VA Loan Myths

Listing Agents take many factors into consideration when securing the most favorable offer for their clients. However, a troubling trend has emerged where sellers and their agents often overlook or reject offers from buyers using VA (Veterans Affairs) loans. This preference for Conventional loans stems from certain misconceptions about VA loans that need to be addressed. In this Insights article, we’ll analyze the most common VA Loan myths in hopes to spread awareness and ensure our nation’s Veterans are treated justly.

VA Loans Overview

VA loans are mortgage loans backed by the U.S. Department of Veterans Affairs and are available to eligible Veterans, active-duty service members, and certain members of the National Guard and Reserves. These loans offer numerous benefits, including:

1. No Down Payment: VA loans typically require no down payment, making homeownership more accessible to Veterans. Veterans are welcome to put money down if they wish to reduce the loan amount, but they aren’t required to.

2. Competitive Interest Rates: The VA guarantees a portion of the loan, which helps Veterans secure lower interest rates. All things considered, VA loans typically have lower rates than Conventional, USDA and/or FHA. 

3. No Private Mortgage Insurance (PMI): Unlike Conventional loans, VA loans do not require PMI, reducing monthly mortgage payments. They instead require a VA Funding Fee which can be paid at Closing or financed into the loan. The VA sets the funding fee amounts based on various criteria and some Veterans may be exempt from paying the fee entirely.

4. Flexible Credit Requirements: VA loans have more lenient credit score and income requirements overall than other loan types, making them accessible to a broader range of Veterans.

Despite these benefits, several myths persist, leading to the unfair treatment of VA loan offers.

Myth #1: Significantly Longer Closing Times

One major misconception is that VA loans take significantly longer to close compared to Conventional loans. While it's true that VA loans involve additional steps, such as requiring a VA approved Appraiser and the issuance of a Certificate of Eligibility (COE), modern advancements in the industry have streamlined this process entirely. Our Closing times for VA loans at Murray Mortgage Solutions are roughly the same as Conventional which is far faster than the industry standard in both cases.

Myth #2: Excessively Strict Appraisal Requirements

Another myth is that VA appraisal requirements are excessively strict and prone to causing delays. While VA appraisers do follow specific guidelines to ensure the property is safe and habitable, these standards are only slightly different from those of Conventional loan appraisals.

VA loans include a basic checklist of items that need to work properly for the home to meet what are known as Minimum Property Requirements (MPRs). If the Listing agent has a specific concern, the VA MPR’s and Appraisal guidelines are publicly available online or they can contact us directly to verify it won't cause an issue during Underwriting. Here is an important excerpt directly from Chapter 12: Section 1 of the VA Underwriting Handbook.

"The appraiser should not recommend repairs of cosmetic items, items involving minor deferred maintenance or normal wear and tear, or items that are inconsequential in relation to the overall condition of the property. While minor repairs should not be recommended, the appraiser should consider these items in the overall condition rating when estimating the market value of the property."

Another important section, also in Chapter 12 discusses detached improvements such as sheds and how they are approached. "Detached sheds or other improvements on the site may be included in value if the improvement meets VA’s MPRs. If the improvement does not meet MPRs it must be excluded from value. If the improvement presents a health or safety hazard, the appraisal must be completed subject to the removal of the improvement."

If repairs are required, it’s not stipulated that the seller is responsible for any or all fixes, including any issues that turn up on a VA appraisal. The buyer and seller, with the help of their agents, can decide what works for both parties. Veteran buyers are allowed to pay for repairs to keep a deal moving forward.

Myth #3: VA Escape Clause is a Deal-Breaker

The VA amendatory escape clause is a provision included in purchase agreements for properties financed with VA loans. This clause is designed to protect veterans and active-duty service members from being obligated to purchase a property if its appraised value is lower than the agreed-upon purchase price. If the appraisal comes in lower than the purchase price, there are numerous options for all parties involved to ensure the loan moves forward.

• Renegotiate the Purchase Price: The buyer and seller can renegotiate the purchase price to align with the appraised value. This is often the most straightforward solution, as it adjusts the contract to reflect the market value of the property.

• Buyer Pays the Difference: The buyer has the option to pay the difference between the appraised value and the purchase price out of pocket. It's a common misconception that this isn't allowed for VA loans.

• Seller Concessions: The seller can offer concessions, such as paying for closing costs or making repairs, to make the deal more attractive to the buyer, even if the purchase price remains higher than the appraised value. This can help the buyer feel more comfortable with proceeding with the purchase despite the lower appraisal.

• Appeal the Appraisal: The buyer or seller can appeal the appraisal by providing additional information or comparable sales (comps) that support a higher value. The lender can request a reconsideration of value (ROV) from the VA appraiser. While this process doesn’t always result in a higher appraisal, it can be worthwhile if there are strong comps that were initially overlooked.

• Terminate the Contract: If renegotiation and other options are not viable, the buyer can terminate the purchase contract without penalty, thanks to the VA escape clause. This means the buyer will not forfeit their earnest money deposit and is free to walk away from the transaction.

Myth #4: Sellers Pays Closing Costs

It’s easy to assume that because VA loans allow for zero down payment, someone else has to cover the closing costs. The reality is that sellers don’t have to pay anything on behalf of a VA buyer. The VA does have limits on what specific types of fees Veterans can pay, but this does not translate to higher costs for sellers. Most of the meaningful fee restrictions relate to Lenders, not Sellers or Agents. As with any type of financing, sellers and buyers can negotiate the distribution of closing costs as they see fit.

Myth #5: VA buyers cannot afford to use any other kind of loan.

According to some studies, Veterans have higher incomes on average than civilians. VA buyers typically qualify for Conventional mortgages as well as part of the Pre-Approval process. Most Veteran buyers specifically choose the VA loan because they might want to invest their down payment funds elsewhere, like home repairs or other financial investments. VA Loans also offer other financial advantages as we discussed such as avoiding Mortgage Insurance and lower interest rates. For most Veterans and service members, their VA loan benefit is the most powerful mortgage option on the market. 

Bottom Line

By rejecting VA loan offers, sellers and their agents are inadvertently penalizing those who have served our country. Veterans have earned the benefits provided by VA loans through their service and sacrifice. Denying them the opportunity to utilize these benefits due to outdated precepts needs to change.

Ultimately, the key to overcoming these misconceptions lies in education and awareness. By fostering a better understanding of VA loans and their benefits, we can ensure that Veterans receive the opportunities they deserve in the housing market. It's time to debunk the myths and open the doors of homeownership to our Veterans with the same enthusiasm and respect we offer to all buyers.