What To Do If A VA Appraisal Comes In Low
One of the biggest hurdles VA home buyers must clear is the VA appraisal. VA appraisals are much like regular appraisals — an approved appraiser will come out to the house you’re looking to buy and establish its value.
The main difference is the VA has stricter guidelines when it comes to houses. The Department of Veterans Affairs guarantees VA home loans, so they want to make sure the house meets their standards.
Unfortunately, VA appraisals can work against the home sale. If a VA appraisal comes in low compared to the loan amount, problems can occur.
For example, a home on the market for $275,000 can get a VA offer with all $275,000 financed. But if the VA appraisal report says the home is only worth $265,000, then suddenly the VA will only finance up to $265,000. This means the VA home buyer needs to make up the $10,000 difference between the purchase price and the appraisal value.
What options do VA home buyers have when this occurs?
VA Appraisal Process
The VA appraisal process is very similar to any other home appraisal. Your VA lender will order an evaluation with a VA-approved-appraiser.
The VA appraiser’s job is the establish a “fair market value” for the property and ensure the home meets the VA’s Minimum Property Requirements.
What if the VA appraisal comes in too low?
Getting a reconsideration of value
If a VA appraisal comes in low, a reconsideration of value (ROV) could be the best option.
An ROV is when the VA reevaluates how much the home is actually worth. Depending on how it goes, it could completely change the VA appraisal.
One way to get an ROV is to find better comps. “Comps” is short for “comparable homes” or “comparable sales”: similar homes to the one you’re trying to buy. If you can find comps closer to your expected price range, the VA may reevaluate their decision. For example, a similar home with no view may be valued the same as the home you’re buying. But that view has a market value, and you can make the argument the home should be valued higher.
There’s also always the chance the appraiser made an error in valuation, or they missed something when appraising the house. If this is the case, then a new appraisal could shift the value of the property in the borrower’s favor.
What to do if a reconsideration of value doesn’t work
While they help some VA buyers, ROVs don’t always work out. If the appraised value is still too low, there are other ways to avoid paying huge costs to make up the difference.
One of the most common ways VA home buyers get around a low appraisal is by getting the seller to lower the sales price. Some homes are overvalued, and a low VA appraisal should be a wake-up call to the current homeowner that their home might not be worth what they think. They could then lower the asking price to the same value as the appraisal, clearing the way for the VA loan to go through.
Another possibility is that you, the home buyer, cover the additional costs that exceed the mortgage loan. There’s a good chance you’ll have to cover the costs from out of pocket, meaning cash, if the downpayment is too low or if no downpayment is being paid at all.
Then there’s the compromise between buyer and seller to split the additional costs equally. So, in our scenario where an additional $10,000 is owed, the seller would reduce the purchase price by $5,000 and the buyer would make up the additional $5,000.
Along with these options, there are other ways to reduce the cost of the home. It’s common for home sellers to include appliances and/or furniture with the sale, including the costs in the total price. Unfortunately, VA appraisers won’t include this – their job is to evaluate the value of the home without including anything in it. Choosing to let the buyer keep the appliances can lower the total cost of the loan without changing the value of the house.
If there’s no way around the low VA appraisal, then you should always be prepared to walk away from the deal. VA appraisers are professionals, and they have to be certified by the VA to evaluate homes. If sellers are unwilling to budge or if a new deal can’t be figured out, then it could be in the buyer’s best interest to find a different house. It’s not the happiest of endings, but it could be worth avoiding large, out-of-pocket payments just to get the specific home.
How to avoid VA home appraisal issues
VA appraisals aren’t as complicated as they may seem. There are early signs homebuyers can find to tell if a home will clear an appraisal or not. Click here to find out more about how to avoid VA appraisal issues during the home buying process.