VA Loans: Special Processing

Which VA home loans might require the lender to use special processing? Which loans require additional consideration? Some aspects of the VA loan program in this area are determined by VA home loan program guidelines, others may be lender standards. Here’s what you need to know about certain VA home loan options that may require extra processing, paperwork, or lender review.

Which VA Mortgages Require Special Handling?

There are a number of loans that need extra attention from the lender. According to the VA Lender’s Handbook, Chapter 7, we learn these loans include, but are not limited to:

• Joint Loans
• Construction/Permanent Home Loans
• Loans for Alterations and Repairs
• Supplemental Loans
• Adjustable Rate Mortgages
• Loans Involving Temporary Interest Buydowns
• Farm Residence Loans
• Loans for Manufactured Homes Classified as Real Estate

The VA Lender’s Handbook was updated in 2019 to eliminate certain passages that have become obsolete, superseded, or otherwise modified. What follows is not a detailed list of all those changes, but rather the important features you need to be aware of under current VA loan policy for the loans below.

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Joint Loans

There is some confusion over VA joint loans, which are loans that involve a qualified VA borrower and a non-VA applicant OR a VA-qualified applicant who chooses not to use VA loan benefits at that time.

The VA only guarantees the portion of the loan the veteran is obligated to pay. But that’s not all; VA loans do NOT require a joint loan situation when a legally married couple apply for the VA mortgage even if one member of the couple is a civilian.

According to Chapter 7 of the VA Lender’s Handbook, VA Pamphlet 26-7, Joint loans are described as follows:

• When a veteran and non-VA borrowers are liable for the loan AND the Veteran and the other obligor(s) own the security
• Veteran borrows with one or more non-vets/VA borrowers who are not a spouse
• Veteran borrows with one or more Veterans (not spouse) who will not be using their entitlement
• Veteran and the Veteran’s spouse who is also a Veteran, and both entitlements will be used, or
• Veteran and one or more other Veterans (not spouse), all of who will use their entitlement

In cases where a VA joint loan is for a veteran and fiancé “who intend to marry prior to loan closing and take title as Veteran and spouse,” is NOT considered a joint loan but your lender may require documentation to support this.

Joint loans are unique among VA mortgages as they allow more living units than other types of VA mortgages. From VA Pamphlet 26-7, we learn that if a property is being purchased “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.”

That would allow two veterans to buy a home with as many as six family units PLUS “one business unit.”

Construction/Permanent Home Loans

VA construction loans are complicated due to a variety of factors including additional lender scrutiny for the applicant’s credit history, FICO scores, etc. Why?

Construction loans require many considerations; an approved contractor must be located, blueprints must be obtained, there must be a plan for the construction project, permits, and much more.

If you are in a hurry to move into a new home, a VA construction loan is not for you. But if you have the time, VA construction loans feature zero down payment within certain parameters, and veterans who receive or are eligible to receive VA compensation for service-connected medical conditions are also exempt from having to pay the VA loan funding fee, which is a major benefit.

There are three different options for VA construction loans. One is a refinance loan that permits you to refinance a property and get cash for approved upgrades or improvements to the property.

The refinance is subject to typical VA Cash-Out refinance loan rules, but with the added requirements of an approved contractor, obtaining building permits, making a list of projects that meet VA requirements for the refi loan, etc.

You can use the VA refinance loan option under the Construction/Permanent loan program to refinance either a VA mortgage or a non-VA loan.

For new construction purposes, there are two VA loans; one is a “Single Close” or One-Time Close VA mortgage loan, the other features two closing dates.

The distinction is quite important because under the One-Time Close VA mortgage, your lender fixes a single loan closing date, which is scheduled before construction begins. There are no worries about applying or being approved for a second loan to pay for the purchase of the home once the construction phase is completed and paid for.

Not so with what the VA labels a Construction to Permanent Purchase (Two Part Closing Vehicle) loan, which features one loan application for the construction phase and another for the purchase.

A two-loan situation makes it tougher for some borrowers who may be worried that their credit reports aren’t as strong as they should be and fear being approved for one loan but turned down for another. It’s always best to ask the advice of an experienced professional or even someone who has experience taking out a two-close construction loan before you commit.

Another important consideration and special processing feature of these loans? When payments begin. You start making your monthly VA construction loan payments only after the construction phase is complete. That means you may have a delay for as long as a full year before you start paying. But you will still be required to pay off the loan under the original loan term.

The VA official site provides this example; if your construction project takes six months to complete construction and have a 30-year mortgage, you will be required to pay the loan off in 29 years and six months from the start of your mortgage payments.

VA Home Loans for Alterations and Repairs

The basic rules for this VA loan program are fairly simple. You can apply for a VA loan for alteration and repair of a home that meets the following requirements:

• Must be a residence owned and occupied by the Veteran, OR
• Must be in conjunction with a purchase loan on that property
• Alterations and repairs are required to be “ordinarily found on similar property of comparable value” in that housing market
• The cost of alterations/repairs to structures may be included in a loan for purchases or VA Cash-Out refinance of improved property “to the extent that their value supports the loan amount.”

Not all participating lenders may offer these types of loans; ask first.

Supplemental Loans

VA Supplemental loans are intended to improve, repair, or renovate a residence owned by the veteran and secured by an existing VA mortgage. These loans are also offered to veterans who wish to “reoccupy” a home after the completion of the labor on the home.

Conditions of these loans include the following:

• The alterations to the home must be intended to “substantially” protect or improve “the basic livability, or utility of the property,” AND
• The alterations are restricted primarily to “maintenance, replacement, improvement or acquisition of real property, including fixtures.”

Luxury items such as new swimming pools, barbecue pits, or similar alterations are not allowed under this loan program. Furthermore, no more than 30% of the loan can be used to replace, repair, or improve “non-fixtures” or “quasi fixtures” including “refrigeration, cooking, washing, and heating equipment.”

VA loan rules say in order to qualify for this loan, any existing VA loan “must be current” including property taxes and insurance. The loan “must not otherwise be in default” unless the purpose of this supplemental VA loan is to help the borrower avoid default and foreclosure.

Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs) require special consideration because of the nature of the interest rate commitment the borrower makes with the lender; within specified fixed periods the interest rate may be adjusted based on a fixed amount. Borrowers usually get an introductory rate that has a fixed expiration before the first interest rate adjustment.

Adjustable rate mortgages as a result carry a risk of higher payments should the rate adjustments involve higher rates.

Rate adjustments are typically done annually but much depends on whether you apply for a standard ARM which will have its first interest rate change in one year, or a hybrid ARM which has “longer initial fixed rates” ranging from three to ten years before the first adjustment.

In some cases the amount of interest rate increase is limited to a total of 5% over the lifetime of the loan. In others, the rate may increase by as much as six percentage points over the lifetime of the loan. Much can depend on which version you choose, lender requirements, state law, and other variables.

Loans Involving Temporary Interest Buydowns

A temporary interest buydown is possible for VA borrowers if the participating lender is willing to offer it. These buydowns help reduce the initial amount of your mortgage payments for a fixed period of time, helping borrowers ease into the full mortgage payment over time. VA loan policy for such transactions is to approve them when the borrower is “otherwise eligible” for the loan. The VA Lender’s Handbooks states, “A temporary interest rate buydown can be used in conjunction with any type of VA-guaranteed loan.”

Farm Residence Loans

There is a fair bit of confusion in some circles over the VA Farm Residence Loan option. In many cases the problem seems to stem from the word “farm.” For the purposes of a VA mortgage, only the residential nature of the property may be considered for purposes of valuation, maximum loan amount, etc.

VA loan rules here say a VA Farm Loan may be approved to purchase, build, repair, or renovate “a farm residence which is occupied or will be occupied by the Veteran/borrower as a home.”

But these loans cannot be used to cover the non-residential value of excess land, the loan cannot pay for any outbuildings needed to run a farm (including barns and silos), and no livestock or farm equipment may be purchased with a VA Farm Residence Loan. The word “residence” in the name is key to the nature of the mortgage.

Loans for Manufactured Homes Classified as Real Estate

The most important consideration in this area is that VA home loan rules require a permanent foundation on any property secured with a VA loan.

No matter if it’s a mobile home, manufactured home, modular housing, pre-fab or any other property type that is transported from a manufacturer to the lot where it will be installed, being fixed to a permanent foundation is a condition of VA loan approval.

You cannot apply for a VA mortgage to buy a mobile home not classified and taxable as real estate. The permanent foundation rules permit you to have the home fixed to an approved foundation as part of the process of the purchase; it may not necessarily have to be on a foundation prior to loan closing day, as long as it IS when you close the deal.

Native American Direct Loans

This is a loan that is unique among VA mortgages: the loan is underwritten by the Department of Veterans Affairs, but is handled differently than “typical” VA mortgages. In order to qualify for a Native American Direct Loan the following must apply:

• The applicant has a valid Certificate of Eligibility to be eligible for the VA home loan benefit and have available entitlement.
• This VA loan can be used only to purchase, construct, or improve a home on Federally-recognized trust, allotted lands, Alaska Native corporations and Pacific Island territories.
• For owner/occupiers only
• Credit qualifications are required

Direct loans are the only VA mortgage product underwritten by the government rather than by the borrower seeking out a participating lender. To apply for a Native American Direct Loan, contact your nearest VA Regional Loan Center.

Things To Remember About VA Loans That Require Special Processing Or Consideration

Not all VA lenders offer all VA loan products. Some VA lenders may choose not to issue construction loans, mobile home loans, or other mortgages that are either not in demand, not profitable, etc.

The VA guidelines listed here may be supplemented by state law, local ordinances, lender standards, or other factors. VA loan rules don’t override state laws, and certain considerations like community property laws (which affect married couples applying for credit), building code, etc.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News