Why sellers say no to VA loans is a frequent question I am asked in a sellers market. When the market favors sellers, they may have several offers to choose from. Many sellers reject VA loans because they hear that they take longer to close or that appraisals may be difficult. As you prepare to list your home, you may consider which kinds of loans you are willing to accept when you review offers to purchase your home. While a great program for the buyer, they can initially be a bit off-putting for sellers. There are a couple of VA loan requirements for sellers to keep in mind to make the process a smooth one.
Both FHA and VA loans have been around for years, and they’re backed by solid guarantees from the Federal Housing Administration and the Veterans Administration, respectively. Yet in a recent survey by the National Association of Realtors, only 30% of sellers say they’d likely accept an offer from a buyer who’s planning to use an FHA or VA loan. By contrast, 89% of sellers would likely accept an offer from a buyer with a conventional mortgage.
The Process is Considered to Take Too Long
Why sellers say no to VA loans sometimes reflects their belief that VA loans take too long. Some sellers think the VA process takes months. The fact of the matter is any loan can take a while to close. It depends on how fast the buyers respond to the lender when they ask for specific documents. It also depends on how complete the buyers’ finance package is when they provide it to the lender. If the lender has to constantly come back to the buyer and ask for paystubs, W-2s, or other documentation that the buyer should automatically provide, it can delay the process for any program. Yes, sometimes VA loans do take a little longer, but they do not usually take an excessive amount of time. In addition, it is helpful to consider who the lender is. I have lenders who can close a VA loan in less than a month, but some larger companies or credit unions are not used to working on the sellers’ time line and dates can slip easily in closing a VA loan. Be sure to ask your Realtor to interview the buyer’s lender to determine how long they take to close loans so you will be prepared.
The Property Appraisal Has an Inspection Component
Sellers say to VA loans because they have heard that the appraisal process for a VA loan can be a little tougher than any other program. The VA not only requires the appraised value to equal the sales price for funding, but they also have Minimum Property Requirements every house must meet. If the property does not meet the requirements, the seller must fix the problems before the loan can close. This can end up costing the seller more money and delaying the closing even further, depending on the complexity of the issues. The requirements the VA has are not as tough as they seem, though. Basically, the VA wants to ensure the house is clean, sanitary, and ready to move into without delay. As long as the home is not a fixer-upper, it should not be an issue.
The VA home inspection related to the minimum property requirements is performed by a licensed inspector. It’s important to keep in mind that this is not a thorough home inspection by a typical inspector, but one that looks at any large structural or safety issues.
Many VA home buyers will have both the mandated VA inspection, as well as a standard, more in-depth home inspection, so don’t be surprised to see both.
As noted, this inspection is meant to only look for issues that will be a significant cost to the homebuyer, or safety concerns. For example, a significant issue might be lack of working heat, or pest infestation. It could also be something as simple as having broken windows or handrails.
The three keys an inspector is looking for is safe, sound, and sanitary. Any of these issues that are found will have to be fixed.
If a home inspection fails, then they will have to be fixed before the loan is approved. It is the seller’s responsibility to get these issues fixed, and they must be done before the loan is approved. Notably, the repairs must be done at the homeowners expense. Since the seller is buying into potentially significant repair costs, this can be a disincentive to accepting a VA offer.
The Appraisal Stays With the Property for 6 Months
Sellers say no to VA loans occasionally because they fear that the house will not appraise for the sale price. If the property appraises for less than the sale price and the contract falls apart because of the low appraisal, the seller may not be able to just move past it. The same appraisal will be used for 6 months for any subsequent VA borrower.
Other Problems With Low Appraisals
VA appraisals are known for their conservativeness so sellers say no to VA loans because of the concern about a low appraisal. If a bidding war begins, the veteran is often out of the running because of the appraisal issues. If the buyer bids over the asking price, chances are the appraisal will never come close to the higher amount. Then the buyer must come up with the difference in cash to close the sale, ask the seller to reduce the sale price to the lower appraisal amount or cancel the contract (assuming that the contract allows for that.)
A VA loan deal does not have to be a deal breaker for sellers. If they understand the process and have a home in good condition, there should not be any problems. Yes, they might have to wait a little longer for the process to complete, but that could be the case for any loan program. It really depends on the workload of the lender and the appraiser. If there are appraisal issues, you have the right to appeal the value. If the seller and his realtor do the right homework, the asking price should be a fair value for the home. You should also be prepared to come up with a way to negotiate any closing costs. If you talk with the lender ahead of time to learn what closing costs they will charge, you can negotiate them up front with the appropriate party.
Confusion Over Who Pays Closing Costs and Fee
Another misconception many sellers have is that they will have to cover the non-allowable closing costs for the borrower. It is true that the VA limits the closing costs the borrower must pay; it does not mean the seller has to pay them. There are other options. The closing costs the buyer is allowed to pay with VA financing include the appraisal, title, credit, origination fee, recording fee, and survey. These basic fees cover a large part of the loan process, but not all of it. This leaves many fees still outstanding including underwriting, processing, and even attorney fees. Who pays these? There are several options:
- Seller – The seller is under no obligation to pay the closing fees for the buyer. However, he does have the option to increase the agreed upon sales price of the home and crediting the buyer back the amount of the closing costs. This way the buyer basically wraps the closing costs into his loan and the seller still gets the same amount of money for the home.
- Lender – The lender can also help with the closing costs by offering a credit at the closing. Of course, there must be some way the lender makes up for this credit. He does so with the interest rate. They will generally increase the rate between 0.25 and 0.5% to cover the closing costs for you.
- Borrower – There is still one way you can pay the non-allowed fees on a VA loan. The lender can charge you an origination fee, which is an allowed fee. This way the lender can wrap all of the non-allowed fees into one lump sum that does not exceed 1% of the loan amount.
Sellers are expected to pay for termite inspections whenever they are applicable.
Weigh the Pros and Cons of VA Loans
While VA loans definitely have some negatives it’s still absolutely worth working with those looking to utilize them. Casting a wide net is essential to selling a home and getting the best price for it, and it won’t do any good excluding people as potential buyers. By selling a house to someone with a VA loan you increase your chances of finding a good buyer, and understanding the VA loan requirements for sellers is a crucial step to avoiding any inconveniences. Take the time to consider the buyer’s overall financial situation. Do they have cash reserves to make up the difference between a low appraisal and a high sale price? Could they make the repairs required by the appraiser before closing? Is their lender able to close quickly? You might discover that the best offer really is the VA buyer.
If you have any additional questions about selling your home in the DC metro area, then please give the Lise Howe Group call at 240-401-5577 or email us at email@example.com.