VA Loans Requiring Special Underwriting

There are many types of VA loans and refinancing loans. Some are typical and require no special attention from the lender or the Department of Veterans Affairs aside from the normal amount of underwriting and processing that usually happens. Other loans require more development for a variety of reasons.

For example, the VA has a category of “other refinancing loans” that have additional requirements. These include:

-construction loans,
-installment land sale contracts
-loans assumed by veterans at interest rates higher than that for the proposed refinance.

These types of transactions don’t have a long list of additional rules and regulations--the VA loan rulebook states of them:

“These loans may not exceed the lesser of:

·  the VA reasonable value plus the VA funding fee, or
·  the sum of the outstanding balance of the loan to be refinanced plus allowable closing costs (including the funding fee) and discounts.

The cost of energy efficiency improvements can also be added to the loan”.

When it comes to new purchase VA loans that require additional attention or further regulations, there is a list which includes VA Energy Efficient Mortgages, Adjustable Rate Mortgages and Graduated Payment Mortgages.

VA Energy Efficient Mortgages (EEMs) require additional attention because they have the potential to increase mortgage payments. Additional underwriting may be needed in some cases. VA EEMs are intended for “approved improvements” or upgrades--a borrower can use a VA EEM to help pay for energy efficient improvements to the home-but only those improvements permitted by the program.

In the case of VA Adjustable Rate Mortgages, additional care is needed with these loans because of the changing interest rate feature of the loan. The borrower must be able to afford not only the introductory rate, but also the amount of the mortgage payments after the rates change once the introductory period is over. According to the VA loan rulebook:

“An ARM loan offers more flexible interest rates based on negotiated initial fixed interest rates coupled with periodic adjustments to the interest rate over time.  Hybrid ARMs have longer initial fixed rates of 3, 5, 7, or 10 years, while a “traditional” ARM allows for an annual adjustment after 1 year.” These adjustments can affect the borrower’s financial bottom line; the costs must be carefully examined.

Graduated Payment Mortgages also feature changing monthly financial obligations. According to the VA, “A GPM is a mortgage with the following amortization features:

• lower initial monthly payments than payments on a comparable mortgage under the standard amortization plan,
• periodic (normally annual) increases in the monthly payment by a fixed percentage for a stated “graduation period,”

and

• monthly payments that level off after the graduation period and remain the same for the duration of the loan.

− The payments, after the leveling off period, are higher than payments on a comparable mortgage under the standard amortization plan.”

The VA official site adds that the method used to achieve this, “involves deferring a portion of the interest due on the loan each month during the graduation period and adding that interest to the principal balance. This decreases the monthly payments during the graduation period, and increases the outstanding principal balance during the graduation period, creating ‘negative amortization.’”

Again, such loans feature dramatically different payment terms than a fixed-rate mortgage loan; as such the borrower’s ability to pay before, during, and after these adjustments must be measured carefully.

For borrowers who have done their homework and calculated the expense of their loans, these options can be part of a sound financial strategy. But the key to making these types of VA loans work is planning. The lender understands this and will scrutinize the loan application accordingly. Borrowers should also pay careful attention to the terms and details of these unique loans to get the most out of them and avoid financial surprises later on during the lifetime of the mortgage.

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