What Happened?

On August 11, 2024 the Department of Veterans Affairs (the “VA”) released Circular 26-24-17, clarifying how a servicer should process an assumption when there is secondary financing.  Significantly, the VA clarified an open question of whether a junior mortgage obtained simultaneously with the assumption of a first-lien VA-guaranteed loan must also be assumable.

Why Does it Matter?

Assumable mortgage loans have been gaining in popularity in our current high interest rate environment.  Often, however, buyers will need secondary financing to make up the difference between the mortgage to be assumed and the purchase price of the property.  There has been a lack of guidance on how to process the assumption of a first-lien VA-guaranteed loan that involves secondary financing, as well as the question of whether such secondary financing must also be an assumable loan.

VA Circular 26-24-17 clarifies that the VA does not prohibit an assumer (regardless of whether a Veteran) of a VA-guaranteed loan from obtaining secondary financing (i.e., a junior lien) in conjunction with an assumption of the VA-guaranteed loan, and that such secondary financing does not need to be an assumable mortgage.  However, if the secondary financing is not assumable, “the holder of the VA-guaranteed loan should counsel the assumer that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future.”

Additionally, to protect the VA-guaranteed loan priority, holders are expected to ensure:

• The secondary financing is subordinate to the VA-guaranteed loan, such as through a subordination agreement.
• Documentation exists in the loan file that provides the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assumer.
• Proceeds of the secondary financing are used for amounts due to the seller at closing as part of the assumption process or allowable closing costs.  Note, that the assumer cannot receive cash back from the secondary financing.
• Contract terms of the secondary financing 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 interest rate can be negotiated between the assumer and the lender and can be higher than the rate on the VA-guaranteed loan.
• Underwriting decisions include the recurring payment of any secondary financing.

What Do I Need to Do?

Servicers that process assumptions of VA-guaranteed loans should review the circular closely and ensure the requirements are implemented into servicers’ compliance management systems, as this circular took effect immediately when issued on August 11, 2024.

[View source.]