How Often Do VA Appraisals Come in Low?

Homebuyers utilizing a VA loan navigate a distinct process, with the appraisal serving as a fundamental step. This assessment determines a property’s value and confirms it meets specific safety and habitability standards. While the appraisal is a routine part of the homebuying journey, a common concern among both buyers and sellers involves the possibility of the appraised value falling below the agreed-upon purchase price.

Understanding VA Appraisals

A VA appraisal is a specialized evaluation required for homes financed with a VA loan, serving two primary functions. First, it establishes the fair market value of the property, which is the appraiser’s professional opinion of a home’s reasonable market price. Second, and uniquely to VA loans, it ensures the property complies with the Department of Veterans Affairs’ Minimum Property Requirements (MPRs). These MPRs are health and safety standards designed to protect veterans.

While both involve property assessment, the VA appraisal differs from a standard home inspection. A home inspection details overall condition and defects, whereas the VA appraisal focuses on meeting MPRs and justifying the loan amount. A VA-approved appraiser, independent and selected by the VA, conducts this assessment and submits a detailed report to the lender, outlining the appraised value and any necessary repairs.

Factors Affecting Appraisal Value

An appraiser determines a property’s value by considering various objective criteria. A significant factor is the analysis of comparable sales, or “comps,” which are recent sales of similar local homes. Appraisers seek at least three comparable properties that share characteristics like size, age, and location. The property’s condition also holds considerable weight, encompassing structural integrity, mechanical systems, and overall maintenance.

The property’s physical characteristics, such as size, features, and recent renovations, also contribute to the appraiser’s final valuation. Beyond the individual property, broader market trends play a role. Supply and demand dynamics within the local real estate market and prevailing interest rates can influence a home’s perceived value. When the contract price exceeds the appraiser’s calculated value, a discrepancy can arise, potentially leading to a lower appraisal.

Responding to a Low VA Appraisal

When a VA appraisal comes in below the agreed-upon purchase price, VA-prescribed procedures and options become available to both buyer and seller. One mechanism is the Tidewater Initiative, invoked by the appraiser during assessment. If the appraiser anticipates the property’s value will be less than the contract price, they inform the lender. The lender then provides additional comparable sales data to the appraiser within 48 hours. This pre-appraisal step allows for submission of additional evidence to support a higher valuation before the final report is issued.

Should the appraisal still come in low, a formal Reconsideration of Value (ROV) can be pursued. An ROV is a request to the VA to re-evaluate the appraisal, initiated by the buyer’s lender. To support an ROV, grounds like factual errors in the report or omission of relevant comparable sales are required. The buyer’s agent or lender gathers supporting evidence, such as additional strong comparable sales, to justify a higher property value for VA review.

Beyond VA-specific procedures, other outcomes exist if the appraised value remains below the contract price. The buyer might cover the difference out of pocket. Alternatively, the seller could lower the sale price to match the appraised value, or a negotiation might lead to both parties sharing the difference. If an agreement cannot be reached, and the buyer is unwilling or unable to cover the gap, the contract may be terminated, allowing withdrawal without penalty due to the VA appraisal contingency.

Assessing the Likelihood of a Low Appraisal

How often VA appraisals result in a value lower than the purchase price is a frequent concern in VA loan transactions. While possible, a low VA appraisal is not the most common outcome. This scenario is largely influenced by prevailing market conditions, property characteristics, and the seller’s initial pricing strategy.

In dynamic real estate markets, rapidly fluctuating property values mean the contract price might sometimes outpace available market data. A seller’s asking price significantly exceeding true market value, or competitive bidding, can increase the likelihood of an appraisal gap. Despite these factors, the VA appraisal process protects both the veteran homebuyer and the lender. It ensures the property represents a sound investment and meets standards for safe, livable conditions, even if it occasionally means adjusting the purchase price to align with the appraised value.