VA loans provide veterans and active service members an outstanding homebuying option. But, what about from a seller’s perspective? How does selling a home change when working with a VA loan buyer? We’ll use this article to answer these questions, outlining what sellers should know about VA loans.
Specifically, we’ll discuss the following:
- VA Loan Overview
- Pros of Selling to VA Loan Buyers
- Cons of Selling to VA Loan Buyers
- Supporting Veteran Homeownership
- Final Thoughts
VA Loan Overview
The VA loan program is administered by the Department of Veterans Affairs, but loans are actually originated by VA-approved lenders (e.g. banks, credit unions, and mortgage companies). With this system, the VA guarantees VA loans. If a borrower defaults, the VA will refund a portion of the outstanding loan balance to the lender.
This VA insurance allows lenders to provide outstanding terms for VA loans. And, for sellers, the most important thing to understand about VA loans is how good of a mortgage product they are for qualified borrowers. This high-quality nature means that, if dealing with a veteran buyer, he or she will likely use the VA loan. Of note, VA loans include the following outstanding characteristics:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
Generally speaking, the process of selling to a VA loan buyer parallels selling to any buyer. But, certain key differences exist that sellers should understand. Accordingly, we’ll use the rest of this article to outline the pros and cons of working with VA loan buyers as compared to buyers using conventional loans.
Pros of Selling to VA Loan Buyers
The following characteristics of VA loans make them easier to work with from a seller’s perspective:
- Less stringent underwriting criteria: Due to the fact that the government guarantees VA loans, VA-approved lenders can use looser underwriting criteria. Typically, borrowers can qualify with lower credit scores and higher debt-to-income ratios with a VA loan relative to a conventional one. This means that, comparing two buyers with equal financial profiles, the one with a VA loan will have an easier time qualifying for a loan than the one using a conventional loan.
- More reliable closing statistics: Many people – incorrectly – believe that VA loans are more difficult to close than conventional ones. While these loans do require some extra steps, they have successfully closed at a rate higher than their conventional counterparts over the past five years. No closing is guaranteed. But, this fact should provide sellers confidence in the likelihood of closing with a VA home loan buyer.
- Increased purchasing power: With a conventional loan, buyers need between 3% to 20% down payments. Realistically, putting this cash together poses an insurmountable obstacle to many potential buyers, even if they have qualifying income and credit. On the other hand, VA loans don’t require a down payment. This means that borrowers tend to have significantly more buying power, as down payment needs do not increase with the purchase price.
Cons of Selling to VA Loan Buyers
Sellers also need to understand the elements of VA loans that make them more challenging. But, if you understand how the below items work, you’ll have a much easier time selling to a VA loan buyer.
- VA Minimum Property Requirements (MPRs): The VA loan program exists to promote homeownership for veterans and active service members. Accordingly, the VA mandates that properties have baseline levels of habitability. In VA parlance, homes need to be safe, sound, and sanitary. And, to meet these objectives, the VA has established MPRs that homes must meet in order to qualify for a VA loan. If a home fails an MPR, the VA will not approve the loan. For sellers who don’t understand this process, MPRs can cause an unpleasant surprise during the closing process.
- VA appraisal: Related to MPRs, VA loan buyers must have a VA appraisal completed. In addition to confirming property value, this appraisal will review a property for MPR compliance. Following the walk-through, the appraiser will send a final report to the VA for review. If the report flags any MPR violations, the VA will not approve the loan until either the buyer or seller resolves these issues.
NOTE: If selling a home in an area with high veteran and active military populations, there’s a good chance you’ll need to deal with MPRs and VA appraisals. Many real estate agents specialize in VA loan purchases, and they can be a great resource for VA compliance. When you use a listing agent who’s familiar with the VA loan process, he or she can make sure your home is as ready as possible for the VA appraisal process. This can save you a ton of headaches during the closing process.
- Power of attorney potential: This is less a con and more a “be aware of” for sellers. Inherently, military members using the VA loan have an increased likelihood of travel and deployment. Accordingly, it’s not uncommon for a service member to close on a VA loan via power of attorney. For the seller, this should largely be transparent. But, you should be aware that it’s a possibility that someone besides the actual buyer will close in his or her stead.
Lastly, we need to dispel a rumor about VA loans. Many people argue that VA loans take longer to close, making working with these buyers more difficult. Realistically, VA loans and conventional loans both close on an average of 40 to 50 days from the signed contract. As a result, sellers should not consider closing time a con to working with VA loan buyers.
Supporting Veteran Homeownership
When you sell to a VA loan buyer, you support veteran or active military homeownership. This provides no practical financial benefit to sellers. But, you can certainly argue that supporting veteran homeownership is still a good thing.
And, when you sell to a VA loan buyer, you know that they’ll actually live in the house. The VA home loan exists to support veteran homeownership – not investing. Consequently, the VA requires the buyers move into their home within 60 days and occupy it as their primary residence for at least a year. Simply put, when you sell to a VA buyer, you sell to someone looking for a home – not an investment property.
Once again, supporting veteran homeownership certainly doesn’t offer a financial benefit to sellers. But, it doesn’t hurt to know that, when you sell to a VA loan buyer, you’re helping someone who has served our country find a home.
Final Thoughts
In many respects, selling to a VA loan buyer is no different than selling to any buyer. But, some differences do exist. If sellers understand these differences before listing their homes, they’ll avoid potential surprises during the closing process. And, in selling to a VA loan buyer, you also have the advantage of supporting veteran homeownership, which is certainly a positive.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
