VA Loans sometimes get a bad rap. For a home buyer, they’re a benefit often not utilized. And for a seller, they’re assumed to be more difficult to deal with. But a buyer who turns down this earned benefit is walking away from a 0% down loan with no mandatory private mortgage insurance (PMI) and often lower rates than a conventional loan. And a seller who hesitates is one who doesn’t understand that there’s no significant difference between closing success rates for VA Loans versus conventional loans.
The real problem is not the VA Loan—it’s perception, and faulty perception at that. The secret to successfully navigating a VA Loan as either a buyer or a seller is to have a real estate agent who is knowledgeable about and experienced with VA Loans working with you.
The most critical piece of the VA Loan is a successful VA appraisal. That appraisal will address two issues: the valuation of a property and whether or not it meets Minimum Property Requirements (MPRs).
Property Valuation. The language the VA uses is “reasonable value,” and the term is synonymous with “market value.” The VA’s assessment of a home’s value is intended to give, in their words, “a figure which represents the amount a reputable and qualified appraiser, unaffected by personal interest, bias, or prejudice, would recommend to a prospective purchaser as a proper price or cost in the light of prevailing conditions” (VA Lenders Handbook). The appraisal will factor in the age, features, and condition of the home. In addition, they’ll look at comparable sales from within the past six months. In other words, what are similar houses in the area selling for? When all of this is considered, a reasonable value for the home is determined.
That appraisal ideally comes in at or higher than the purchase price. Should that not be the case, it does not mean game over. If the VA appraisal comes in lower than the purchase price for a home, alternatives are available. As a buyer, you can choose to pass on a house with a lower appraisal, renegotiate the purchase price given the appraisal results, or plan to come up with the difference yourself.
As a seller, if the lowered appraisal puts the sale in jeopardy, you may opt to lower the asking price. You’ll want to consider the time and risk involved with starting over with another buyer versus the cost and inconvenience of holding the property for longer than planned. Also keep in mind that the VA Loan appraisal sticks to the property for six months. That means that if the next potential buyer is also planning to use the VA Loan benefit, you’ll have the same problem again. If the home has under appraised, you can opt to narrow your buyer pool to only conventional or cash buyers.
Minimum Property Requirements. There is a series of criteria here. Is the property residential? Free of hazards? Accessible from the street? (You can find the whole list in Chapter 12 of the VA Lenders Handbook.) In a nutshell, a VA Loan appraiser is interested in whether the house is safe, sanitary, and structurally sound.
As a buyer, all of this information should be reassuring to you. You want to know that you’re buying a home that meets these standards. As a seller, knowing what a VA Loan appraiser will be looking for gives you the information you need to make any necessary adjustments in advance of putting your home on the market—particularly if you’re likely to be selling in or near a military community.
What if the appraisal comes back with an adverse report on these criteria? Again, like with the property valuation, this outcome doesn’t necessarily mean that the sale is doomed. A buyer can ask a seller to pay for the necessary repairs or can choose to pay for the repairs out of pocket. A seller can agree to make the repairs or apply a credit at closing toward the cost of the buyer absorbing the expense. Keep in mind, the repairs must be made and reinspected by the appraiser prior to the closing. If the seller is not going to pay for the repairs, and the buyer chooses to pay to make the repairs, there is usually a separate agreement stating what happens to the money the buyer paid out to improve the seller’s home in the event the house does not close.
Whether you’re selling or purchasing a home, your best interests are served when you work with a real estate agent who is experienced with and knowledgeable about VA Loans and appraisals. He or she will be prepared for any issues that may come up and can walk you through them.