The Veterans Benefits Administration of the Department of Veterans Affairs (the “VA”) is a function of the United States government intended to help the country’s veterans and servicemen. One of the benefits provided by the VA is the VA home loan guaranty program. Through VA direct home loans and VA-backed home loans, the VA loan program is intended to make it easier for veterans, servicemen and their survivors to borrow enough money to buy, build, improve, or refinance the home of their choosing.
With a VA direct home loan, the VA serves as the mortgage lender. In most instances though the loan will be a VA-backed home loan, under which the VA guarantees a portion of a loan obtained from a private lender, guaranteeing up to 25% of the total loan amount. This reduced risk for the private lender allows the loan to be offered on more favorable terms than are usually available from conventional financing, and can help eliminate the need for a down payment on purchase of a home, eliminate private mortgage insurance, and utilize less restrictive lending requirements for credit-worthiness and income. According to the VA, nearly 90% of VA-backed loans are made with no down payment.
Borrower Eligibility, Lender Eligibility, and Condominium Project Approval
In order for a VA-backed home loan to be approved, there are primarily three conditions which must be satisfied.
First, the individual seeking the loan must be eligible. The applicant must obtain a Certificate of Eligibility (“COE”) from the VA. VA loan applicants may apply for a COE online here (accessed on September 17, 2020). In order to apply for a COE a veteran will need a copy of their discharge or separation papers. The amount of the benefit received by the VA may vary depending on whether the applicant is eligible for Full Entitlement. In order to have Full Entitlement the applicant must have either never previously used their VA home loan benefit or have paid in full any prior VA home loan benefit. The VA will guarantee up to 25% of a loan amount for a borrower entitled to a Full Entitlement. An eligible borrower who does not have a Full Entitlement will likely be eligible for a Remaining Entitlement, a number derived, in part, by reducing Full Entitlement by any outstanding VA home loan. The VA home loan limit under the Remaining Entitlement is also based on a county loan limit where the applicant lives. If the borrower defaults, the VA will then pay the lender up to 25% of the county loan limit minus the amount of entitlement already used by the borrower.
Second, the borrower must provide their COE to their lender. Once obtained, the applicant then presents the COE to their lender to initiate the application process. There are different types of lenders, however. A borrower seeking to apply for a VA loan will need to make sure that their lender is authorized to close a VA loan either on its own or through the VA underwriting process.
Third, the borrower should determine whether the property being used to secure the loan is capable of being approved by the VA. When the property to be acquired or refinanced is a condominium unit, there are a number of requirements that must be met and the condominium project itself must be certified as approved by the VA. The purpose of this requirement is to protect the interests of veterans and the VA by ensuring that all units within the condominium meet VA regulatory requirements. A full description of the VA regulatory requirements may be found in Chapter 16 of the VA Lender’s Handbook – VA Pamphlet 26-7 available here (accessed on September 17, 2020), and in the Code of Federal Regulations, 38 C.F.R. § 36-4360, et seq.
A condominium unit to be purchased or refinanced with a loan guaranteed by the VA must either be on the VA’s list of approved condominiums or be added to the list if that project meets requirements. The VA’s list of approved condominiums may be accessed here(accessed on September 17, 2020). If a condominium project is not already approved by the VA and a borrower seeks to add the project to the VA’s approved list, it may take several months for the project to be approved. Nonetheless, a lender may initiate VA approval by formally requesting that the VA approve a particular condominium project.
Requesting VA Approval for a Condominium Project
Under Section 16-A.02 of the Lender’s Handbook, a lender seeking VA approval of a condominium project must provide a written request for VA approval and a copy of the condominium’s organization documents to the applicable VA Office of Jurisdiction. Under Section 16-A.3 of the Lender’s Handbook, the VA requires specific documents to be submitted which will vary based on applicability; but, in general, the following documents will need to be submitted as part of the request for approval:
- Master Deed and/or Declaration of Covenants, Conditions and Restrictions
- Bylaws for the Condominium Association
- Articles of Incorporation for the Condominium Association
- Subdivision Plan for the Condominium Project
- Any applicable Easements
- Any applicable Service Contracts
- Condominium Association Budget
- Current financial statements and reserves of the Condominium Association
- Immediately prior two Condominium Association meeting minutes
Once submitted, the condominium’s organizational documents will then be reviewed for compliance with VA regulations, and condominium approval must be obtained from the VA before any lots or units in the project are eligible for the VA loan guaranty.
Expediting a Request for VA Approval
In some instances, it may be possible to attempt to expedite a request for approval. Section 16-A.02 of the Lender’s Handbook describes two such circumstances, one when the project has previously been approved by another Department of the federal government and another when the applicable condominium documents have, in substance, previously been reviewed and approved by the VA. As to the first such circumstance, Section 16-A.02 states:
Generally, projects already approved by the Department of Housing and Urban Development (HUD) or the United States Department of Agriculture (USDA) do not need further VA review. Upon receipt of evidence of HUD/USDA approval, such as a copy of the HUD/USDA approved project list or the project approval letter, the VA office of jurisdiction adds the project to the nationwide VA list without issuing a formal VA approval letter.
In rare cases, HUD or USDA may approve a project that VA discovers does not comply with VA regulations. In those cases, VA notifies the lender as soon as practicable that it will not guarantee loans in the project.
As to the second such circumstance, Section 16-A.02 also states:
Use of Previously Approved Documents
When the organizational documents being submitted are essentially the same as a set previously approved by VA, the lender/sponsor should include a certification from the declarant or declarant’s attorney which:
- states the fact
- specifically identifies the previous set, and
- describes any variation to the previous set.
In addition, Section 16-B of the Lender’s Handbook encourages the use of attorney opinion letters in an effort to help expedite the review process. The attorney’s opinion must address compliance of the organizational documents with applicable VA regulations 38 CFR 36.4360, et seq., through 36.4360a(g) for condominiums and the material requirements of applicable state and local laws, ordinances, regulations and other legal requirements governing the creation of property owners associations as of the date of the opinion (identifying the applicable laws, ordinances, regulations and legal requirements by name and citation). An attorney’s opinion letter helps expedite VA approval of the project by reducing the extent of VA’s review of the described documents.
Specific VA Requirements for Approval
The Code of Federal Regulations describes several requirements which must be present and several restrictions which are not permitted in a VA-approved project. These are areas that could form the basis for the rejection of a request for approval. Some of the more common requirements and prohibited restrictions are the following:
Priority of Assessments. When a property is located in a condominium, any mandatory homeowner association assessment must be subordinate to the VA-guaranteed mortgage. VA regulations require that every VA loan be secured by a first lien on the property, except under certain circumstances.
Developer/Declarant Right to Amend. The VA recommends that developers have amendment procedures for the master deed or equivalent document, amendable by an instrument approved by not less than 67 percent of unit owners. This percentage is equivalent to the 66 2/3% requirement imposed by Section 90(1) of the Michigan Condominium Act, MCL 559.190(1). Once a project has been approved, during the time that the developer/declarant controls the project, the association must request VA approval of proposed amendments prior to recordation, and VA approval of any amendments to the master deed, bylaws, or other enabling documentation is required while the developer/declarant is in control of the association. A written statement signed by an officer of the association’s board of directors and submitted with VA Form 26-1844, is required as evidence of approval. VA approval is not required, however, for amendments which annex additional phases to the condominium in accordance with a development plan previously accepted by VA.
Association Right to Terminate Certain Contracts. The VA prohibits the requirement that an Association be bound by either (i) a management contract, employment contract or lease of recreational or parking areas or facilities; or (ii) a contract or lease, including franchises and licenses, to which a developer/declarant is a party unless the Association has the right to terminate such agreement without penalty at any time upon not more than 90 days notice.
Right of First Refusal. The right of a unit owner to sell, transfer, or otherwise convey his or her unit in a condominium may not be subject to a right of first refusal or similar restriction if the declaration or similar document is recorded on or after December 1, 1976.
Right to Lease. The Condominium Documents may not prohibit or restrict a unit co-owner’s right to lease his or her unit except for a requirement that leases have a minimum initial term of up to 1 year and except for any age restrictions or other restrictions allowable under 38 C.F.R. § 36.4309(e) or § 36.4354(b)(5)(iv).
Developer/Declarant Control. Similar to the transitional control requirements imposed by the Michigan Condominium Act, the VA requires that the developer and/or declarant relinquish control, direct or indirect, of the association administering the condominium project within specified periods of time, namely not later than 120 days after 75 percent of the units have been sold, or a specified date between 3 and 7 years after the first unit was sold depending on the type of condominium.
The requirements and prohibited restrictions identified above are only examples of the provisions that will be considered by the VA. Through its review process the VA is looking for potential conflicts between the interest of its borrower and the interest of the community, such as language that prevents resale, leasing, or foreclosure unless the developer or association approve. These types of circumstances could adversely affect the perceived risk of loss and could result in a rejection of any request for approval.
Lastly, between May 24, 2018, and July 1, 2020, under Circular 26-18-12, available here, (accessed on September 17, 2020), the VA had instructed lenders in Michigan to process site condominiums in a manner similar to a single family detached homes. Site condominiums are routinely used in Michigan as an efficient alternative to single-family detached housing. There was a concern within the VA that requiring each site condominium project to go through the VA condominium approval process required by Chapter 16 of the Lender’s Handbook disproportionately impacted veterans within Michigan who sought to purchase a site condominium unit. Accordingly, under Circular 26-18-12, program participants did not need to obtain VA for approval of site condominiums in order for the project to be eligible for a VA-backed home loan. By its terms however, Circular 26-18-12 was rescinded effective July 1, 2020. At present, it has not been extended and whether this “site condominium exception” for Michigan will continue or resurface in the future remains to be seen. [UPDATE: On Friday, September 18, 2020, the VA issued Circular 26-20-36, available here, (accessed on September 24, 2020), extending the site condominium exception for Michigan to October 1, 2022.]
The VA-backed home loan can be an effective means by which an eligible borrower can find the home of their dreams. Condominium communities that wish to be able to allow their co-owners to market their units to borrower’s eligible for a VA-backed home loan need to ensure that their condominium is either on the VA list of approved condominiums or, at a minimum, that their organization documents would satisfy VA review. Increasing the pool of eligible purchasers for a community could potentially assist in increasing property values within that community. The attorneys at Hirzel Law, PLC, can assist a community or lender interested in seeking VA approval or in determining its eligibility.
Matthew W. Heron is a Member at Hirzel Law, PLC where he concentrates his practice in real estate, community association law, condominium law, real estate litigation, and zoning and land use. Mr. Heron also has extensive experience in a variety of litigation matters, including insurance coverage, non-compete agreements, automotive supplier disputes, and breach of contract. He routinely appears in both federal and state courts throughout Michigan and has argued before the Michigan Court of Appeals and the Court of Appeals for the Sixth Circuit. He can be reached at (248) 480-8758.
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