A home loan through the Loan Guaranty program of the Department of Veterans Affairs (“VA”) presents a real opportunity for U.S. veterans to purchase a home when they may otherwise not be able to do so. Benefits to a VA loan include lower interest rates, more flexible underwriting requirements, no down payment, and increased purchasing power. One potentially under-utilized way in which a VA loan can be utilized is through the purchase of a unit in a VA-approved condominium. The review process may at first seem daunting, but the approval process is almost entirely conducted through the veteran’s lender, and the VA has approved almost two-thousand condominiums in Michigan alone. This article reviews the potential benefits of a VA loan guaranty over conventional financing, the eligibility requirements for veterans, and then also the VA’s review process for condominiums.
Benefits of a VA Loan Guaranty
There are several advantages to a VA loan over other types of financing. One of the biggest advantages to a VA loan is that a VA loan does not require any down payment. Nearly all conventional financing require a down payment, and even a loan guaranteed by the Federal Housing Administration (“FHA”) requires at least 3.5% down. In addition, a VA loan does not require private mortgage insurance (“PMI”). This is a significant financial advantage over other types of financing especially if the borrower does not make a down payment. According to one provider, annual PMI costs can range between .55% and 2.25% of the mortgage balance. On a $200,000 loan, the monthly PMI premium on a non-VA loan can sometimes range between $91.67 and $375, depending on credit scores. With a VA loan, any PMI cost is eliminated.
Under a VA loan guaranty, the VA provides insurance to lenders (called the VA guaranty) that assures a lender that the amount of the guaranty will be repaid if the veteran can no longer make payments. As a result, the interest rate of a VA loan is typically about .25% lower than a conventional loan. In addition, a VA loan will often not disqualify a veteran due to a lower credit score, bankruptcy, or prior foreclosure (though a foreclosure may require repayment of the outstanding deficiency), providing some flexibility in underwriting guidelines as compared to conventional financing.
In addition, once eligibility is achieved, a VA loan is always available and never expires, no matter how many times it is used (or even if it is never used). Borrowers eligible for a VA loan are able to use and reuse this eligibility as long as they maintain only one VA loan at a time. Further, once a borrower has earned VA loan eligibility, this eligibility never goes away. Eligibility is based on the length of time served and the period of time in which the service took place.
VA Loan Guaranty Eligibility
1. Veteran Eligibility
There are, in essence, two components to a VA loan. The first component is eligibility which is also the most significant. This means that the veteran meets certain basic criteria of appropriate length and character of service to be able to use a VA loan (though not discussed in this article, if a veteran does not qualify for a VA loan, they may still potentially obtain favorable terms on an FHA loan due to their status as a veteran).
A veteran is eligible for VA home loan benefits if the veteran served on active duty in one of the U.S. armed forces after September 15, 1940, and was discharged under conditions other than dishonorable after either (1) 90 days or more, any part of which occurred during wartime, or (2) 181 continuous days or more during peacetime. There is a two-year service requirement for veterans who enlisted after September 7, 1980, or who entered service as an officer after October 16, 1981. For these veterans, they must have completed either: (1) 24 months of continuous active duty, or (2) the full period for which they were called or ordered to active duty, but not less than 90 days (wartime) or 181 continuous days (peacetime). Members of the Reserves and National Guard can become eligible upon completion of 6 years of service.
The second component is entitlement. This means the amount a veteran may have available for a guaranty on a VA loan. A veteran’s basic entitlement is $36,000. For loans in excess of $144,000, additional entitlement may also be available, usually no more than 25% of the loan amount.
The VA loan is a service which is available through the borrower’s local lender, and does not require the borrower to go through the VA. While lenders are able to obtain a certificate of eligibility (“COE”) for a particular veteran in order to determine whether that veteran qualifies for a VA loan, a veteran is able to verify their eligibility directly through the VA’s ebenefits website. A lender will rely on the COE as proof that the veteran is eligible for the VA loan guaranty benefit, though the veteran must still qualify based on income and credit requirements which will vary depending on the amount of the loan sought by the veteran.
2. Condominium Eligibility
A veteran may use a VA loan to purchase a unit in a condominium. In order to do so, the entire condominium must be approved by the VA before any units are eligible for the VA loan guaranty. The VA maintains a list of VA loan guaranty-eligible condominiums by county which can assist in searching for a home. Condominium eligibility can greatly assist a potential buyer in finding the right home by expanding those homes that are available for purchase. For example, in Michigan there are 1,853 condominiums listed as VA loan guaranty eligible.
Each lender is responsible for ensuring that a particular condominium qualifies, and each loan must meet certain title and lien requirements. The condominium eligibility requirements are contained in Chapter 16 of the VA’s lender pamphlet, VA Pamphlet 26-7. For example, with respect to title requirements, the estate must not be less than fee simple (38 C.F.R. 36.4361(a)), and every loan must be secured by a first lien on the property (subject to certain exceptions) superior to even any lien of the condominium association. (38 C.F.R. 36.4362).
In order to qualify the condominium, the lender must provide the following information to the VA Office of Jurisdiction:
- A written request for VA approval; and
- A copy of the condominium’s organizational documents.
The list of organization documents required by the VA is contained in Chapter 16 of the VA’s lender pamphlet, VA Pamphlet 26-7. The VA then reviews these documents for compliance with VA regulations, (i.e., 38 C.F.R. 36.4360) and then once the VA approves the documents units within the condominium are then eligible for the VA loan guaranty. If the VA has previously approved a condominium and the condominium’s organizational documents are essentially the same as when previously approved, the lender can expedite the approval process by including a certification which:
- States that the condominium’s organizational documents have previously been approved,
- Specifically identifies the prior documents that had been approved, and
- Describes any differences between the prior documents and the current documents.
One additional way that a lender could expedite the VA’s review of a condominium’s organizational documents is to include an attorney’s opinion regarding the condominium’s eligibility. The use of an attorney’s opinion must:
- Be prepared in letter form on the attorney’s firm’s letterhead,
- Be signed, dated, and show the name and title of the attorney rendering the opinion, and
- Address four areas: (1) project identification; (2) documents reviewed; (3) attorney’s qualifications; and (4) attorney’s opinion.
The attorney’s opinion must address compliance of the organizational documents with the material requirements of applicable state and local laws governing the creation of community associations as of the date of the opinion and identify such applicable state and local laws by name and citation. The opinion must also identify any variations between the condominium or its documents and any applicable law. In most cases, the VA will require that the variation be corrected by, for example, recording an amendment correcting any deficiency.
In many ways the VA’s review simply ensures that the organizational documents of the condominium contain provisions already required either by the Michigan Condominium Act, MCL 559.101, et seq., or the Michigan Nonprofit Corporation Act, MCL 450.2101, et seq.). These provisions include the following areas:
- Legal description of the real estate of the condominium
- Description of common elements
- Membership of unit co-owners in the governing association
- Maintenance of organizational documents for association members
- Voting rights of members in the association
- Election, removal, and replacement of the board of directors of the association
- Meetings and powers of the board of directors
- Amendment of the organizational documents
- Notice to mortgagees of potential amendments and other mortgagee rights
- Maintenance of common elements
- Adoption of annual budget and collection of assessments
- Enforcement of condominium documents
- Requiring certain kinds of insurance
- Provisions regarding reconstruction of common areas after condemnation or casualty loss
- Provisions governing parking, if applicable
- Provisions regarding reserved rights of the developer/declarant
Accordingly, a condominium project that complies with Michigan law has a good chance of qualifying as a VA-eligible condominium project.
If a veteran is eligible, a VA loan guaranty can be advantageous to conventional financing in providing a veteran with greater purchasing power than otherwise might be available. In some instances, however, potentially due to either a lack of familiarity or a concern regarding the condominium’s eligibility, qualified veterans may not think to use this purchasing power to look for units in a condominium project. The qualification and eligibility process for both the applying veteran and the condominium project itself, however, are both conducted by the veteran’s lender. Accordingly, the application, underwriting and eligibility review process can be handled all at one time by a single processor. In addition, the VA’s lender pamphlet provides lenders with a number of suggestions as to how the review process can be expedited. Therefore, and especially for a condominium project which already complies with Michigan law, a VA loan guaranty for the purchase of a unit in a Michigan condominium could be easier than many may think.
Matthew W. Heron is a Member of Hirzel Law, PLC where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, land use, large contractual disputes and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. Mr. Heron concentrates his practice on drafting, revising, amending, restating and interpreting governing documents of condominium and homeowner’s associations in Michigan. He can be reached at (248) 478-1800 or [email protected]. You can also follow him on Twitter at @mwheron75.