Sellers should be aware of VA loan requirements, as these can impact the sale of their home. Ensuring the property meets VA standards can make the transaction smoother and more appealing to potential buyers.
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A home loan backed by the VA is an invaluable benefit for military personnel and veterans who dream of homeownership, but some home sellers may have reservations about dealing with the VA loan process and its nuances.
The various VA loan requirements for sellers have created some myths and misconceptions among sellers and real estate professionals, even causing some sellers to dismiss VA-backed offers entirely. The truth is, accepting offers from buyers using a conventional mortgage loan can be just as complicated as from those using a VA loan. And beyond the many misconceptions, sellers have little to worry about should they choose to work with a buyer who makes an offer with a VA loan.
So, how do VA loans differ from conventional loans? Unlike a conventional loan, the VA loan program is administered by the Department of Veterans Affairs. The loans are issued by VA-approved lenders, including banks, credit unions and mortgage companies. Essentially, the VA guarantees the loans, so if a borrower defaults, the lender is protected. This protection incentivizes lenders to work with VA-backed borrowers and to provide competitive loans. Other key distinctions are that VA loans require no down payment or private mortgage insurance, the interest rates are usually lower and credit score requirements are forgiving.
Since there’s always a chance a VA-backed buyer will make an offer on your home, there are a few VA-specific requirements that a seller should be aware of. First, the VA requires an independent appraiser to assess the property and ensure it conforms to a list of Minimum Property Requirements (MPRs). Through negotiations, the buyer may also request the seller to pay or contribute to some of the fees associated with the sale. For example, there are fees not allowed by the VA that a buyer may ask a seller to pay for in full. Further, the VA’s guidelines allow sellers to pay up to 4% of the selling price in concessions to the buyer. Finally, VA loans come with a funding fee that’s typically paid by buyers but could fall onto the seller in negotiation. Let’s further explore the pros and cons of working with a VA-backed buyer.
A VA loan buyer has several advantages over someone with a traditional loan that increase the chances of a successful deal. This is mostly because VA-backed buyers face less stringent underwriting criteria while being able to maximize their purchasing power. Let’s explore these advantages in greater detail so you’ll understand all the characteristics that make VA loan home buyers more appealing to sellers than those buyers with conventional loans.
Compared with other loan programs, VA-backed buyers are, on average, more likely to close a home deal. According to a June 2021 report by ICE Mortgage Technology (formerly mortgage application software company Ellie Mae), 70% of VA-backed loans reached closing compared with just 51% of conventional loans. Part of this success is owed to the preapproval process for VA loans, which makes this segment of buyers particularly strong.
You may worry that VA loans take much longer to close because of the various requirements for sellers. This is largely a misconception among some real estate professionals that the process is rife with red tape and hard-to-meet criteria. Overall, these loans keep pace with other loan products and the difference in closing times, on average, is fewer than 10 days. According to ICE Mortgage Technology, the most recent statistics show that conventional mortgages take an average of 57 days to close, FHA loans take 62 days, and VA loans close in an average of 66 days.
Because the loans are guaranteed by the government, the application process for a VA loan includes less stringent credit-score requirements and higher debt-to-income ratios. The underwriting system is automated and fairly quick, and the process is far more forgiving than those of conventional loans. For sellers, this means that if you were to compare two buyers with similar financial profiles, a VA-backed buyer would have an easier time qualifying for a loan.
A down payment is often an obstacle for those using a conventional loan, since they will need between 3% and 20% of the purchase price on hand to meet down payment requirements. This obstacle often limits their home search, even if they have sufficient income and credit. VA loans don’t require a down payment, which increases the number of houses the buyer can consider.
It’s true that some aspects of the VA loan process can be more challenging for sellers when compared with conventional loans. The process takes a bit longer, mostly because of some processes, standards and complexities that are specific to the VA loan process. Let’s explore the cons of selling to a VA-backed buyer, the specific disadvantages and possible misconceptions.
A fair amount of negativity associated with VA loans is tied to its unique appraisal process, which includes both a valuation of the property and an assessment of a specific set of property conditions, known as Minimum Property Requirements. This process, conducted by an independent appraiser, can usually be completed in fewer than 10 days in most parts of the country. Sellers may have heard that a property must be in top condition in order to pass appraisals and conform to MPRs, but this isn’t the case. And in the event one or more issues get flagged, the buyer can always apply for an exemption or the seller can correct the issue so the deal can move forward.
Some sellers mistakenly believe that they are required to pay all of a VA-backed buyer’s closing costs. In fact, sellers are not required to pay any of a VA buyer’s closing costs. Of course, to close a deal, who pays what can be a matter of negotiation, but this happens on a deal-by-deal basis.
In order to back a loan and ensure veterans and military personnel are making a solid investment, the VA program mandates that properties meet basic standards called Minimum Property Requirements. MPRs ensure the house and property are safe, sound, sanitary and fit for living. In most cases, any issues that are raised by an appraiser can be remediated in order for the deal to reach closing.
If you live in an area with a high concentration of military personnel and veterans, it might be worthwhile to hire a professional to conduct an inspection to make sure the property meets MPRs before you list the home on the market or accept an offer. For a few hundred dollars, you can hire an inspector who’s familiar with VA requirements to point potential issues and ensure your listing will sail through the sales process.
Another aspect of a VA-backed loan that a seller might find off putting is that the buyer may not be present during much of the transaction due to work-related travel or deployment or other military obligations. Some personnel even buy their next home while living in another location. In these cases, buyers who can’t be on-site can use power of attorney, a legal instrument that allows a buyer to designate a person who can enter into contracts on their behalf, to close on their loan. The need for power of attorney should not pose any additional issues for a seller, nor should it further slow the time it takes to close a sale.
As a seller, you may not want to work with a VA-backed buyer and you have the right to refuse an offer tied to a VA loan. Sellers have the right to select the type of financing they prefer, as long as they are not engaging in discriminatory practices that violate fair housing laws. But keep in mind that while VA loans can sometimes take longer to close because of the appraisal rules, the transactions have a greater success rate when compared with other loan types. So it’s best not to rule them out when considering offers.
Again, part of the game plan for preparing a home for a successful sale would be to familiarize yourself with the VA’s appraisal standards and MPRs and try to mitigate any issues an appraiser could flag before you list the home. VA appraisers will take a hard look at most of the home’s systems such as heating, electricity, water and roofing, while also looking for defects, deterioration, poor construction, peeling paint, and more. You can find a sample appraisal form online, or consider hiring a professional to review for MPRs and make recommendations for alterations or repairs.
Despite the negative myths and misconceptions surrounding the VA loan program, working with a VA-backed buyer is a smart decision on several fronts. First, the program is solid, and an approved buyer with a strong offer is likely to make it through to the closing table. Second, the time stipulation is valid but it’s only about a 10-day difference on average, which isn’t a long time to wait given that your VA-backed buyer is likely to close. Finally, while the VA’s property standards are unique, it’s likely that your property already conforms and will glide through the appraisal. All told, an offer from a VA buyer means you’re dealing with a qualified candidate who has solid backing, which should provide for a smooth transaction.