Appraisals Are Not Inspections
Once you’re under contract to purchase a home, the real work starts for your lending team. One of the first steps for your lender is ordering a VA appraisal on the property.
The VA appraisal is an assessment of the property’s value and condition by an independent VA appraiser. VA appraisals are required for every VA purchase loan. But don’t mistake the appraisal for a home inspection, which provides a more in-depth review of the home's physical condition.
These are two different things and unlike the appraisal, a home inspection isn't required when you're buying a home. But many buyers choose to invest in one.
In fact, once they’re under contract, many buyers start with a home inspection to get that in-depth look at the property and its potential (or existing) problems. If you’re satisfied with the inspection and still want to move forward with the purchase, then you’ll move on to having the lender order the VA appraisal.
At that point, your loan team will send a request to the VA, and they’ll assign one of their independent appraisers in your area.
The purpose of the VA appraisal is two-fold. The first is to make sure the home is worth at least what you’ve offered to pay for it. The second is to make sure the property meets both VA and lender guidelines.
Let’s take a closer look at each.
1) Establish an Appraised Value
The first purpose of the VA appraisal is to establish a “fair market value” for the property. A lender is going to finance whichever is less between the appraised value and the purchase price of the home. Appraisers will look at recent comparable home sales, or “comps,” to help determine the property’s value.
VA appraisers look for at least three homes similar in size, age and location to the one you hope to buy. It can be tough to find good comps for unique properties like log cabins, A-frames and even homes on large acreage. Lenders will usually need at least one good recent comparable home sale in order to move forward on a loan.
2) Minimum Property Requirements
The purpose of the VA appraisal is to ensure that homes meet value and are safe, structurally sound and free of health hazards. In pursuit of that goal, the VA appraiser will conduct a check based on the VA's Minimum Property Requirements and address every concern on the appraisal report. Homes must meet the Minimum Property Requirements to be approved for financing, which we’ll cover next in more detail.
A Closer Look at Minimum Property Requirements
VA appraisers will look at the property’s interior and exterior and assess the overall condition. They’ll also recommend any obvious repairs needed to make the home meet the MPRs. Remember, this isn’t a home inspection, and the VA doesn’t guarantee the home is free of defects.
The Minimum Property Requirements have an important purpose, but they can also be frustrating for unprepared buyers and sellers. That’s why it’s so helpful to have a good understanding of the MPRs before you start the house hunt. By knowing some of the red flags and working with a VA-experienced real estate agent, military buyers can target homes that are likely to clear the VA appraisal.
Here’s a look at some of the major MPR issues:
- Residential properties only. Only residential properties are eligible for VA financing. That means office buildings and storefronts are out of the question.
- Property must have adequate living space. The home must possess enough space for the basic functions of daily life. As long as your desired property has enough room for living, sleeping and cooking, you should be set.
- Mechanical systems must be usable and safe. Electrical and plumbing systems must be safe and have some usable life remaining. Minor electrical glitches are no major problem, but an entire home with old knob-and-tube wiring could pose some challenges.
- Heating must be adequate. The home’s heating system must be safe and able to keep a home’s temperature above 50 degrees Fahrenheit. Homes with permanently installed non-electric, non-vented fireplaces or space heaters may be eligible, provided the buyer signs a “hold harmless” agreement and the unit meets applicable codes and has an approved oxygen depletion sensor. Homes that use wood-burning stoves as a primary heating source must also have a conventional heating system that can maintain an adequate temperature.
- Water availability. The home must have a safe water supply, a water heater and a safe method of sewage disposal. Connection to a public water supply isn’t required unless mandated by local codes or health authorities. Private wells and water supplies will need to meet local or federal water quality standards.
- Roofing must be adequate. The roof must be in good shape and provide “reasonable future utility.” The VA doesn’t specify exactly how long a roof needs to last, but lenders may have a hard number, such as three or five years. Missing shingles or gaping holes will present a problem.
- Basements and crawl spaces must be problem-free. Basements and crawl spaces must be dry, clear of debris and properly vented. Any excessive dampness or pooling of water must be corrected. Leaky basements can be a deal breaker for many VA house hunters. Foundation leaks are common among older homes and can be expensive to correct.
- Property access. All properties purchased with VA financing need to have safe access from the street. Homes need to have either private driveways or permanent easements to allow entry. Homes on shared or private roadways will often require legal agreements regarding use and maintenance.
- No health/safety hazards. Nuclear waste, asbestos and radon are huge red flags for VA appraisers. A property plagued with these kinds of hazards is unlikely to qualify for VA financing.
- No defective construction. Appraisers will assess the property for defective construction, poor workmanship, settlement problems, excessive dampness and decay. Minor problems can often be addressed prior to closing, but bigger problems could sideline your purchase indefinitely.
- Termites. A termite inspection may be required in your area. Properties with termites, fungus growth or dry rot must be treated and re-evaluated to garner VA approval. In all but nine states, VA buyers aren't allowed to pay for the cost of a termite inspection. But they are allowed to pay for the cost of repairs if a seller won’t do so.
- Lead-based paint. Flaking paint in properties built before 1978 is assumed to involve lead paint. The problem area must be scraped and repainted, covered with drywall or totally removed.
This is by no means an exhaustive list. Properties may need to meet more localized requirements, too. Again, it’s important to understand that the VA appraisal isn’t the same thing as a home inspection. A home inspection is a more detailed and granular look at the property.
Home inspections can uncover defects, problems and possible looming issues that appraisals might not. You’re not required to get a home inspection, but we strongly encourage you to do so.
VA Appraisal Process
The appraiser compiles the comparable sale and property condition information into a report that’s uploaded to the VA’s secure web portal within 10 business days on average, although it can be more or less depending on where the home is located and other factors. The appraisal report will have an estimated value for the property and list any repairs needed to bring it up to VA guidelines. Lenders don’t have any control over the VA appraiser’s timeline or their analysis.
Homebuyers are responsible for paying for the appraisal upfront. Costs can vary by state, sometimes significantly. For example, appraisal fees in the Northwest might run to $800 or more, while the cost in the Midwest and the South may be more like $450 or $500. You can essentially seek a reimbursement for this as part of your closing costs negotiation with the seller.
Appraisers have an important job, but they don’t actually have the final word on the property.
The VA requires every appraisal report to be reviewed by either a VA staff appraiser or a lender’s Staff Appraisal Reviewer (SAR). Many lenders don’t have their own SARs and must submit their appraisals directly to the VA for review.
Veterans United employs about 100 Staff Appraisal Reviewers because of our focus on VA lending.
A lender’s SAR is not an appraiser. The SAR’s job is to review the appraiser’s report to make sure the estimated value makes sense and that the property meets VA and lender guidelines. SARs can ask for clarification or corrections from the appraiser.
It’s actually the lender’s SAR who ultimately issues the final appraised value of the home, in what’s known as the Notice of Value (NOV). Once the lender receives the appraisal report, the Staff Appraisal Reviewer is generally expected to issue the Notice of Value within five business days. This timeline can stretch beyond five days if the SAR needs to obtain additional information from the appraiser.
The Notice of Value will also list any issues that need to be addressed or verified before the loan can close. Common examples include:
- Any repairs needed to satisfy VA or lender requirements
- Termite inspection if one is required
- Proof that a condo is in a VA-approved development
- Proof that the property’s water source meets requirements
- A copy of a private road agreement
Repairs required in the Notice of Value must often be completed and reinspected before the loan can close. In some cases, lenders may allow you to put money in an escrow account and make repairs after closing. We’ll talk about this more in the next section. Policies and requirements can vary by lender.
Sometimes a home’s appraised value comes in lower than the purchase price. If this happens, talk with your real estate agent and your loan officer about how best to proceed. Sellers may be willing to lower their asking price to fit the home's value.
VA Appraisal Challenges
In a perfect world, the appraised value of the property matches or exceeds your purchase price, and no repairs are necessary to bring the home up to MPR standards. But that’s the best of all possible worlds. You’ll have some decisions to make if the appraised value falls short of the purchase price or if repairs are necessary.
Take a careful look at the appraiser’s findings, and talk with your agent and lender about the best way to proceed.
Let’s take a closer look at two common appraisal problems and potential solutions:
Challenge 1: Appraisal comes in low
A low appraised value can create serious problems for eager homebuyers. Your VA loan amount can’t exceed the appraised value (plus allowable costs and fees). So you have a problem if the home you agreed to purchase for $200,000 only appraises for $150,000.
An appraisal with a less drastic deficit often presents buyers with a few options. Here’s what you can do if your appraised value falls a bit short of your purchase price:
- Ask the seller to lower the price. You can ask the seller to lower the sales price given their home is worth less than what you offered to pay. Most sellers don’t want to lose an enthusiastic buyer, so they may be willing to make a modest price drop.
- Seek a Reconsideration of Value. The VA recognizes that appraisal values can be faulty, so buyers can seek what’s known as a Reconsideration of Value. Your lender and real estate agent will need to provide additional recent comparable home sales that weren’t used in the original appraisal.
- Make up the difference in cash. You can also choose to make up the difference between the appraised value and the loan value in cash. Be cautious before grabbing at this straw. Paying more for a home than it’s worth may not be a wise investment.
- Walk away from the deal. Would-be VA buyers can walk away from a contract with their earnest money intact because of the VA Amendment to Contract. This document safeguards a VA buyer's earnest money in the event the appraised value of the property comes in below the purchase price.
Challenge 2: Repairs are necessary to meet MPRs
The appraisal may also require that certain repairs be made before your loan can move forward. Extensive damage or finicky sellers can be VA loan deal-breakers, so aim for homes in good condition.
There are a few ways to handle required repairs:
- Ask the seller to complete repairs. The first option is to ask the seller to make the necessary repairs. This should always be your first choice. They’re under no obligation to do so, but they may be willing to spend the money if that’s what it takes to sell their home.
- See if you can make them. If the seller refuses, the VA allows borrowers to pay for repairs, even related to Minimum Property Requirement issues. Some lenders may not allow this or even know it’s possible, and those who do can have their own policy for how it works. This is something to discuss in detail with your loan officer and your real estate agent.
- Walk away from the home purchase. The VA appraisal might reveal some really serious concerns. The foundation may be collapsing. The plumbing may be in shambles. A home with these kinds of issues could take a fortune to repair. You’ll be out the cost of the appraisal, but contract contingencies related to the property's condition can help ensure you can walk away from the deal with your earnest money.
The VA appraisal process is one of the most important parts of your homebuying journey. Talk with your loan officer if you have any questions about what to expect.