Chapter 9. LEGAL INSTRUMENTS, LIENS, ESCROWS, AND RELATED ISSUES

Topic 1. Security Instruments
Topic 2. Escape Clause and Notice of Value (NOV)
Topic 3. Title Limitations
Topic 4. Land Sale Contracts and Option Contracts
Topic 5. Secondary Borrowing
Topic 6. Purchase of Property with Encumbrances
Topic 7. Liens Covering Community-Type Services and Facilities
Topic 8. Power of Attorney (POA)
Topic 9. Lender Review of Sales Contracts on Proposed Construction
Topic 10. Escrow for Proposed Completion of Improvements
Topic 11. Hazard Insurance
Topic 12. Escrow for Taxes and Insurance
Topic 13. Homebuyer Assistance Program (HAP)
 

Topic 1. Security Instruments

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Requirements

Department of Veterans Affairs (VA) does not have a specific note or mortgage form that lenders must use for VA-guaranteed loans. VA regulations at 38 C.F.R. 36.4337 provide that security instruments used by a lender which are inconsistent with VA regulations in effect on the date the loan is closed will be considered amended and supplemented to conform to the regulations.

Lenders must ensure that the security instruments they use:

• establish the required lien

• comply with the laws and regulations governing VA’s home loan program

• comply with applicable state laws, and

• contain the following VA clauses:

  □ assumption approval clause,

  □ acceleration clause,

  □ funding fee clause,

  □ processing charge clause, and

  □ indemnity liability assumption clause.

b. Assumption Approval Clause

The instruments evidencing the loan must read substantially as follows:

"THIS LOAN IS NOT ASSUMABLE WITHOUT THE APPROVAL OF THE DEPARTMENT OF VETERANS AFFAIRS OR ITS AUTHORIZED AGENT."

The loan assumption notice must appear conspicuously on at least one of the security instruments for the loan.

c. Other Clauses

The mortgage or deed of trust must contain four additional clauses related to the assumption of the loan. VA does not specifically require that these clauses also be included in the note, unless this is required under state law to make them enforceable. Due to variations in local laws, the lender should obtain legal guidance as to any minor changes in these sample clauses which may be necessary to ensure that they have the effect required by the law and regulations; that is, the lender does not have to use the exact language provided for these four clauses.

Acceleration Clause

This loan may be declared immediately due and payable upon transfer of the property securing such loan to any transferee, unless the acceptability of the assumption of the loan is established pursuant to 38 U.SC. 3714.

Funding Fee Clause

A fee equal to one-half of one percent of the balance of this loan as of the date of transfer of the property shall be payable at the time of transfer to the loan holder or its authorized agent, as trustee for the VA. If the assumer fails to pay this fee at the time of transfer, the fee shall constitute an additional debt to that already secured by this instrument, shall bear interest at the rate herein provided, and at the option of the payee of the indebtedness hereby secured or any transferee thereof, shall be immediately due and payable. This fee is automatically waived if the assumer is exempt under the provisions of 38 U.S.C. 3729(c).

Processing Charge Clause

Upon application for approval to allow assumption of this loan, a processing fee may be charged by the loan holder or its authorized agent for determining the creditworthiness of the assumer and subsequently revising the holder’s ownership records when an approved transfer is completed. The amount of this charge shall not exceed the maximum established by VA for a loan to which 38 U.S.C. 3714 applies.

Indemnity Liability Assumption Clause

If this obligation is assumed, then the assumer hereby agrees to assume all of the obligations of the Veteran under the terms of the instruments creating and securing the loan. The assumer further agrees to indemnify VA to the extent of any claim payment arising from the guaranty or insurance of the indebtedness created by this instrument.

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Topic 2. Escape Clause and Notice of Value (NOV)

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Sales Contract

The Escape Clause must be contained in the sales contract for all VA- guaranteed loans. The lender is responsible for ensuring that the paragraph is in the sales contract prior to closing. In the event the clause is not in the sales contract, VA may not guaranty the loan.

b. Builders and Realtors

The builders/realtors that initiate contracts on new construction must ensure that the Escape Clause is in the contract and the contract is signed by the Veteran and seller.

c. Upgrades

Upgrades are not considered earnest money and the builder is not required to refund this money. When the NOV is below the sales contract price, this clause protects the Veteran with negotiation of the sales contract.

d. Escape Clause

If the sales contract was signed by the Veteran prior to receipt of the NOV, the contract must include, or be amended to include, the clause below.

"It is expressly agreed that, notwithstanding any other provisions of this contract, the purchaser shall not incur any penalty by forfeiture of earnest money or otherwise or be obligated to complete the purchase of the property described herein, if the contract purchase price or cost exceeds the reasonable value of the property established by the Department of Veterans Affairs. The purchaser shall, however, have the privilege and option of proceeding with the consummation of this contract without regard to the amount of the reasonable value established by the Department of Veterans Affairs (38 U.S.C. 501, 3703(c)(1))."

This clause may be found at 38 C.F.R. 36.4303(k)(4) in its entirety

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Topic 3. Title Limitations

Change Date:

September 29, 2022

• Subsection d has been revised to include Attorney Opinion Letters.

a. Estate if the Veteran in the Property

VA regulations at 38 C.F.R. 36.4354 provide the parameters for the required estate of a Veteran in real property securing a VA-guaranteed loan.

The lender is responsible for ensuring the loan conforms to these parameters. For IRRRLs (see Chapter 6 of this handbook).

A beneficial interest in a revocable Family Living Trust that ensures that the Veteran, or Veteran and spouse, have an equitable life estate, provided the lien attaches to any remainder interest and the trust arrangement is valid under state law.

b. Estate Title

Generally, title to the estate shall be that which is acceptable to informed buyers, title companies, and attorneys in the community in which the property is situated.

c. Mortgage Note or Deed

VA does not allow an individual to take title to a property if that individual is not on either the mortgage note or a mortgage deed of trust. Accordingly, if a spouse or other owner does not want to sign a mortgage note and be obligated for a VA-guaranteed home loan that individual must sign a mortgage deed of trust.

d. Title Insurance

VA does not require a lender making a VA loan or the Veteran-borrower to obtain title insurance or, where appropriate for the jurisdiction, an Attorney Opinion Letter. The lender may apply its own title insurance requirements to VA loan transactions. VA requires only that title to the property meet the standards described above in "Estate of the Veteran in the Property."

e. Restrictions on the Purchase or Resale of Properties

Restrictions on the purchase or resale of the property are unacceptable to VA, with certain exceptions. The lender must:

• ensure any restrictions fall within the exceptions provided by VA regulations at 38 C.F.R. 36.4308 and 38 C.F.R. 36.4354;

• consult VA where doubt exists;

• obtain VA approval where required; and

• fully inform the Veteran and obtain his or her consent to the restrictions in writing at the time of loan application.

f. Examples of Restrictions that Require VA Approval

A lender may not accelerate a loan based on the sale of the secured property unless the acceptability of the assumption of the loan has not been established pursuant to Section 38 U.S.C. 3714, except that:

• Under 38 C.F.R. 36.4309(b), VA may guarantee a loan made through a state, territorial, or local government program where restrictions in the legal instruments require acceleration of the loan if it is assumed by a party ineligible for assistance under the program.

• Such acceleration must be mandated by federal, state, territorial, or local law or regulation.

VA may guarantee a loan made through a state or local government program, designed to assist low-or moderate-income individuals, which imposes resale and price restrictions on purchasers. Under such a program, if the property is resold within a period established by local law or ordinance, certain restrictions as set forth in 38 C.F.R. 36.4354(b)(5)(iv)(A) on to whom the property may be sold, the resale price, and other restrictions approved by the Secretary may be applied.

VA may guarantee a loan on which a title restriction limits the sale, lease, or occupancy of the dwelling to persons based on age, including a prohibition against the permanent occupancy of the dwelling by children, provided such restriction complies with applicable federal law (38 U.S.C. 3704(c)).

VA may refuse to approve a property with an age restriction if its operation would create an undue hardship upon the owner in the case of sudden, unforeseen events or be likely to result in an increased risk of loan default.

g. Examples of Restrictions That Do Not Require VA Approval

Title to property involving reasonable encroachments, easements, servitudes, and reservations for water, timber, or subsurface rights, generally do not require VA approval. However, they must be taken into consideration in determining reasonable value.

If any of these restrictions impact the basic livability of the property (meeting minimum property standards), VA approval is required.

h. Effect of Title Limitations on Reasonable Value

Title conditions or limitations must be shown on the NOV and considered by the appraiser in determining the reasonable value of the property. If the lender discovers, prior to loan closing, title conditions or limitations not shown on the NOV, the lender must have VA review the conditions and determine whether the value assigned to the property is materially affected. Without such a determination by VA, the lender risks a later finding that the condition or limitation affects the reasonable value of the property to the extent that:

• the loan will be ineligible for guaranty, or

• a claim on the guaranty will be subject to reduction under 38 C.F.R. 36.4325.

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Topic 4. Land Sale Contracts and Option Contracts

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Eligibility of Land Sale Contracts

VA may guarantee an obligation secured by a land sale contract for the purchase of improved residential property in the same manner as any obligation secured by a mortgage or deed of trust.

• The land sale contract must contain the mandatory clauses provided in Topic 1 of this chapter.

• The contract must be recorded.

b. Refinance Land Sale Contracts

Pursuant to Title 38 of the U.S.C., subchapter 3710(b)(7)(B), VA may also guarantee a loan to refinance the unpaid balance under a land sale contract for the purchase of improved residential property, provided:

• the Veteran will obtain title to the property described in the contract upon closing of the loan, and

• the obligation to be guaranteed is in the form of a mortgage note or bond secured by a mortgage or other acceptable form of security instrument other than the existing land sale contract.

c. Eligibility of Option Contracts

Option contracts are not eligible for guaranty; however, VA may guarantee a loan made for the unpaid purchase price of residential property when the option is exercised.

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Topic 5. Secondary Borrowing

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. What is Secondary Borrowing

For purposes of this topic, secondary borrowing refers to the Veteran obtaining a second mortgage simultaneously with a VA-guaranteed first mortgage, both secured by the same property. This does not include HAPs (see Topic 9, Item 13 of this chapter).

b. Policy

Secondary borrowing is acceptable as long as:

• the Veteran is not placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA,

• the loan (in conjunction with the first mortgage) may not exceed the NOV, and

• the requirements detailed below are met.

c. Requirements

The second mortgage must meet the following requirements:

Table 1: Secondary Borrowing Requirements

d. Unusual Terms

Second mortgages bearing unusual terms, interest rates, etc., are sometimes offered by parties such as:

• federal, state, or local government agencies,

• non-profit organizations,

• private individual,

• builders, or

• sellers.

e. VA Standards

Consult a VA RLC with jurisdiction over the state where the property is located if it is unclear whether the terms of the second mortgage meet VA standards or if there may be a reasonable basis for VA to make an exception to the standards detailed in this topic.

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Topic 6. Purchase of Property with Encumbrances

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Policy

Pursuant to 38 U.S.C. § 3703(d)(3)(A), a VA-guaranteed loan must be secured by a first lien on the realty. Lenders are responsible for properly securing the first-lien position of a VA- guaranteed loan. Any existing liens on the property must be paid off or subordinated to the VA loan.

b. Eligibility

A loan to purchase property subject to unpaid delinquent taxes, special assessments, prior mortgage indebtedness, or other obligations secured by effective liens that the Veteran agrees to pay or which constitute encumbrances on the property is not eligible for guaranty, if the loan amount, plus these unpaid obligations, exceeds VA’s reasonable value of the property.

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Topic 7. Liens Covering Community-Type Services and Facilities

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Policy

Loans for the purchase and construction of homes will be first liens, subject only to taxes, special assessments, and ground rents. VA will not approve superior liens in favor of private entities unless they:

• are legally or practically necessary, and

• result in no prejudice to the Veterans or the Government.

b. Requirements

The lender must obtain VA prior approval of liens held by private parties which are superior to VA home mortgage liens. Liens held by mandatory membership home associations in planned unit developments are not addressed in this topic. The lender must demonstrate that:

• it is not legal or practical to subordinate the superior lien to the VA mortgage,

• there is a viable rationale for not subordinating the superior lien,

• the superior lien will not prejudice Veterans or the Government, and

• if periodic charges or assessments are involved, the amounts are reasonable and limits on the amounts have been established.

c. VA Approval

Always obtain VA approval before the lien is recorded. Builders and developers should be aware that if they plan to market properties through VA financing, covenants creating superior liens should not be recorded without VA approval.

d. Examples

VA may find the following types of superior liens acceptable (38 C.F.R. 36.4356):

• Liens for taxes, assessments, and ground rents.

• Liens by private entities to secure assessments or charges for municipal- type services and facilities which:

  □ are clearly governmental in nature, and

  □ a municipality could support out of public tax revenue if it provided the service, but the municipality does not provide them.

• Liens to implement or augment a service or facility if the government’s provision of such service or facility is inadequate.

• Liens for services or facilities in locations where the services or facilities are adequately supplied by local government generally will not be approved by VA.

• Liens created by recorded covenants in favor of private entities to secure the homeowner’s share of the costs of the management, operation, maintenance, services, or programs for the benefit of a development.

• Liens (on existing properties) previously retained by trustees, improvement associations or other nongovernmental entities for community-type services and facilities in a given area or subdivision, such as maintenance of streets, parkways, playgrounds, water systems, sewage systems, police and fire protection, or street lighting.

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Topic 8. Power of Attorney (POA)

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Policy

VA will allow a Veteran to use an attorney-in-fact to execute any documents necessary to obtain a VA-guaranteed loan. This enables active duty servicepersons stationed overseas, and other Veterans who cannot be present to execute loan documents, to obtain VA loans.

b. Requirements

The Veteran must execute a general or specific POA which is valid and legally adequate. The Veteran’s attorney-in-fact (as specified in the POA) must use this POA to apply for a Certificate of Eligibility (COE) and initiate processing of a loan on behalf of the Veteran. A military POA is considered a general POA and is only valid during the Active Duty Servicemembers’ (ADSM) period of deployment, not to exceed 1 year.

To complete the loan transaction using an attorney-in-fact, ensure that the general or specific POA complies with state law to the extent that:

• the mortgage can be legally enforced in that jurisdiction, and

• clear title can be conveyed in the event of foreclosure.

To complete the loan transaction using an attorney-in-fact, VA also requires the Veteran’s written consent to the specifics of the transaction either through a general POA or a specific POA.

General POA - The Veteran’s signature on both the sales contract and the Uniform Residential Loan Application, as long as the Veteran’s intention to obtain a VA loan on the particular property is expressed somewhere in those documents.

Specific POA. A specific power of attorney or other document(s) signed by the Veteran, which encompasses the elements below.

• Entitlement: A clear intention to use all or a specified amount of entitlement.

• Purpose: A clear intention to obtain a loan for purchase, construction, repair, alteration, improvement, or refinance.

• Property Identification: Identification of the specific property.

• Price and Terms: The sales price, if applicable, and other relevant terms of the transaction.

• Occupancy: The Veteran’s intention to use the property as a home to be occupied by the Veteran (or other applicable VA occupancy requirement or spouse and/or guardian for dependent child(ren)).

c. Veteran’s Status as Alive and not MIA

The lender must always verify that the Veteran is alive at the time of loan closing, whether or not the Veteran is an ADSM in the military. If on active military duty, the Veteran must not be missing in action (MIA).

The lender must make the following certification at the time of loan closing:

"The undersigned lender certifies that written evidence in the form of correspondence from the Veteran or, if on active military duty, statement of his or her commanding officer (including statement of person authorized to act for said officer), affirmatively indicating that the Veteran was alive and, if the Veteran is on active military duty, not missing in action status on (date), was examined by the undersigned and that the said date is on or subsequent (not prior) to the date the note and security instruments were executed on the Veteran’s behalf by the attorney-in-fact."

VA may deny guaranty on a loan if the lender failed to properly verify the Veteran’s status and the Veteran was deceased (or MIA) at the time the loan was closed.

d. Digital Signature

Digital signatures can be accepted as an original signature or wet signature as defined by the Electronic Signatures in Global and National Commerce Act, commonly referred to as the E-sign Act.

e. Prior Approval Loans

VA will issue a Certificate of Commitment only if the Veteran has executed a valid and legally adequate POA and consented to the specific transaction (as described under the “Requirement” heading). If VA has information that the Veteran is MIA or deceased, VA will not issue a commitment. The Certificate of Commitment issued in POA cases contains the condition indicated under "Conditional Commitments" in Chapter 5 of the Lender’s Handbook.

f. Hardship Exceptions

VA may consider an exceptional case if serious hardship may result due to the time or other pertinent factors involved in obtaining the Veteran’s consent to the specific transaction.

Submit the facts of the case to the VA RLC where the property is located for a determination.

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Topic 9. Lender Review of Sales Contracts on Proposed Construction

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Procedures

Prior to requesting an appraisal of proposed construction, the lender must review the sales contract or purchase agreement on the property. The lender must determine whether the contract:

• is acceptable, and

• does not contain unfair contractual provisions.

b. Revisions

The lender must request revisions of an unacceptable contract by the parties to the transaction. The lender should report unacceptable contract practices by a VA program participant (such as a builder) to VA if:

• the program participant is engaged in practices which seriously prejudice the interests of Veterans or the Government, or

• the program participant repeatedly uses unacceptable contracts or contracts containing unfair contractual provisions, and is uncooperative in changing such practices.

c. Closing

The closing of the loan indicates that the lender has determined the contract is acceptable.

d. Examples of Unfair Contract Provisions or Features

Table 2: Description of Unfair Contract Provisions or Features

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Topic 10. Escrow for Proposed Completion of Improvements

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Policy

In some instances, it may not be possible to complete certain items before the Veteran wishes to move into the property. The escrow of funds can permit the Veteran-purchaser to gain occupancy of the dwelling prior to completion of certain items which must be postponed due to weather conditions or other circumstances. Such items include, but are not limited to:

• walkways, driveways, and retaining walls,

• exterior painting,

• landscaping, and

• garages.

b. Escrow of Funds to Complete Unfinished Work

VA may permit the escrow of funds necessary to complete the unfinished work later, and still issue evidence of guaranty. An escrow involves the following:

• withholding 1 1/2 times the dollar amount necessary to complete the postponed items (as estimated by a third party) from the proceeds due the seller at closing,

• holding the escrowing funds in a proper, secure manner, and

• releasing the funds once the postponed items have been satisfactorily completed.

c. Establishing an Escrow Fund

To establish an escrow, the following must apply:

• construction of the dwelling must be complete and the house must be suitable for immediate occupancy,

• postponement of the improvements must be beyond the control of the builder/seller,

• the duration of the postponement must not be unreasonable (usually 90 to 120 days), and

• the amount escrowed must be at least 1 1/2 times an estimate of the amount needed to complete the work.

Lenders are not required to escrow funds when:

• the incomplete work is limited to the installation of landscaping features due to inclement weather (lawns, shrubbery, etc.),

• the estimate of the cost to complete the work is not greater than $2,500, and

• there is adequate assurance that the work will be completed timely and satisfactorily (usually 90 to 120 days).

d. General Procedures

No prior approval of VA is required to escrow funds. Lenders are responsible for establishing escrows in accordance with the guidelines presented in this topic. Lenders are also responsible for assuring that the postponed work is completed. Once the loan closes, VA will randomly monitor cases to ensure completion of escrowed items.

Table 4: Procedures for Escrows for Postponed Completion of Improvements

e. Letter of Credit

A commercial letter of credit may be used in lieu of a cash escrow provided:

• the dollar amount of available credit is at least 1 1/2 times the estimated cost of the postponed work,

• a trust agreement describing the duties, obligations, and responsibilities is submitted (VA Form 26-1849 may be used),

• the letter of credit is irrevocable and a valid and binding obligation on the issuing bank and extends at least 6 months beyond the date for completion of improvements, and

• a copy of the letter of credit and trust agreement is furnished to the appropriate VA office so a control can be maintained on the available credit.

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Topic 11. Hazard Insurance

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. General Requirements

The lender is responsible for ensuring that hazard insurance is obtained prior to loan closing, 4and maintained for the term of the loan. It must be of an insurance type or types and in an amount sufficient to protect the property against risks or hazards to which it may be subjected in the locality.

Generally, the type(s) and amount of insurance coverage customary in the locality will satisfy this requirement. Policies must provide that all amounts payable, including unearned premiums, shall be payable to the holder, or to a trustee or other person for the holder. All policy payments received for insured losses must be applied to the restoration of the security or to the loan balance.

b. Flood Insurance Requirements

The lender is responsible for ensuring that flood insurance is obtained and maintained on any building or personal property that secures a VA loan if the property is located in a special flood hazard area (SFHA), as identified by the Federal Emergency Management Agency (FEMA). The following flood insurance considerations may apply:

• The lender/holder’s responsibility extends through the entire term of the loan, and includes insuring any secured property that becomes newly located in a SFHA due to FEMA remapping.

• The VA appraiser’s opinion on whether the property is located in a SFHA does not relieve the lender from responsibility for ensuring flood insurance coverage on a property which is in fact located in a SFHA.

• Personal property requiring coverage can include a manufactured home and its appliances, carpet, etc. if they secure the loan.

• The amount of flood insurance must be equal to the lesser of the outstanding principal balance of the loan or the maximum limit of coverage available for the particular type(s) of property under the National Flood Insurance Act.

• Contact local property insurance agents or brokers, or FEMA regional offices, for current information on maximum available coverage.

Note: VA cannot guarantee a loan if the security is located in a SFHA and flood insurance is not available.

c. Consequences of Uninsured Losses

VA may reduce a future guaranty claim based on the lender’s noncompliance with VA hazard/flood insurance requirements which results in uninsured losses (unless a waiver has been granted). The lender must determine the minimum insurance coverage needed to meet the requirements of 38 C.F.R. 36.4329 for a specific loan. If the required amount of coverage is maintained, no future guaranty claim can be reduced due to inadequate coverage provided there has been no change in the nature, value, or use of the security that would require new or additional coverage (based on what is customary in the locality) since VA’s determination was made.

d. Special Considerations with Homeowners Associations

Condominiums and many townhouse homeowners associations (HOAs) maintain blanket or master policies on common areas, including common mechanical and structural elements.

The limits of coverage should be described in the policy, and may also be referred to in the organizational documents. Lenders should be aware that policies maintained by some HOAs may not provide adequate coverage.

Condominium HOAs may protect only the shell of the structure. These “studs out” policies do not cover:

• interior walls,

• flooring,

• plumbing or electrical fixtures,

• cabinets,

• heating, ventilation, and air conditioning (HVAC) equipment,

• appliances, and

• other items considered part of the real property.

Carefully review the terms of each blanket policy, or confirm with the HOA that adequate coverage is in effect (and check periodically for any changes in coverage). If coverage is inadequate, the homeowner can be held responsible through the terms of the loan instruments, for maintaining coverage on the portions of the real property not covered by the master policy.

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Topic 12. Escrow for Taxes and Insurance

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. Requirements

VA does not require the lender to establish escrow accounts for the collection and payment of property taxes, hazard insurance premiums, and similar items. It is the lender’s responsibility to ensure that property taxes and hazard insurance premiums are paid timely.

A lender who chooses to escrow for taxes and insurance must comply with applicable laws, including the Real Estate Settlement Procedures Act (RESPA).

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Topic 13. Homebuyer Assistance Program (HAP)

Change Date:

July 30, 2019

• This chapter has been revised in its entirety.

a. General Information

VA permits Veteran purchasers to utilize HAP services when obtaining a VA home loan. Both government and private entities administer HAPs.

• Lenders are not required to obtain VA approval of such programs before closing the loan. Homebuyer assistance programs that are administered by a state, county, or municipal government entity have blanket approval for use with VA loans. These state and local programs are not to be confused with the Department of Defense HAP.

• HAPs that do not fall under the blanket approval, should forward the documentation to the VA RLC with jurisdiction over property state.

b. Requirements

Lenders making VA loans involving HAPs must ensure the following:

• the borrower(s) meet(s) VA credit standards,

• the lender obtains a VA appraisal, and

• the property must meet VA minimum property standards.

If the sale price of the property exceeds the VA reasonable value of the property, VA will only allow HAP assistance in the form of a grant to pay the difference. Otherwise the Veteran must pay the difference of price over value from his or her own funds without borrowing.

HAPs often require buyers to occupy the property for a specified period of time. The lender must, at closing, obtain the borrower’s acknowledgement of this requirement, and provide a copy of the signed acknowledgement if VA requests the loan file for review.

c. HAP Fees

Chapter 8 of this handbook lists closing charges that Veteran-borrowers are not allowed to pay when a one-percent loan origination fee is charged. Since HAPs are designed to assist low to moderate income buyers, lenders may not charge Veteran-borrowers unallowable fees and use HAP funds to offset these charges since this practice dilutes the assistance that the HAP was intended to provide.

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