What Sellers Need to Know About VA Loan Requirements

Buying or selling a home can be an exciting yet stressful process This is especially true when it comes to VA loans, which have specific requirements that must be met before a sale can go through. As a seller, it’s important to understand these VA loan requirements so you can make the process as smooth as possible.

In this comprehensive guide we’ll break down everything sellers need to know about VA loans including

• An overview of how VA loans work
• Key benefits and drawbacks of VA loans
• VA appraisals and minimum property requirements
• Allowable fees and seller concessions
• Tips for preparing your home for a VA appraisal
• Why you shouldn’t decline VA loan offers

What is a VA Loan?

VA loans are mortgage loans guaranteed by the Department of Veterans Affairs (VA) to help eligible military members, veterans, and surviving spouses finance a home. Instead of requiring a down payment, the VA guarantees a portion of the loan amount, protecting the lender from losses if the borrower defaults.

Some key features of VA loans include:

• Requires no down payment
• No monthly mortgage insurance
• Competitive interest rates
• Can be used multiple times

Due to these flexible terms, VA loans help make homeownership more accessible and affordable for those who served our country.

Pros and Cons of VA Loans for Sellers

VA loans offer some unique advantages and potential drawbacks for home sellers compared to conventional mortgages.

Pros

• Higher closing success rate: VA borrowers are less likely to have financing issues, so they tend to close at a higher rate. This gives sellers confidence the deal will make it to closing.

• Looser qualifying criteria: VA underwriting guidelines are more lenient, so buyers may find it easier to get approved. This expands the seller’s potential buyer pool.

• Increased buying power: With no down payment requirement, VA buyers can qualify for a higher loan amount and make stronger offers.

Cons

• VA appraisals: The property must pass a VA appraisal verifying its value and condition. This could delay closing or require repairs.

• Minimum property requirements (MPRs): The home must meet VA minimum property standards related to safety, livability, and structural soundness.

• Limited seller concessions: The VA restricts certain closing costs sellers can pay on the buyer’s behalf to 4% of the purchase price.

While VA loans have some particular requirements, sellers shouldn’t view them as universally good or bad. With preparation and understanding, sellers can navigate the VA process smoothly.

VA Appraisals and Minimum Property Requirements

Perhaps the biggest VA loan requirement impacting sellers is the mandatory VA appraisal. The appraisal serves two key purposes:

1. Establish the property’s fair market value to ensure the loan amount is justified.

2. Inspect the overall condition to confirm the home meets VA minimum property requirements.

The VA assigns a licensed appraiser to perform an interior and exterior inspection of the home. They will consider the home’s age, size, layout, condition, and comparable sales in the neighborhood.

In addition to verifying the value, the appraiser checks for any deficiencies related to:

• Structural integrity
• Functioning utilities and systems
• Adequate living space
• Health and safety hazards

Cosmetic issues like worn carpets or outdated finishes aren’t dealbreakers. But any defects making the home unsafe, unsanitary, or virtually unlivable must be repaired for VA approval.

As the seller, the cost of these MPR repairs typically falls on you. But it’s negotiable – sellers aren’t ever required to foot the bill for VA appraisal repairs.

Allowable Fees and Concessions for VA Loans

The VA places limits on certain fees that the seller can pay on the buyer’s behalf at closing. This helps protect the veteran homebuyer.

According to VA guidelines, sellers can pay up to 4% of the purchase price towards the buyer’s:

• Closing costs
• Prepaid costs like property taxes and home insurance
• Discount points to buy down the interest rate

However, sellers cannot pay for the VA funding fee or any upfront mortgage insurance premiums.

Beyond the 4% limit, any contributions must be credited to the buyer as a price reduction to avoid the appearance of an inflated purchase price. For example, if the seller agrees to replace the roof for $5,000 over the 4% allowance, the contract price would be lowered by $5,000.

While VA guidelines restrict seller concessions, payment of closing costs is always negotiable between the buyer and seller. Don’t assume you must pay for the buyer’s costs just because they are using a VA loan.

Preparing Your Home for a VA Appraisal

To ensure you can close on time, it helps to proactively prepare for the VA appraisal process. Here are some tips:

• Get a pre-listing home inspection: This will flag any defects early so you can make repairs before going on the market.

• Consider a pest inspection: Termites and wood-boring insects are automatic grounds for rejection. Better to treat any issues immediately.

• Check for water intrusion: Stained drywall, mold, leaky plumbing, and damp basements could pose MPR threats.

• Update safety features: Install smoke detectors, carbon monoxide alarms, hand railings on stairs, tempered glass windows, and GFCI outlets.

• Make minor repairs: Fix sticking doors, broken tiles, cracks in walls, dripping faucets, damaged siding, and any tripping hazards.

• Clear moisture and mildew: Clean gutters, downspouts, and proper drainage to reduce moisture. Ventilate rooms prone to humidity.

• Improve exterior curb appeal: Poor landscaping, cracked pavement, peeling paint, and clutter reflect poorly.

• Clean and declutter: A tidy, organized home shows better and allows the appraiser to thoroughly inspect.

VA appraisals get a bad reputation, but around 80% of homes pass on the first inspection. With some preventative care, you can avoid delays or expenses post-contract.

Should You Reject VA Loan Offers?

Some sellers refuse to work with VA buyers because they believe VA loans are bad for sellers. This perception usually stems from misunderstandings about the process.

In reality, sellers shouldn’t discriminate against VA offers just because of the loan type. Here are some key reasons to consider VA buyers:

• VA borrowers are statistically less likely to have financing issues that jeopardize the sale. You want offers from buyers who can actually get to closing.

• Excluding VA buyers shrinks your potential buyer pool. More offers tends to lead to better offers.

• Most VA loans close in a similar timeframe as conventional loans – only about 3 days difference on average.

• The VA appraisal process protects buyers from overpaying and ensures they can afford maintenance costs.

• Veterans have earned VA home loan benefits through military service. They deserve fair consideration, not blanket rejection.

While every seller’s circumstances are different, there are usually no compelling reasons to automatically decline VA buyers. As with any offer, you can negotiate terms, timeframes, and contingencies to suit your needs.

Key Takeaways

VA loans have earned an unwarranted reputation among some home sellers. But with the right understanding and preparation, VA sales can proceed just as smoothly as conventional sales.

As a seller, it’s in your best interest to:

• Recognize the strengths of VA borrowers in terms of loan approval and closing likelihood
• Proactively address any deficiencies to pass the VA appraisal
• Negotiate VA concessions and costs in your favor
• Avoid declining VA offers out of hand due to misperceptions

Smart sellers consider all offers fairly, knowing that VA buyers can make reliable transaction partners. With a few adjustments, VA loans can end up being your quickest path to close.