The VA loan provides veterans an outstanding path to homeownership. However, this loan product also differs slightly from other mortgages. Of note, the VA loan requires a VA appraisal, something not all veterans understand before beginning the process. As such, we’ll use this article to provide some tips to pass a VA appraisal.
Specifically, we’ll discuss the following:
- VA Loan Overview
- What is a VA Appraisal?
- VA Appraisal Tip #1: Understand the Comps
- VA Appraisal Tip #2: Find an Experienced Real Estate Agent
- VA Appraisal Tip #3: Understand VA MPRs
- VA Appraisal Tip #4: Agree on a Reasonable Closing Timeline
- Bonus Tip: Always Get a Home Inspection!
- Final Thoughts
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VA Lo
an Overview
Prior to discussing VA appraisals, we’ll provide a brief overview of the VA loan, itself. The Department of Veterans Affairs (VA) currently administers this home loan program, but the VA does not actually lend money. Instead, the VA guarantees a portion of every loan issued by a VA-approved lender (e.g. banks, credit unions, mortgage companies, etc.). If a borrower defaults (that is, stops paying) on one of these loans, the VA will reimburse the lender a portion of the outstanding loan balance.
This VA-provided protection lowers risk for lenders. And, this reduced risk translates into outstanding borrower terms. Veterans and service member using the VA loan to purchase a home receive the following benefits:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
However, these tremendous terms also come with additional VA loan requirements. For instance, any borrower using a VA loan must complete a VA appraisal, which we’ll discuss in the next several sections.
What is a VA Appraisal?
Simply put, an appraisal estimates a home’s value. And, if you’re planning on using any mortgage to purchase a home, the lender will require an appraisal. When lenders issue a home loan, they provide you money to buy a home, using that home as collateral. That way, if you stop repaying the loan, the lender can foreclose on the home, that is, take possession of it. Then, the lender sells the home to pay off the outstanding loan balance.
For this reason, lenders want to ensure that the loan they provide isn’t greater than the value of the home. And, this is the primary purpose behind a VA appraisal. As the VA guarantees these loans, it wants to make sure that lenders don’t issue loans above the property’s fair market value. During the loan closing process, VA-approved appraisers review the property and comparable sales in the market to determine this value. If the appraised value comes in lower than the contract price, the VA will deny the loan.
However, VA appraisals include an additional element beyond determining a home’s value. The VA loan program exists to support veteran homeownership – not investing. Accordingly, the VA requires that homes meet certain standards of habitability. Bottom line, the VA wants to make sure homes are in good enough condition for a veteran to safely occupy immediately after purchase.
To support this occupancy goal, the VA established minimum property requirements (MPRs) for homes purchased with a VA loan. Prior to approving a loan, the VA requires that properties meet these thresholds – most of which deal with a home’s habitability. And, from a practical perspective, the VA enforces this with its appraisal program. In addition to estimating value, VA appraisals also visually inspect properties to make sure they meet minimum property requirements. Homes need to be safe for occupants, sanitary, and structurally sound.
If a VA appraisal fails due to either A) a home’s value, or B) its MPRs, the VA will not approve the loan. For this reason, it’s important for veterans to understand how to pass a VA appraisal when purchasing a home. In the next few sections, we’ll discuss some tips for how to make this happen.
VA Appraisal Tip #1: Check the Comps
As stated, a major objective of a VA appraisal is to determine a property’s fair market value. While the quality and condition of a home affects value, market comps play the largest role. Market comparable sales, or comps, are the recently sold properties in a local market that are similar to the home you’d like to purchase.
For instance, if you want to buy a 2-bedroom, 1-bathroom townhouse, VA appraisers will research the sales prices of recently sold 2-bedroom, 1-bathroom townhouses in the neighborhood. The appraiser would then use this sales information to help determine your desired property’s value.
If your contract purchase price isn’t supported by market comps, your property will likely not appraise. Using the above example, assume you agreed on a contract price of $200,000 for this townhouse. If the average price of recently sold comps was $125,000, the VA appraiser likely will not determine that your home is worth $200,000 – meaning the VA would not approve a loan for the contract price.
If you understand market comps before agreeing to a purchase price, you can avoid the heartache of having your VA loan denied. In other words, you can help yourself pass a VA appraisal before making an offer on a home by understanding what purchase price comps will support.
VA Appraisal Tip #2: Find an Experienced Real Estate Agent
Realistically, most home buyers don’t have in-depth knowledge of real estate market analysis techniques. And, some people just don’t have the time. Regardless why, most people using the VA loan won’t go out and personally determine market comps before making an offer on a home. For this reason, it’s essential to work with a real estate agent experienced with the VA loan process.
First, buyers don’t pay real estate agent commissions – sellers do. Consequently, from a financial perspective, you don’t lose anything by working with an agent. Second, agents experienced with VA loans can provide you key insight into passing a VA appraisal.
Importantly, before making an offer on a home, an experienced real estate agent can look at the property and tell you whether or not it will pass a VA appraisal. This can save you a ton of time, money, and stress. If you avoid a property that won’t pass an appraisal – due to asking price or condition – you’re far more likely to pass the VA appraisal for the property you do eventually decide to purchase.
VA Appraisal Tip #3: Understand VA MPRs
In addition to understanding market comps, experienced real estate agents can also help you determine whether a property meets VA MPRs. For instance, a property with a damaged roof likely won’t meet VA MPRs, meaning it wouldn’t pass an inspection. By knowing this, you can save yourself the hassle of making an offer, only to find out the property won’t pass a VA appraisal due to MPR shortcomings.
While not an exhaustive list, here are some of the broad property criteria VA appraisers look for in homes:
- Safe and functional mechanical systems
- Adequate heating systems
- Adequate roofing
- No signs of leaks in basements and crawl spaces
- No sign of termites, dry rot, or fungus growth
- No lead-based paint (must be remediated if it existed in the past)
When you look at a home, any of the above should trigger some serious red flags.
VA Appraisal Tip #4: Agree on a Reasonable Closing Timeline
Most real estate agents will tell you that 30 to 45 days from contract to closing provides you a reasonable timeline. However, VA appraisals can extend this timeline, with many VA loans taking closer to 50 or 55 days to close.
Recognizing this, make sure you and the seller agree on a reasonable closing timeline. A VA appraisal generally takes one to two weeks, but it can take far longer if issues arise. For instance, an appraiser may identify a broken air conditioner, something that would likely trigger an MPR failure. Fixing this may take a couple weeks after the initial appraisal.
While VA appraisals certainly can go smoothly, it’s better to provide yourself a buffer in the closing timeline. If the seller wants to push a very aggressive timeline, you and your real estate agent should insist on a more reasonable one. This will provide you ample time to complete the VA appraisal, especially if issues arise during the appraisal.
Bonus Tip: Always Get a Home Inspection!
Many veterans don’t realize it, but a VA appraisal is not the same as a home inspection. Inspections go into far more detail assessing a property. As a result, an inspection can help you identify potentially major property issues that a VA appraisal would not.
The VA does not mandate separate home inspections, but it’s well worth the additional expense. No one wants to accidentally buy a money pit, and an inspection will help you uncover problems before purchasing a home. And, even if the inspection doesn’t uncover any major issues, it will provide you a good overview of your home, its appliances, and the mechanical systems.
Final Thoughts
VA loans are a great path to homeownership. But, to successfully close on one of these loans, buyers need to make sure the home passes its appraisal. By following the recommendations in this article, veterans have a far better likelihood of passing their VA appraisals.
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.
