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Underwriting Guidelines (VA Loans)

Underwriting Guidelines (VA) Mortgage Lending Division Version 5.9 – 03/22/21

CMS Policies & Procedures Page 2 of 306 Proprietary and confidential. For Internal use only. Do not distribute externally.

DOCUMENT OVERVIEW

Purpose The following document describes the responsibilities and requirements of the Carrington Mortgage Services, LLC (CMS) Mortgage Lending Division Underwriter (Underwriter) when reviewing and underwriting Veteran Administration (VA) mortgage loan applications.

Table of Contents

Document Overview ........................................................................................................... 2

VA Underwriting ............................................................................................................... 21 Overview ................................................................................................................. 21

VA Loan Programs and Compliance ................................................................................ 21 Overview ................................................................................................................. 21

VA Prior Approval ............................................................................................................. 21 Requirements .......................................................................................................... 21

Veterans Eligibility and Entitlement .................................................................................. 21 Overview ................................................................................................................. 21 Establishing Eligibility .............................................................................................. 22 Determining Amount of Entitlement ........................................................................ 22 VA Guaranty Examples ........................................................................................... 23 Funding Fee (FF) Field and Conditions on COE .................................................... 25 IRRRL Exemption Status ........................................................................................ 25 Exempt Status and Verified Income........................................................................ 25 Additional COE Conditions ..................................................................................... 26 Applying for a Certificate of Eligibility ...................................................................... 26 Application for Unmarried Surviving Spouses ........................................................ 27 Previously Issued COE is Missing .......................................................................... 27 Discharge of Veteran and Proof of Service Requirements ..................................... 27 Discharged Reserve/Guard Members .................................................................... 28 Assisting in Obtaining Required Proof of Service ................................................... 28 Basic Eligibility Requirements ................................................................................. 28 Restoration of previously used Entitlement ............................................................ 29 Ineligible Veteran .................................................................................................... 29

The VA Loan and Guaranty ............................................................................................. 30 Overview ................................................................................................................. 30 Eligible Loan Purposes ........................................................................................... 30 Ineligible Loan Purposes ......................................................................................... 31 Cash to Veteran an Ineligible Purpose ................................................................... 31 Maximum Loan Amount .......................................................................................... 32 Down Payment ........................................................................................................ 33 Maximum Guaranty Table ....................................................................................... 33 The Law on Occupancy .......................................................................................... 34 Occupancy by Veteran’s Spouse or Dependent Child............................................ 34 Geographic Bachelor-ing ........................................................................................ 34 Occupancy Requirements for Deployed Active Duty Service Members ................. 34 Occupancy After Retirement ................................................................................... 35 Delayed Occupancy Due to Property Repairs or Improvements ............................ 35 Intermittent Occupancy ........................................................................................... 35 Occupancy Certification .......................................................................................... 35



Interest Rate Changes ............................................................................................ 36 Discount Points ....................................................................................................... 36 When Can Points Be Added in the Loan? .............................................................. 36 Changes to the Agreed Upon Discount Points ....................................................... 37 Loan Maturity Limits ................................................................................................ 37 Amortization Requirements ..................................................................................... 37

VA Loan Identification Number (LIN) ....................................................................... 37 Assigning the LIN .................................................................................................... 37

Borrowers Fees, Charges and the VA Funding Fee ........................................................ 38 Overview ................................................................................................................. 38 VA Funding Fee ...................................................................................................... 38 Fees and Charges the Veteran-Borrower can Pay ................................................. 38 Itemized Fees and Charges .................................................................................... 39 Lender’s One Percent Flat Charge ......................................................................... 41 The VA Funding Fee ............................................................................................... 45

VA Loan Eligibility ............................................................................................................ 48 Overview ................................................................................................................. 48

LDP and GSA Procurement/Non-Procurement ............................................................... 48 Requirements .......................................................................................................... 48

Uniform Residential Loan Application .............................................................................. 49 Loan Application Requirements .............................................................................. 49

Face-To-Face Interview ................................................................................................... 50 Overview ................................................................................................................. 50

Identity and Social Security Number Validations ............................................................. 50 Identity Verification .................................................................................................. 50 Social Security Number Validation.......................................................................... 50

Previous Financial Crimes ............................................................................................... 50 Policy ....................................................................................................................... 50

Occupancy Types ............................................................................................................ 51 Overview ................................................................................................................. 51 Primary Residence .................................................................................................. 51 The Law on Occupancy .......................................................................................... 51 Occupancy by Veteran’s Spouse or Dependent Child............................................ 52 Occupancy Requirements for Deployed Active Duty Service Members ................. 52 Occupancy After Retirement ................................................................................... 52 Delayed Occupancy Due to Property Repairs or Improvements ............................ 52 Intermittent Occupancy ........................................................................................... 53 Occupancy Certification .......................................................................................... 53

Borrowers, Co-Borrowers, Co-Signers, and Non-Borrowing Spouses ............................ 53 Borrowers, Co-Borrowers And Co-Signers ............................................................ 53 Resident Alien Spouses .......................................................................................... 54 Non-Borrowing Spouse ........................................................................................... 54 Community Property State-Specific Information ..................................................... 56

Ineligible Borrower and Vesting Types ............................................................................ 56 Ineligible Borrowers ................................................................................................ 56



Ineligible Vesting Types .......................................................................................... 56

Transaction Types ............................................................................................................ 56 Overview ................................................................................................................. 56 Purchase Mortgage ................................................................................................. 57 Refinance Mortgages .............................................................................................. 58 Cash Out Refinance Transactions Effective for loan applications taken 2/15/19 and after ......................................................................................................................... 58 Streamline Refinance Mortgages............................................................................ 60 Construction Permanent Mortgages (Single-Close Modification of Note) .............. 61 Loan Transactions Paying Off Land Contracts ....................................................... 61 Principal Curtailment ............................................................................................... 61

Leasehold Estates ............................................................................................................ 62 Overview ................................................................................................................. 62 VA Approval ............................................................................................................ 62 Leasehold Estate Requirements ............................................................................. 62 Lease Requirements ............................................................................................... 62 Ground Rents .......................................................................................................... 63

Maximum Loan Amounts ................................................................................................. 63 Maximum Loan Amount .......................................................................................... 63

Loan-to-Values ................................................................................................................. 65 Calculating Loan-to-Value ....................................................................................... 65 Calculating Loan-to-Value for Cash-Out Refinances .............................................. 65 Calculating Combined Loan-to-Value ..................................................................... 65

Combined Loan Amount .................................................................................................. 65 Definition ................................................................................................................. 65

Secondary or Subordinate Financing ............................................................................... 66 Overview ................................................................................................................. 66 Secondary Borrowing .............................................................................................. 66 Down Payment Assistance Program ...................................................................... 66 Homebuyer Assistance Program ............................................................................ 66 Property Assessed Clean Energy (PACE) .............................................................. 66

Seller Contribution Limitations ................................................................................ 67 Seller Concessions ................................................................................................. 67

VA Risk Management ................................................................................................ 67 Overview ................................................................................................................. 67

Risk Controls .................................................................................................................... 68 Verifications Sent to Post Office Boxes .................................................................. 68 Fraud/Red Flags ..................................................................................................... 68

VA Documentation ..................................................................................................... 74 Overview ................................................................................................................. 74

Minimum Documentation Requirements................................................................. 74 Documentation Requirements to Close a VA Loan ................................................ 74 Documentation Requirements to be Eligible for Underwriting ................................ 76 Document Images ................................................................................................... 77

Electronic Signatures ....................................................................................................... 78 Requirements .......................................................................................................... 78



VA Automated Underwriting ............................................................................................. 80 Overview ................................................................................................................. 80 Eligibility Requirements ........................................................................................... 80 Automated Underwriting Systems ........................................................................... 80

Eligible Loan Types ................................................................................................... 80 Eligible Loan Types ................................................................................................. 80 Ineligible Loan Types .............................................................................................. 80

Automated Underwriting Decisions ......................................................................... 81 Overview ................................................................................................................. 81 Approve/ Eligible ..................................................................................................... 81

Underwriting Findings Report .................................................................................. 82 Overview ................................................................................................................. 82 Risk/Eligibility .......................................................................................................... 82 Verification Messages/ Approval Conditions .......................................................... 82 Observations ........................................................................................................... 83 Underwriting Analysis Report .................................................................................. 84

Submission/Resubmission Requirements.............................................................. 85 Requirements .......................................................................................................... 85

Credit Processing ...................................................................................................... 86 Requirements .......................................................................................................... 86 Credit-Related Waivers and Verification Documentation........................................ 86 Disputed Accounts and Public Records .................................................................. 87

Income/Employment .................................................................................................. 87 Overview ................................................................................................................. 87

Asset Documentation ................................................................................................ 88 Overview ................................................................................................................. 88 Retirement Accounts ............................................................................................... 88 Gifts ......................................................................................................................... 88 Foreign Assets ........................................................................................................ 88

Appraisal and Documentation Requirements ........................................................ 88 Requirements .......................................................................................................... 88 Changes in Purchase Price .................................................................................... 88

VA Manual Underwrite ..................................................................................................... 89 VA Credit .................................................................................................................... 89

Overview ................................................................................................................. 89 Credit Report Requirements ..................................................................................... 89

Credit Report Standards ......................................................................................... 89 Verification and Rating of Debts and Obligations ................................................... 90 Credit Report Red Flags ......................................................................................... 90 Age of Credit Report ............................................................................................... 90 Three Repository Merged In-File Credit Report (Trimerge) .................................... 90 Residential Mortgage Credit Report (RMCR) ......................................................... 91 Non-Traditional Credit ............................................................................................. 92 Thin Credit ............................................................................................................... 93 Insufficient Credit .................................................................................................... 93 Undisclosed Debt .................................................................................................... 93

Credit Scores ............................................................................................................. 94 Overview ................................................................................................................. 94



Credit Score Risk Factors ....................................................................................... 94 Credit Score Requirements ..................................................................................... 97 Selecting Credit Score ............................................................................................ 98

Credit History Evaluation .......................................................................................... 99 Overview ................................................................................................................. 99 Number and Age of Accounts ............................................................................... 100 Payment Histories ................................................................................................. 100 Collections and Charge-Offs Paid through Closing Transaction .......................... 100 Credit Utilization .................................................................................................... 101 Inquiries ................................................................................................................. 101

Credit Components ................................................................................................. 101 Verification of Credit Requirements ...................................................................... 101 Housing Payment History ..................................................................................... 102 Bankruptcy/ Foreclosure/ Deed-in-Lieu ................................................................ 103 Short Payoffs ......................................................................................................... 104 Consumer Credit Counseling Services (CCCS) ................................................... 104

Major Adverse Credit ............................................................................................... 105 AUS Approve ........................................................................................................ 105 AUS Refer or Manual Underwrite ......................................................................... 105 Collection Accounts .............................................................................................. 105 Charged off Accounts ........................................................................................... 105 Judgments ............................................................................................................. 106 Payoff of Unpaid or Untimely Debts ...................................................................... 106

Employment and Income Evaluation and Documentation ............................................. 106 Overview ............................................................................................................... 106

Documentation Age ................................................................................................. 106 Requirements ........................................................................................................ 106

Verbal Verification of Employment ........................................................................ 107 Requirements ........................................................................................................ 107

Tax Information Authorization IRS Form 4506-C/2907 Tax Transcripts ............ 107 Requirements ........................................................................................................ 107

Income Tax Returns ................................................................................................ 108 Requirements ........................................................................................................ 108 Personal Income Tax Returns .............................................................................. 108 Amended Tax Returns .......................................................................................... 109

Preliminary Title Report/Title Commitment........................................................... 109 Requirements ........................................................................................................ 109

Income Verification .................................................................................................. 110 Overview ............................................................................................................... 110 Importance of Verification ..................................................................................... 110 Income of a Spouse .............................................................................................. 110 ECOA Considerations ........................................................................................... 110 Income from Non-Military Employment ................................................................. 111 Analysis: Applicant Employed Less Than 12 Months ........................................... 114 Analysis: Recent History of Frequent Changes of Employment ........................... 114 Income from Overtime Work, Part- time Jobs, Second Jobs, and Bonuses......... 114 Income from Commissions ................................................................................... 115 Self- Employment Income ..................................................................................... 115



Active Military Applicant’s Income ......................................................................... 117 Income from Service in the Reserves or National Guard ..................................... 119 Recently Activated Members of the Reserve or National Guard .......................... 120 Income of Recently Discharged Veterans or Veterans to be Discharged from the Military ................................................................................................................... 120 Rental Income ....................................................................................................... 122 Temporary Boarder Rental Income Single Family Residence .............................. 124 Alimony, Child Support, and Maintenance Payments........................................... 124 Automobile or Similar Allowances ......................................................................... 124 Other Types of Income ......................................................................................... 125 Employment by a Relative .................................................................................... 126

Other Income ............................................................................................................ 126 Employment Gaps ................................................................................................ 126 Interest and Dividend Income ............................................................................... 126 Non-Taxable Income ............................................................................................. 126 Note Income .......................................................................................................... 127 Retirement, Pension, Annuity Income and IRA Distributions ............................... 127 Social Security Income ......................................................................................... 127 Teachers ............................................................................................................... 127 Trust Income ......................................................................................................... 128

Unacceptable Sources of Income .......................................................................... 128 Sources of Unacceptable Income ......................................................................... 128

Income Taxes and Other Deductions from Income ............................................. 129 Income Tax and Social Security Deductions ........................................................ 129 Other Deductions from Income ............................................................................. 129

Residual Income Requirements ............................................................................. 130 Residual Income ................................................................................................... 130 Residual Income by Region .................................................................................. 131

VA Assets ....................................................................................................................... 131 Overview ............................................................................................................... 131

Amount of Cash Required ...................................................................................... 131 Requirements ........................................................................................................ 131

Verifications Required............................................................................................. 132 Requirements ........................................................................................................ 132

Pending Sale of Real Estate ................................................................................... 132 Requirements ........................................................................................................ 132

Asset Sources .......................................................................................................... 133 Overview ............................................................................................................... 133 Bank Accounts ...................................................................................................... 134 Earnest Money Deposits ....................................................................................... 136 Employer Assistance Plans .................................................................................. 137 Equity from Other Assets ...................................................................................... 137 Gifts ....................................................................................................................... 139 Gift of Equity .......................................................................................................... 140 Income Tax Refund ............................................................................................... 140 Life Insurance – Cash Value ................................................................................. 140 Loan From A Relative ........................................................................................... 141 Real Estate Commission from Sale of Subject Property ...................................... 141



Rent Credits .......................................................................................................... 141 Repayment Of A Personal Loan ........................................................................... 142 Retirement Accounts ............................................................................................. 142 Secondary Financing ............................................................................................ 142 Seller Concessions ............................................................................................... 143 Stocks/Bonds ........................................................................................................ 143

Cash Reserves ......................................................................................................... 144 Requirements ........................................................................................................ 144

Unacceptable Sources of Assets ........................................................................... 144 Requirements ........................................................................................................ 144

Debts and Obligations .................................................................................................... 145 VA Liabilities and Debt Ratios ................................................................................ 145

Overview ............................................................................................................... 145 Shelter Expense/ Monthly Housing Expenses ...................................................... 145 Total Qualifying Primary Housing Expense-to-Income Ratio ............................... 145 Monthly Debt Obligations ...................................................................................... 146 Payment Shock Calculation .................................................................................. 146 Debt Pay Off/Pay Down ........................................................................................ 147 Projected Obligations ............................................................................................ 147 How to Calculate a Student Loan Monthly Payment ............................................ 147 Income Based Repayment (IBR) Plan .................................................................. 147 Total Qualifying Debt-to-Income Ratios ................................................................ 148 Contingent Liabilities ............................................................................................. 148 Other Considerations ............................................................................................ 149 Compensating Factors .......................................................................................... 149 Child Care Expense .............................................................................................. 150 Non-Occupant Co-Borrowers ................................................................................ 150

Debts and Obligations ............................................................................................. 150 Verification ............................................................................................................ 150 Verification of Alimony and Child Support Obligations ......................................... 151 Analysis of Debts and Obligations ........................................................................ 151 Borrower(s) as Co-obligor/Co-signor on a Loan or Obligations ............................ 151 Pending Sale of Real Estate ................................................................................. 151 Secondary Borrowing ............................................................................................ 152 Deferred Student Loan Payments......................................................................... 152 Loans Secured By Deposited Funds .................................................................... 152 Open 30-Day Charge Accounts ............................................................................ 153

Debts Owed to the Federal Government ............................................................... 153 Title Search Requirements ................................................................................... 153 Repayment Requirements .................................................................................... 153 What is the Credit Alert Verification Reporting System (CAIVRS)? ..................... 154 CAIVRS Procedures ............................................................................................. 154 Borrower with Presently Delinquent Federal Debts .............................................. 155 Treatment of Federal Debts .................................................................................. 155

Appraisal Independence ................................................................................................ 156 Overview ............................................................................................................... 156 Appraisal Selection ............................................................................................... 156 Safe Harbor Act for Appraisals ............................................................................. 157



Appraisal Documentation ....................................................................................... 158 Required Appraisal Forms .................................................................................... 158

Appraisal Transfer (Case Number Assignment after Completion of Appraisal)159 Overview ............................................................................................................... 159 Second Appraisal .................................................................................................. 159 Converting to VA Appraisal after Completion ....................................................... 159

Assisted Appraisal Processing Program (AAPP) ................................................ 160 Assisted Appraisal Processing Program (AAPP) .................................................. 160

Uniform Appraisal Dataset (UAD) .......................................................................... 161 Overview ............................................................................................................... 161 Condition ............................................................................................................... 161 Quality ................................................................................................................... 163

Property and Project Types .................................................................................... 166 Ineligible Property/ Project Types ......................................................................... 166

Eligible Property Types ........................................................................................... 167 Mixed-Use Property .............................................................................................. 167 Condominium ........................................................................................................ 167 Planned Unit Development (PUD) ........................................................................ 168 Deed Restrictions .................................................................................................. 168

Environmental Hazards ........................................................................................... 169 Requirements ........................................................................................................ 169 Locations Near High-Pressure Gas and Liquid Petroleum Transportation Lines . 170 Overhead High-Voltage Transmission Lines ........................................................ 171 Operating and Abandoned Oil and Gas Wells ...................................................... 171 Operating and Abandoned Stationary Fuel Storage Tanks .................................. 171 Ground Subsidence .............................................................................................. 172 Properties Affected by Lead Base Paint ............................................................... 172 Asbestos Insulation ............................................................................................... 173 Chinese Drywall .................................................................................................... 174 Heavy Traffic ......................................................................................................... 174 Railroad Tracks and Other High Noise Sources ................................................... 174 Properties Affected By Airport Noise and Hazards ............................................... 175

Water and Sewage Systems ................................................................................... 176 Connection to Public System ................................................................................ 176 Private Water Systems ......................................................................................... 176 Cisterns ................................................................................................................. 176 Community Water and Sewer Systems ................................................................ 176 Shared Wells ......................................................................................................... 176 Individual Sewage Systems .................................................................................. 176

Certifications ............................................................................................................ 177 Overview ............................................................................................................... 177 Utilities ................................................................................................................... 177 Carbon Monoxide (CO) Detectors ........................................................................ 177 Property Inspection ............................................................................................... 177 Termite Inspection ................................................................................................ 178

VA Property Eligibility and Appraisal Requests ................................................... 182 Overview ............................................................................................................... 182

Requesting the Appraisal ....................................................................................... 183



Requirements ........................................................................................................ 183 Requesting the Appraisal ...................................................................................... 183

Property Types Eligible for Appraisal ................................................................... 185 Overview ............................................................................................................... 185 Existing Construction ............................................................................................ 185 New Construction .................................................................................................. 185 Proposed or Under Construction .......................................................................... 185 Manufactured Homes ............................................................................................ 186 Additions to Manufactured Homes ........................................................................ 186 Modular Homes ..................................................................................................... 186 Property to be Altered/ Improved/ Repaired ......................................................... 187 Security for Existing VA Loan ............................................................................... 187 Properties Not Likely to Meet MPRs ..................................................................... 187 Location Related Problems ................................................................................... 188

Property Types Not Eligible for Appraisal ............................................................ 188 Condo Not Approved ............................................................................................ 188 Ownership Not Fee Simple ................................................................................... 188

Other Appraisal Request Restrictions ................................................................... 189 No Duplicate Appraisals ........................................................................................ 189 Builder ID Required ............................................................................................... 189 No Appraisal Due to Sanction ............................................................................... 189 Building Code Enforcement .................................................................................. 190 Potential Restriction to Veterans Under Contract ................................................. 190 Potential “Master” Appraisals Restrictions ............................................................ 190 If No Inspector Available ....................................................................................... 190 Definition Construction Exhibits and Inspections .................................................. 190

New Construction .................................................................................................... 191 Construction Warranty .......................................................................................... 191

Proposed or Under Construction ........................................................................... 192 Individual vs. “Master” Appraisals ......................................................................... 192 Construction Exhibits ............................................................................................ 192 Construction Inspections ....................................................................................... 192 Construction Warranty .......................................................................................... 192 Determining the Type of Warranty ........................................................................ 193

Room Additions and Car Storage Conversions ................................................... 193 GLA Considerations .............................................................................................. 193 Non-GLA Areas Valued Separately ...................................................................... 193

Construction Exhibits ............................................................................................. 194 General Requirements .......................................................................................... 194 Required Exhibits .................................................................................................. 194 Number and Distribution of Exhibit Sets ............................................................... 194 Reduced-Size Plans ............................................................................................. 194 “Master” Appraisals ............................................................................................... 195 Modular Construction ............................................................................................ 195 Manufactured Homes ............................................................................................ 195 Geological or Soil Instability .................................................................................. 196 Inspections to be Made by HUD ........................................................................... 196

Conversion of HUD Value Notices for VA Use...................................................... 197



Overview ............................................................................................................... 197 Exception .............................................................................................................. 197 Setting Property Related Conditions ..................................................................... 198

Fees for Appraisals and Inspections ..................................................................... 198 Policy ..................................................................................................................... 198 Liquidation Appraisal Fees .................................................................................... 198 “Master” Appraisal Fees ........................................................................................ 198 Construction Inspection Fees ............................................................................... 198 Mileage Fee .......................................................................................................... 199 Fee Payment Problems ........................................................................................ 199 Late Fees .............................................................................................................. 199

Appraisal Requirements ......................................................................................... 200 Overview ............................................................................................................... 200 General Requirements .......................................................................................... 200

Appraisal Report Contents ..................................................................................... 201 Required Items ...................................................................................................... 201

Submission of Appraisal Reports .......................................................................... 203 Electronic Transmissions ...................................................................................... 203 Access to Appraisal Reports ................................................................................. 203 Appraiser E-Appraisal Exemption ......................................................................... 203 Appraiser Signature and Electronic Signature ...................................................... 203

Approaches to Value ............................................................................................... 204 Sales Comparison Approach ................................................................................ 204 Cost Approach ...................................................................................................... 204 Income Approach .................................................................................................. 204

Selection and Analysis of Comparable Sales ....................................................... 205 Overview ............................................................................................................... 205

Other Market Analysis Considerations ................................................................. 206 Overview ............................................................................................................... 206

Remaining Economic Life of Improvements ........................................................ 209 Overview ............................................................................................................... 209 What the Appraiser Must Consider ....................................................................... 209 What the Appraiser must Report ........................................................................... 209

Proposed Construction ........................................................................................... 210 Overview ............................................................................................................... 210 Appraiser Certification Required ........................................................................... 210 “Master” Appraisal Reports ................................................................................... 210 Valuing “Options” .................................................................................................. 211 Manufactured Homes ............................................................................................ 211 Property to be Altered/ Improved/ Repaired ......................................................... 211 Partial Release of Loan Security ........................................................................... 212 Planned Unit Developments (PUDs) and Condos ................................................ 212 Solar Energy Systems .......................................................................................... 212 Local Housing/ Planning Authority Code Enforcement ......................................... 212 Properties Subject to Flooding .............................................................................. 213 Properties in Coastal Barrier Areas ...................................................................... 213 Properties Near Airports ....................................................................................... 214

Minimum Property Requirements .................................................................................. 216



Minimum Property Requirement Procedures ....................................................... 216 MPRs .................................................................................................................... 216 Appraisal is Not a Home Inspection ...................................................................... 216 Safe, Sound, Sanitary ........................................................................................... 216 Appraisal Subject to Repairs to meet MPRs ......................................................... 216 Cosmetic Items ..................................................................................................... 216 Detached Improvements ....................................................................................... 216 Home Inspection Recommended.......................................................................... 216 Local Requirements .............................................................................................. 216 SAH ....................................................................................................................... 216

Marketable Real Estate Entity ................................................................................ 217 Single Real Estate Entity ...................................................................................... 217 Multiple Parcels ..................................................................................................... 217 Road or Waterway Dividing the Property .............................................................. 217

Space Requirements ............................................................................................... 217 Space Requirements ............................................................................................ 217 Non-Standard Construction .................................................................................. 217

Access ...................................................................................................................... 217 Street Access ........................................................................................................ 217 Private Road Requirements .................................................................................. 217 Maintenance Agreement Signatures..................................................................... 217 RLC Approval Required if the Veteran is Accepting Additional Responsibility ..... 218 Private Street in PUD or Condominium ................................................................ 218 Easements Must Run with the Land ..................................................................... 218 Backyard Access................................................................................................... 218 Exterior Wall Access ............................................................................................. 218 Property Constructed Adjacent to Another Property Line ..................................... 218

Encroachments ........................................................................................................ 218 Encroachments ..................................................................................................... 218 Prompt Notification ................................................................................................ 218

Drainage and Topography ...................................................................................... 219 Grading ................................................................................................................. 219 Topographic Conditions ........................................................................................ 219

Geological or Soil Instability, Subsidence, and Sinkholes ................................. 219 Soil Conditions ...................................................................................................... 219 Subsidence ........................................................................................................... 219 Dangerous Subsidence or Sinkholes .................................................................... 219 Repairs by Contractor ........................................................................................... 219 Hairline Cracks ...................................................................................................... 219 New or Proposed Property .................................................................................... 219

Special Flood Hazard Area ..................................................................................... 220 Flood Insurance .................................................................................................... 220 Regular Flooding ................................................................................................... 220 Verification of Flood Zone ..................................................................................... 220 Flood Zones .......................................................................................................... 220 Excluding Non-Residential Improvements ............................................................ 220 Private Flood Insurance ........................................................................................ 220

Coastal Barrier Resources System ........................................................................ 220



Eligibility ................................................................................................................ 220 Appraiser Responsibilities ..................................................................................... 220

Lava Flow Hazard Zones ......................................................................................... 220 Appraiser Responsibility ....................................................................................... 220 Property Eligibility.................................................................................................. 220 Market Value to be Considered ............................................................................ 220

Non-Residential Use ................................................................................................ 221 Eligibility Considerations ....................................................................................... 221 No Value to Business or Commercial Property .................................................... 221

Zoning ....................................................................................................................... 221 Zoning Compliance ............................................................................................... 221 Legal, Non-Conforming Use ................................................................................. 221

Local Housing/Planning Authority Code Enforcement ....................................... 221 Local Authority Requirements ............................................................................... 221 Repairs Required by a Local Authority ................................................................. 221

Utilities ...................................................................................................................... 221 Electricity ............................................................................................................... 221 Appraiser Not Conducting Operational Checks .................................................... 221 Electrical Wires ..................................................................................................... 222 Utilities for Living Units .......................................................................................... 222 Access for Maintenance and Repair ..................................................................... 222

Water Supply and Sanitary Facilities ..................................................................... 222 Water and Sewer .................................................................................................. 222 Safe Drinking Water .............................................................................................. 222 Market Value Considerations ................................................................................ 222 Filtration of Water .................................................................................................. 222 Individual Water Supply ........................................................................................ 222 Hauled Water ........................................................................................................ 223 Individual Sewer Supply ........................................................................................ 223 Connection Mandated by a Local Authority .......................................................... 223

Individual Water Supply .......................................................................................... 223 Health Authority Requirements ............................................................................. 223 Third Party Testing ................................................................................................ 223 Conditions Requiring a Veteran’s Signed Statement............................................ 223 Water Filtration System ......................................................................................... 223 Distance Requirements ......................................................................................... 223 Testing Validity Period .......................................................................................... 224 Connection Mandated by a Local Authority .......................................................... 224

Individual Sewage Disposal ................................................................................... 224 Individual Sewage Disposal .................................................................................. 224 Pit Privies .............................................................................................................. 224 Health Authority Approval ..................................................................................... 224 Connection Mandated by a Local Authority .......................................................... 224

Shared Wells ............................................................................................................ 224 Shared Well Requirements ................................................................................... 224 Appraiser Responsibility ....................................................................................... 224 Lender Responsibility ............................................................................................ 224 Water Quality ........................................................................................................ 224



Community Water Supply/Sewage Disposal Requirements ............................... 225 Community Water/Sewer to be Noted in an Appraisal ......................................... 225 Sufficient Water Supply ......................................................................................... 225 Adequate Size Sewage System............................................................................ 225 Local/State Authority Approval.............................................................................. 225 Trust Deed ............................................................................................................ 225 Trust Deed for Private System .............................................................................. 226 Documentation Required ...................................................................................... 226 Acceptability of Trust Deed ................................................................................... 226 Builder Costs Included in Valuation ...................................................................... 226 System Transfer .................................................................................................... 226 Lower Valuation .................................................................................................... 227 Field Station Review for Problems or Changes .................................................... 227

Hazards ..................................................................................................................... 227 Hazards ................................................................................................................. 227 Prompt Notification of the Lender ......................................................................... 227

Defective Conditions ............................................................................................... 227 Definition ............................................................................................................... 227 Appraisals “Subject to” Repair of Defective Conditions ........................................ 227 Examples .............................................................................................................. 227

Mechanical Systems ................................................................................................ 228 Requirements ........................................................................................................ 228 Appraiser Responsibility ....................................................................................... 228

Heating ...................................................................................................................... 228 Requirement .......................................................................................................... 228 Non-Vented Heater ............................................................................................... 228 Mild Climate .......................................................................................................... 228 Air Conditioning ..................................................................................................... 228

Leased Mechanical Systems and Equipment ....................................................... 228 No Value to Leased Equipment ............................................................................ 228 Leased Equipment to be Noted in the Appraisal .................................................. 228

Alternative Energy Equipment ............................................................................... 229 Alternative Energy Systems .................................................................................. 229 Market Acceptance to be Considered ................................................................... 229 No Value to Leased Equipment ............................................................................ 229

Roof Covering .......................................................................................................... 229 Requirement .......................................................................................................... 229 Multiple Shingle Layers ......................................................................................... 229 Appraiser Expectation ........................................................................................... 229 Appraisal Considerations when the Roof is Not Visible ........................................ 229

Attics ......................................................................................................................... 229 Appraiser Expectations ......................................................................................... 229 Deficient Conditions .............................................................................................. 229

Crawl Space ............................................................................................................. 230 Appraiser Expectation ........................................................................................... 230 Requirements ........................................................................................................ 230 Floor Joists ............................................................................................................ 230 Dampness ............................................................................................................. 230



Vacant Area Beneath House ................................................................................ 230 Basements ................................................................................................................ 230

Dampness or Structural Problems ........................................................................ 230 Sump Pump .......................................................................................................... 230

Swimming Pools ...................................................................................................... 230 Pool Equipment ..................................................................................................... 230 Structural Defects.................................................................................................. 230 Above-Ground Pools ............................................................................................. 230 Local Requirements for Securing Pools ............................................................... 231

Burglar Bars ............................................................................................................. 231 Requirement .......................................................................................................... 231 Removal of Burglar Bars ....................................................................................... 231

Lead-Based Paint ..................................................................................................... 231 Properties Built in 1978 or Later ........................................................................... 231 Properties Built before 1978 ................................................................................. 231 Correction of Defective Lead-Based Paint ............................................................ 231 Appraiser Certification of Repairs ......................................................................... 231

Wood Destroying Insects/Fungus/Dry Rot ........................................................... 232 Apparent Damage ................................................................................................. 232 Termite Infestation Probability Map ...................................................................... 232 Local Requirements Webpage .............................................................................. 232 Non-Residential Improvements............................................................................. 232 Requirements for Properties in Condominium Developments .............................. 232

Radon Gas ................................................................................................................ 233 Testing Recommended by VA .............................................................................. 233 Builder Certification ............................................................................................... 233 Additional Information ........................................................................................... 233

Potential Environmental Problem .......................................................................... 233 Potential Environmental Problem.......................................................................... 233 Examples .............................................................................................................. 233 Appraisal Considerations ...................................................................................... 233

Stationary Storage Tanks ....................................................................................... 234 Distance Requirement .......................................................................................... 234 Comparable Sales ................................................................................................ 234 NOV Requirement ................................................................................................. 234

Mineral, Oil, and Gas Reservations or Leases ..................................................... 234 Influence on Property ............................................................................................ 234 Appraisal Considerations ...................................................................................... 234

High Voltage Electric Transmission Lines ............................................................ 234 Residential Structure ............................................................................................. 234 Detached Improvements ....................................................................................... 234 Distance Requirement .......................................................................................... 234

High Pressure Gas and Liquid Petroleum Pipelines ............................................ 234 Residential Structure ............................................................................................. 234 Detached Improvements ....................................................................................... 234 Distance Requirement .......................................................................................... 234

Properties near Airports ......................................................................................... 235 Appraiser Responsibility ....................................................................................... 235



Appraisal Considerations ...................................................................................... 235 Proposed Construction in a Clear Zone ................................................................ 235 Existing or New Construction in a Clear Zone ...................................................... 235 Accident Potential Zone ........................................................................................ 235 Maps Available Online .......................................................................................... 235

Manufactured Home Classified as Real Estate .................................................... 235 MPRs .................................................................................................................... 235 Real Estate Entity.................................................................................................. 235 Permanent Foundation ......................................................................................... 235 HUD Standards ..................................................................................................... 235 Space Requirements ............................................................................................ 235 State/Local Requirements ..................................................................................... 235 Proposed Construction ......................................................................................... 236 Eligible Loan Purposes – Manufactured Housing ................................................. 236

Modular Homes ........................................................................................................ 237 State/Local Codes ................................................................................................. 237 Comparable Sales ................................................................................................ 237 On-frame Modular Home Requirements ............................................................... 237

Energy Conservation and Sustainability............................................................... 237 Energy Efficient Mortgages ................................................................................... 237 Energy Conservation Encouraged ........................................................................ 237

Requests for Waiver of MPR Repairs .................................................................... 238 Waiver Requested by a Veteran ........................................................................... 238 Inspection Report .................................................................................................. 238 Contributory Value ................................................................................................ 238 Materials Shortage Following a Natural Disaster .................................................. 238 Escrowed Funds for Completion of Repairs ......................................................... 238

Manufactured Homes .............................................................................................. 239 Existing Construction ............................................................................................ 239 Proposed or Under Construction .......................................................................... 239 Foundation Requirements ..................................................................................... 240

Value Notices ........................................................................................................... 242 Overview ............................................................................................................... 242 Issuing a Notice of Value ...................................................................................... 242

Reviewing Appraisal Reports ................................................................................. 243 Purpose of the Review .......................................................................................... 243

Resolving LAPP Appraisal Review Problems....................................................... 244 Contact and Cooperation ...................................................................................... 244 Referral to VA ........................................................................................................ 244 VA Consistency ..................................................................................................... 244 SAR’s are not Appraisers ...................................................................................... 244 Implication of SAR Certification ............................................................................ 245

LAPP – Issuing A NOV at Other than the Appraiser’s Value Estimate .............. 245 Change Restrictions .............................................................................................. 245 Other Changes ...................................................................................................... 245 Penalty for Abuse .................................................................................................. 245 Potential Conflict with State .................................................................................. 245

Preparing Notices of Value ..................................................................................... 246



Format Under LAPP .............................................................................................. 246 Format if Prepared by VA Staff ............................................................................. 246 Notice of Value ...................................................................................................... 246

Notice of Value Conditions and Requirements .................................................... 246 Overview ............................................................................................................... 246 Table of NOV Conditions & Requirements ........................................................... 246

Distributing Notices of Value ................................................................................. 255 LAPP Cases .......................................................................................................... 255 NOV Issued by VA ................................................................................................ 255

How Long Notice of Value is Valid ......................................................................... 255 Existing or New Construction ................................................................................ 255 Proposed or Under Construction .......................................................................... 255 Extension of Validity Period .................................................................................. 255

Requesting Changes to the NOV ........................................................................... 256 Making Changes ................................................................................................... 256 How to Make a Change ........................................................................................ 256 Submission of Real Estate Market Data ............................................................... 256 Processing Change of NOV Request ................................................................... 256 Appraiser’s Role .................................................................................................... 257 VA’s Role .............................................................................................................. 257 Lender’s Role ........................................................................................................ 257

Transfer of Appraiser’s Reports between Lenders .............................................. 258 Lender Cooperation .............................................................................................. 258 LAPP Cases .......................................................................................................... 258 Other Cases .......................................................................................................... 258 If Unable to Obtain Appraisal ................................................................................ 258

Requirement to Notify VA ....................................................................................... 258 Requirement to Notify VA ............

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