Change Date

September 15, 2004, Change 4

This section has been changed to create subsection lettering.

a. Description

As a marketing tool, builders, sellers, or lenders will sometimes establish and fund escrows to temporarily reduce a borrower’s loan payments during the initial years of the mortgage.  The borrower may also fund such an escrow for herself/himself as a financial management tool.

VA will guaranty loans involving temporary interest rate buydowns, if otherwise eligible. 

A temporary interest rate buydown can be used in conjunction with any type of VA-guaranteed loan except a GPM.

b. Escrow Requirements

Funds must be safely escrowed with an independent third-party escrow agent beyond the reach of prospective creditors of the builder, seller, lender, and the borrower.

Exception:  If the Federal National Mortgage Association (FNMA) is the holder, it may take custody of the funds.

The escrow agent must make payments directly to the lender or servicer.  The funds may be used only for payments due on the note.  The funds may not be used to pay past due monthly loan payments.  If the loan is foreclosed or prepaid, the funds must be credited against the veteran’s indebtedness.

Escrowed funds may not revert to the party that established the escrow.  If the property is sold subject to, or on an assumption of the loan, the escrow must continue to pay out on behalf of the new owner.