N A letter to program participants this past January, the New EnglandRegional Office of the Department of Veterans Affairs urged lenders andreal estate brokers to to counsel veterans and service personnel on theimportance of obtaining release approvals from the VA before closing onthe sales of their homes securing VA guaranteed or insured loans.
Manchester, New Hampshire – Veterans who sell their homes by allowingthe purchaser to assume their loan must be extremely careful to follow properprocedures to avoid potential problems later.
Under the governing law, a veteran who obtains from a private lendera loan which is guaranteed or insured by the Department of Veterans Affairs(a VA loan), is legally obligated to indemnify the United States Governmentfor the net amount of any guaranty or insurance claim the VA may thereafterby required to pay to the lender. However, current law and regulations providefor the release of a veteran from liability to the Government when the veteransells the property by letting the new buyer assume the VA loan. If the loanis current, the purchaser-transferee is acceptable to the VA from an incomeand credit standpoint, the purchaser-transferee assumes the loan and alsoassumes the above-mentioned indemnity obligation, then the veteran can bereleased from any future liability if the new buyer were to default on theloan.
Pursuant to Public Law 100-198, veterans who obtained their home loansunder commitments dated March 1, 1988 and later must go through releaseof liability processing. Failure to do so may result in the immediate foreclosureof the loan, even if there is no delinquency in the required monthly installmentpayments. This regulation bears repeating: a veteran continues to be responsiblefor their loan until they obtain a release of liability, even if they selltheir home.
It is extremely important that veterans with VA loans prior to March1, 1988 who find it necessary or expedient to sell their homes without theirVA guaranteed or insured loans being paid in full (i.e. they let the buyerassume their loan), avail themselves of this opportunity to be releasedby the VA. Those who have not done so have frequently found themselves obligatedfor the repayment of sizable amounts in the many cases in which their purchasers,or subsequent owners, have defaulted.
Veterans need to remember that when a buyer assumes their VA loan, thatbuyer could sell the property the next day and let the second buyer assumethe loan from the first buyer. So no matter how qualified and willing theveteran’s buyer may seem, that buyer might not be the buyer who ends updefaulting on the loan. Obtaining a release of liability eliminates problemsfrom future sales and transfers.
While obtaining a release of liability prevents the VA, the federal governmentor the mortgage lender from suing the veteran if the buyer who assumes themortgage defaults, the release does not allow the veteran to reuse his orher veteran housing benefit until that loan is paid off. The only exceptionto this rule is if the veteran sells the home to another veteran who alsohas an unused eligible housing benefit and the buyer occupies the home asa primary residence. The veteran selling his or her home must execute withthe buyer a Substitution of Entitlement in order to restore the originalhousing benefit.
Veterans planning to purchase another home with their veteran housingbenefit would be wise to consider not allowing a purchaser to assume theirloan unless the buyer is also a veteran and is willing to substitute theirbenefit. This procedure is especially important for any veterans with loanscommitted prior to March 1, 1988 because these loans do not require a releaseof liability by the VA. A veteran with a loan closed before this date cansimply sign over the deed to any potential buyer. In a rush to sell, theveteran may not realize that letting the buyer assume the existing loanprevents the veteran from reusing his or her housing benefit.
The VA housing benefit can be extremely valuable to veterans and currentservice personnel. Any veteran considering the sale of his or her home wouldbe wise to obtain counseling from a VA lender and consult with an attorneyfamiliar with VA benefits.
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