Why Are VA Loans Bad for Sellers?

VA loans benefit eligible service members, veterans, and surviving spouses, facilitating homeownership often without a down payment. These loans are designed to ensure veterans acquire homes that are safe, structurally sound, and sanitary. However, the specific requirements and processes associated with VA loans can introduce unique considerations for sellers.

VA Loan Specific Property Standards

Homes financed with a VA loan must meet specific Minimum Property Requirements (MPRs) to ensure they are safe, structurally sound, and sanitary. These standards are in place to protect the veteran buyer and the Department of Veterans Affairs. Common issues that can trigger an MPR requirement often include conditions that pose a health or safety risk.

For instance, properties must have working electrical, heating, and cooling systems, and the roof needs to be free of leaks with a reasonable remaining life expectancy. Issues such as peeling paint in homes built before 1978, which could indicate lead-based paint, or evidence of wood-destroying insects like termites, fungus, or dry rot, typically require remediation. Furthermore, the home must have a continuous supply of clean, potable water and an approved sewage disposal system. If a property does not meet these MPRs, the seller often needs to complete the necessary repairs before the loan can close.

The VA Appraisal Process

The VA appraisal process differs from a conventional appraisal because it serves a dual purpose: determining the fair market value of the property and verifying adherence to the VA’s Minimum Property Requirements (MPRs). A VA-approved appraiser conducts this assessment, and their findings are crucial for the loan’s progression. The appraiser’s report culminates in a Notice of Value (NOV), which officially establishes the home’s value for VA purposes.

If the appraised value comes in below the agreed-upon purchase price or if MPRs are not met, it can impact the transaction. In cases where the appraiser believes the property will not meet the contract price, the “Tidewater Initiative” may be invoked. This initiative provides a 48-hour window for the buyer, agent, or lender to submit additional comparable sales data to the appraiser to support the higher purchase price before the final NOV is issued. If the appraisal remains low, the buyer may need to cover the difference in cash or negotiate a lower price with the seller.

Allowable Seller Contributions

The Department of Veterans Affairs (VA) has specific rules regarding what costs a veteran borrower can pay and what costs are considered “non-allowable.” This often leads to sellers being asked to cover certain expenses. While sellers are permitted to contribute up to 4% of the loan amount towards specific costs, such as discount points, prepaid taxes, and the VA funding fee, certain other fees cannot be charged to the veteran.

“Non-allowable” fees, which the veteran is prohibited from paying, include charges like loan application fees, attorney fees not related to title work, rate lock fees, and document preparation fees. These costs must be absorbed by the lender or covered by another party in the transaction, often the seller. For instance, real estate commissions, historically covered by sellers, are a significant example of a cost that veterans typically cannot directly pay, making it a point of negotiation for the seller. These guidelines ensure that veterans are not burdened with excessive upfront costs, but they can shift financial responsibility to the seller.

Understanding the Closing Timeline

The perception that VA loans take longer to close than conventional loans is common, though often the difference is marginal. In 2024, the average time to close a VA loan was approximately 55 days, which is slightly longer than the 48-day average for conventional loans. However, many factors influence the closing timeline for any loan type, including appraisal turn times, underwriting complexities, and the responsiveness of all parties involved.

While the VA appraisal process, particularly if it identifies Minimum Property Requirements (MPRs) that need repair, can extend the timeline, a well-prepared VA loan can close efficiently. Appraiser availability, especially in rural areas, can sometimes cause delays. If repairs are necessary to meet MPRs, the time taken to complete these repairs will directly impact the closing date. The buyer’s prompt submission of documentation and proactive communication with the lender also play a significant role in expediting the process.