VA Issues Requirements for Secondary Borrowing on Assumption Transactions

VA recently published requirements for holders processing assumption transactions where the assumer obtains secondary borrowing simultaneously with the assumption of a VA-guaranteed home loan.  There are a variety of requirements, including:

• The holder must take steps to ensure the secondary borrowing is subordinate to the VA-guaranteed loan;
• The holder must document the name of the secondary lender and the amount and repayment terms of the secondary borrowing in the assumption loan file;
• The assumer may not receive cash back from the borrowing, although proceeds may be used to pay for allowable closing costs; and
• The recurring monthly payment for the secondary borrowing must be considered when evaluating the assumer’s debts and in automated underwriting feedback.

If the secondary borrowing is not assumable, VA expects that the holder of the VA-guaranteed loan counsel the assumer that this may restrict their ability to sell the property through an assumption in the future.  VA also provided that the interest rate on the secondary borrowing may exceed the rate on the VA-guaranteed loan.

The requirements are effective immediately.