A Look at the VA Loan Appraisal Process
When VA lenders approve a VA loan application there are really two distinct approvals issued—one for the veteran and one for the property. Both must be separately approved during the loan process. A borrower with $100,000 in the bank, an 850 credit score and single digit debt ratios won’t get a VA loan unless the subject property is approved as well.
How do VA appraisals work and what do they look for?
Before we answer those questions, let’s first briefly explain that an appraisal and a property inspection are two separate items. An appraisal reports the current market value of a property while a property inspection reviews the physical condition. An appraisal report will make note of the physical condition and may even point out issues that need to be corrected before a final value can be made, but the primary purpose of the appraisal is to independently report the value of the home, which you can read more about here.
The appraised value must be at least the same as the sales price. If the appraised value comes in lower than the agreed upon price, the veteran has three basic choices—negotiate a lower price, come to the closing table with the difference between the sales price and appraised value or walk from the transaction altogether.
The appraiser arrives at a value by comparing recent sales prices of similar homes in the area. A “similar” home means comparing a single family residence with another. Comparing a single family home with a condominium won’t work. Recent sales means homes that have sold within the previous six or twelve months. It is rare that two separate properties are exactly alike. One home may have a view of the mountains and one may not. Homes with views can have a higher value compared to similar homes in the neighborhood. Other items can add value such as the overall condition of the home, updated appliances, wood floors or other amenities. Fewer bedrooms, square footage and a smaller lot may provide a lower value as well.
Let's say the appraiser sees that a 2,000-square-foot home sold for $200,000. That’s $100 per square foot. The appraiser also finds two more homes that sold for $105 and $99 per square foot. If the subject property being financed has a contract price at or around $100 per square foot, then these additional sales will be used to support the sales price of the home. If the price comes in above that value, all the better. But if the value works to say $85 per square foot after all adjustments are made then there’s a problem. The veteran is now left with the same three choices, negotiate, pay the difference or walk.
But there might be one more thing that can be done to salvage the deal—an additional comparable sale. The appraiser researches public records and the local multiple listing service for recent sales to compare. Sometimes however there a properties that sold that never appeared in the MLS, a so-called “pocket listing.” Your real estate agent can do some research to see if there have been any such transactions and bring that property to light.
Minimum Property Requirements
A VA appraisal also has additional protections for the veteran that other appraisals don’t have. These protections are called Minimum Property Requirements, or MPRs. MPRs require the property meet certain conditions before being VA eligible. In essence, the property must be habitable. The veteran must be able to move in right away with functioning water, electricity and other major systems in place. The MPRs include:
- Adequate heating to ensure a temperature of 50 degrees Fahrenheit.
- Proper utilities throughout the property.
- No evidence of termites or other wood-destroying pests.
- The roof must be in good condition
- If there is a basement, there can be no evidence of moisture.
- Crawl spaces must be easy to access and free of debris and moisture.
- No lead-based paint.
- No hazards such as improper or non-existent stair railings or exposed wiring.
- Easy access to the home and property.
- Void of any physical defects and deferred property maintenance.
The appraiser will complete the MPR form and include it with the appraisal report. It's important to remember the appraisal isn't the same thing as a home inspection. Inspections aren't mandatory, but buyers should consider them an essential part of the homebuying process.
Ideally, sellers will pay to make necessary repairs in order for the the loan to close. But VA borrowers can also consider paying to make repairs, even those related to the MPRs. Whether that's a good investment is a question to consider in much greater detail, often in concert with your real estate agent and a good loan officer.