteran’s absence from home a

substantial amount of time, the following two conditions must be met:

• the veteran must have a history of continuous residence in the community,

and

• there must be no indication that the veteran has established, intends to

establish, or may be required to establish, a principal residence elsewhere.

Use of the property as a seasonal vacation home does not satisfy the

occupancy requirement.

h. Unusual

Circumstances

Discuss unusual circumstances of occupancy with the appropriate VA office

or submit a description of the circumstances to the VA office for prior

approval.

Continued on next page

VA Pamphlet 26-7, Revised

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5. Occupancy, Continued

i. The

Certification

The veteran certifies that the occupancy requirement is met by checking the

appropriate occupancy block and signing:

• VA Form 26-1802a, HUD/VA Addendum to the Uniform Residential Loan

Application, at the time of loan application (prior approval loans only), and

• VA Form 26-1820, Report and Certification of Loan Disbursement, at the

time of loan closing (all loans).

This satisfies the lender’s obligation to obtain the veteran’s occupancy

certification.

The lender may accept the occupancy certification at face value unless there

is specific information indicating the veteran will not occupy the property as a

home or does not intend to occupy within a reasonable time after loan closing.

Where doubt exists, the test is whether a reasonable basis exists for

concluding that the veteran can and will occupy the property as certified.

Contact the appropriate VA office if the lender cannot resolve issues

involving the veteran’s intent by applying this test.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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6. Interest Rates

Change Date

November 8, 2012, Change 21

• This section has been updated to make minor grammatical edits.

a. Requirement

VA no longer prescribes interest rates for VA-guaranteed loans. The interest

rate is negotiated between the veteran-borrower and the lender to allow the

veteran to obtain the best available rate.

b. Changes to

the Agreed

Upon Interest

Rate

The lender and borrower are expected to honor any lock-in or other

agreements they have entered into which impact the interest rate on the loan.

VA does not object to changes in the agreed upon rate, as long as no

lender/borrower agreements are violated. The following procedure applies in

such cases.

Any increase in the interest rate of more than one percent requires:

• re-underwriting to ascertain the veteran’s continued ability to qualify for the

loan,

• documentation of the change, and

• a new or corrected Uniform Residential Loan Application, (URLA) with

any corrections initialed and dated by the borrower.

Reference: For prior approval loans, see section 4 of chapter 5.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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7. Discount Points

Change Date

November 8, 2012, Change 21

• This section has been updated to make minor grammatical edits.

a. Requirement

Veterans may pay reasonable discount points on VA-guaranteed loans. The

amount of discount points is whatever the borrower and lender agree upon.

Discount points can be based on the principal amount of the loan after adding

the VA funding fee, if the funding fee will be paid from loan proceeds.

b. When Can

Points be

Included in the

Loan?

Discount points may be rolled into the loan only in the case of refinancing

loans, subject to the following limitations:

Interest Rate Reduction Refinancing Loans

A maximum of two discount points can be rolled into the loan.

If the borrower pays more than two points, the remainder must be paid in

cash.

Refinancing of Construction Loans, etc.

Loans to refinance are:

• a construction loan,

• an installment land sales contract, or

• a loan assumed by the veteran at an interest rate higher than that for the

proposed refinancing loan

Any reasonable amount of discount points may be rolled into the loan as long

as the sum of the outstanding balance of the loan plus allowable closing costs

and discount points does not exceed the VA reasonable value.

Reference: See the maximum loan limitations in section 3 of this chapter.

Cash-out Refinancing Loans

While discount points cannot specifically be included in the loan amount, the

borrower can receive cash from loan proceeds, subject to maximum loan

limits (See section 3 of this chapter). The cash received by the borrower can

be used for any purpose acceptable to the lender, including payment of

reasonable discount points.

Continued on next page

VA Pamphlet 26-7, Revised

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7. Discount Points, Continued

c. Changes to

the Agreed

Upon Discount

Points

The lender and borrower are expected to honor any agreements they have

entered into which impact the discount points paid on the loan. VA does not

object to changes in the agreed upon points, as long as no lender/borrower

agreements are violated. The following procedures apply in such cases.

Any increase in discount points requires:

• verification that the borrower has sufficient assets to cover the increase,

• documentation of the change, and

• a new or corrected URLA with any corrections initialed and dated by the

borrower.

Reference: For prior approval loans, see section 4 of chapter 5.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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8. Maturity

Change Date

April 10, 2009, Change 9

• This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. Maximum

Maturity

• Amortized loans: 30 years and 32 days,

• Nonamortized loans: 5 years.

In addition, every loan must be repayable within the estimated economic life

of the property securing the loan.

The period for repayment of a loan is measured from the date of the note or

other evidence of indebtedness.

b. Maturity

Extending

Beyond the

Maximum

VA regulations provide that any amounts, which fall due beyond the

maximum maturity automatically, fall due on the maximum maturity date.

Thus, if a lender inadvertently makes a loan that exceeds the maximum

maturity, it may still be subject to guaranty.

However, the regulations also limit the amount that can be collected as a final

installment, such as, they prohibit excessive ballooning. The holder of a loan

that violates this provision may desire to correct the situation through means

which are legally proper in the jurisdiction.

VA Pamphlet 26-7, Revised

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9. Amortization

Change Date

November 8, 2012, Change 21

• This section has been updated to make minor grammatical edits.

a. Requirement

All VA loans must be amortized if the maturity date is beyond 5 years from

the date of the loan. Loans with terms less than 5 years are considered term

loans and need not be amortized.

Generally, for amortized VA loans:

• payments must be approximately equal,

• principal must be reduced at least once annually, and

• the final installment must not exceed two times the average of the preceding

installments.

Exceptions to these requirements are made in the case of:

• GPMs – See section 7 of chapter 7,

• Growing Equity Mortgages (GEMs) – See section 8 of chapter 7,

• alternative amortization plans prior approved by VA, and

• construction loans.

b. Alternative

Amortization

Plans

Certain amortization plans which do not meet the requirements described in

subsection a above may be used if approved in advance by VA. A lender may

submit an amortization plan to VA for prior approval if the plan:

• is generally recognized; that is, is used extensively by established lending

institutions, but

• does not meet the requirements of approximately equal periodic payments

and a reduction in principal not less often than annually.

Exception: GPMs and GEMs.

Continued on next page

VA Pamphlet 26-7, Revised

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9. Amortization, Continued

c. Special

Provisions for

Construction

Loans

See “Amortization” in section 2 of chapter 7.

d. Standard

and Springfield

Plans

The Standard and Springfield plans satisfy VA amortization requirements.

• The Standard plan provides for equal payments over the life of the loan.

The amount applied to interest decreases, with a corresponding increase in

the amount applied to principal.

• The Springfield plan provides for gradually decreasing payments over the

life of the loan. The amount applied to interest decreases, while the amount

applied to principal remains constant.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

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10. Eligible Geographic Locations for the Secured Property

Change Date

April 10, 2009, Change 9

• This section has been updated to correct hyperlinks and make minor

grammatical edits.

a. Where Can

the Property be

Located?

Real property securing a VA-guaranteed loan must be located in the United

States, its territories, or possessions (Puerto Rico, Guam, Virgin Islands,

American Samoa and the Northern Mariana Islands).

VA Pamphlet 26-7, Revised

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11. What Does a VA Guaranty Mean to the Lender?

Change Date

November 8, 2012, Change 21

• This section has been updated to make minor grammatical edits.

a. Protection

Against Loss

VA guarantees a portion of the loan, identified on the VA Loan Guaranty

Certificate (LGC) by percentage and dollar amounts. If a loss ultimately

occurs on the loan, VA will reimburse the loan holder for all or part of such

loss:

• limited by the stated percentage and dollar amount of the guaranty,

• limited by any VA maximums for reasonable and customary foreclosure

expenses, and

• subject to the lender’s compliance with applicable law and regulations.

b. Lender

Responsibility

It is the lender’s responsibility to comply with all laws and regulations related

to the VA Home Loan program, and thereby prevent VA’s denial or reduction

of a payment on a future claim. A lender can accomplish this by ensuring that

its employees who perform work related to VA lending:

• understand and comply with VA policies, procedures and regulations, and

applicable law, and

• direct questions to VA when issues arise that are not addressed in this

handbook or other materials provided by VA.

c. When is a

Loan that was

Closed

Automatically

Guaranteed?

A loan is automatically guaranteed by VA upon closing (prior to issuance of

the LGC) provided the loan was made by:

• a supervised or a nonsupervised lender with automatic authority, and

• the lender complied with applicable law and regulations.

Continued on next page

VA Pamphlet 26-7, Revised

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11. What Does a VA Guaranty Mean to the Lender?, Continued

d. When is a

Prior Approval

Loan

Guaranteed?

A prior approval loan is also guaranteed by VA upon closing (prior to

issuance of the LGC) provided:

• the closed loan matches the proposed loan upon which the Certificate of

Commitment was based, and

• the lender complied with applicable law and regulations.

e. What is

Evidence of

Guaranty?

Evidence of guaranty is VA Form 26-1899, Loan Guaranty Certificate, which

is generated electronically via VA’s webLGY application. The LGC

represents tangible proof to the lender that VA’s guaranty is given in good

faith. It is contingent upon:

• the veteran, property and purpose of the loan being eligible,

• no fraud or material misrepresentation on the part of the lender, and

• the lender’s compliance with applicable law and regulations.

For example, VA may deny or reduce payment on a future claim based on the

lender or holder’s noncompliance whether or not VA has issued evidence of

guaranty on the loan.

The LGC also has an audit indicator that, if noted Yes, lets the lender know

the case has been identified for full review. In these instances, the lender then

needs to submit a complete loan origination package to the appropriate VA

office for review. Packages should be submitted within 15 days of the LGC

being generated.

f. Total Loss of

Guaranty

Willful fraud or material misrepresentation by the lender or holder, or by an

agent of either, will relieve VA of liability for payment of any claim on the

loan. VA also has no liability in the case of:

• forgery on the note, mortgage, loan application, or other loan documents, or

• a Certificate of Eligibility or discharge papers that are counterfeited,

falsified, or not issued by the Government.

A holder of a VA loan who acquired the loan without notice or knowledge of

fraud or material misrepresentation in procuring the guaranty will not be

denied payment of any claim on the loan by reason of such fraud or material

misrepresentation.

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-25

11. What Does a VA Guaranty Mean to the Lender?, Continued

g. Partial Loss

of Guaranty

A holder of a VA loan who fails to comply with applicable laws and

regulations may receive only partial payment of a claim if VA’s liability

increases due to the holder’s noncompliance. Material misrepresentation

which is not willful has the same consequence.

No claim will be paid on such loan until the amount of any increase in VA’s

liability is known. The burden of proof is on the holder to establish that VA’s

increased liability is not due to the holder’s noncompliance or

misrepresentation.

Examples of noncompliance with applicable law and regulations which may

lead to an increase in VA’s liability include:

• failure to obtain and retain the required lien on 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.

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-26

12. Post-Guaranty Issues

Change Date

November 8, 2012, Change 21

• This section has been changed to include hyperlinks.

a. Corrections

to LGCs

LGCs are generated using data entered from several sources, including the

VA Funding Fee Payment System (VA FFPS). If a lender discovers an error

in reported data, such as date of loan closing, before they have generated the

LGC, they must access the VA FFPS system to make the correction. This

will then result in the correct closing date being shown when the LGC is

obtained.

If the error is discovered after the LGC has been generated, lenders will need

to contact the appropriate VA RLC for assistance. An LGC with minor

typographical errors that do not compromise accurate identification of the

loan is valid.

b. Replacement

of Missing LGC

with Duplicate

A lender may obtain duplicate LGCs at any time simply by accessing the

system and reprinting the LGC.

c. Transfer of

Loans

It is not necessary to notify VA of the assignment of a guaranteed loan.

d. Loan

Assumptions

The assumption of VA-guaranteed loans for which commitments were made

on or after March 1, 1988, requires the approval of VA (or certain lenders on

VA’s behalf).

Continued on next page

VA Pamphlet 26-7, Revised

Chapter 3: The VA Loan and Guaranty

3-27

12. Post-Guaranty Issues, Continued

e. Paid-in-Full

Loans

Holders of VA-guaranteed loans are required to electronically report the date

the loan was paid-in-full in the VA Loan Electronic Reporting Interface

(VALERI) system. Lenders are required to report paid-in-full loans to VA

upon full satisfaction of the loan by payment or otherwise.

Lenders/servicers are not required to mail LGCs to VA when a loan is

terminated. Since this information will now be reported through VALERI,

there is no need to have the actual LGC returned to VA upon termination of

the loan.

f. Maintenance

of Loan

Records

Lenders must maintain copies of all loan origination records on

VA-guaranteed home loans for at least 2 years from the date of loan closing.

Even if the loan is sold, the original lender must maintain these records (or

legible copies) for the required period.

Loan origination records include:

• the loan application (including any preliminary application),

• verifications of employment and deposit,

• all credit reports (including preliminary credit reports),

• copies of each sales contract and addendum,

• letters of explanation for adverse credit items, discrepancies and the like,

• direct references from creditors,

• correspondence with employers,

• appraisal and compliance inspection reports,

• reports on termite and other inspections of the property,

• builder change orders, and

• all closing papers and documents.

Lenders must make these records accessible to VA personnel conducting

audit reviews.