Borrowers exploring their options with the VA loan program will learn that the Department of Veterans Affairs will not guaranty loans that restrict the borrower’s ability to sell or dispose of the property. Any condo, duplex, or other community-property arrangement must not have bylaws or association agreements that would prevent the VA borrower from freely selling that property.
Some condo projects have a clause in their association paperwork or other agreements, known as the “right of first refusal.” This clause can be trouble for those who want to get a condo project on the VA approved list. However, there are some cases where something may be viewed as a title restriction that may not necessarily interfere with the VA loan process.
According to Chapter Nine of VA Pamphlet 26-7, “VA may guarantee a loan on which a title restriction limits the sale, lease, or occupancy of the dwelling to persons based on age, including a prohibition against the permanent occupancy of the dwelling by children, provided such restriction complies with applicable Federal law.” The last portion of that sentence is key.
Also, “VA may refuse to approve a property with an age restriction if its operation would work an undue hardship upon the owner in the case of sudden, unforeseen events or be likely to result in an increased risk of loan default.”
Chapter Nine also mentions that title restrictions may not even require VA approval depending on what those restrictions might be. “Title to property involving reasonable encroachments, easements, servitude, and reservations for water, timber, or subsurface rights, generally do not require VA approval. However, they must be taken into consideration in determining reasonable value.”
Such restrictions may require additional review by the Department of Veterans Affairs. “If any of these restrictions impact the basic livability of the property, VA approval is required.”
And also, “Title conditions or limitations must be shown on the NOV and considered by the appraiser in determining the reasonable value of the property. If the lender discovers, prior to loan closing, title conditions or limitations not shown on the NOV, the lender must have VA review the conditions and determine whether the value assigned to the property is materially affected.”
If you are not sure about the effects of a specific title restriction or whether it is allowed or not, contact the VA directly for assistance.