In connection with its guaranteed home loan program, the Department of Veterans Affairs (VA) announced in Circular 26-24-17 [Link: https://benefits.va.gov/HOMELOANS/documents/circulars/26-24-17.pdf] requirements when a party assuming a VA guaranteed loan in connection with the purchase of a home also obtains a secondary mortgage to help finance the purchase. The VA notes that a VA guaranteed home loan, other than for repairs, alterations, or improvements, must be secured by a first lien and that when a party assuming an existing VA loan also obtains secondary financing, if the secondary loan is not processed correctly it can jeopardize the VA guaranteed home loan’s first lien position.
In the Circular, the VA advises that when processing the assumption of a VA guaranteed loan, loan holders are expected to take the following steps to protect the loan’s priority:
• Any steps necessary to ensure the secondary borrowing is subordinate to the VA guaranteed loan. The steps may, for example, include obtaining a subordination agreement.
• The secondary borrowing must be documented in the assumption loan file, including the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assuming party.
• The proceeds of the secondary borrowing may be used to pay for allowable closing costs needed to close the assumption, or for amounts due the seller at closing as part of the assumption transaction.
• The assuming party may not receive cash back from the secondary borrowing.
• The recurring monthly payment for the secondary borrowing must be considered when evaluating the assuming party’s debts on VA Form 266393, Loan Analysis, and in automated underwriting feedback, as applicable.
• The interest rate on the secondary financing may exceed the rate on the VA guaranteed loan and may be negotiated between the assuming party and the lender of the secondary borrowing.
• If the secondary borrowing is not assumable, the holder of the VA guaranteed loan “should counsel” the assuming party that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future. In contrast, when a veteran obtains secondary financing in connection with the origination of a first lien VA guaranteed loan, the secondary financing must be assumable by a creditworthy party.
• The secondary financing must include a reasonable grace period before a late charge is assessed and, in the event of default, before the secondary lender may commence foreclosure proceedings. The guidance does not address what is a reasonable grace period. VA regulations permit the imposition of a late fee on a VA guaranteed loan when an installment is paid more than 15 days after the due date.
Except as noted, the requirements are generally consistent with VA requirements when a veteran obtains secondary financing in connection with the origination of a first lien VA guaranteed loan. The guidance does not address the level of diligence that a holder must engage in to obtain information on the secondary financing as necessary to comply with the requirements set forth above.
[View source.]
