I want to discuss something that has been sticking in my craw for a bit of time now. That is how the general real estate market is often misunderstanding the VA home loan and the Veterans who are trying to use that entitlement to buy their next home.
By my observation, there are three areas where people misunderstand the VA home loan and put Veterans at an unnecessary disadvantage. The worst thing is that these three areas are NOT true and these misunderstandings too often prevent Veterans from getting into the home they want.
First is a misunderstanding of the financials. This happens in several ways. Too often I have heard a real estate professional tell a seller “this person has no skin in the game” because the Veteran is able to make a purchase with no cash down payment. The fact is that the Veteran’s military service to our nation stands as a down payment. This is ignored, unnecessarily by many as a proxy for the loan’s performance, which they shouldn’t worry about anyway. Also, the loan is underwritten to monthly cash flow instead of strictly by debt to income (DTI) ratios. The fact is that on occasion a VA loan will be approved with a DTI over 50 or even 55% when a conventional loan, regardless of down payment will not be approvable at 50%. The residual income calculation, that is the income left after everything is paid, is the key calculation in the VA loan. Because of this type of underwriting the VA loan performs statistically the same as the 20% conventional loan.
Second is the appraisal. Too often I have heard the old wives tales that used to be true decades ago, that VA appraisals take more time and any little problem needs to be fixed by the sellers before closing. Today neither is true. That system has been long fixed. Add to that, the VA appraisal is the only one required to notify us in advance that there may be a problem with a property appraising for the sales price. Through the “tidewater” process, we can work with the seller and their agent to get the best, most comparable properties considered in establishing value before a final appraised value is issued. On a conventional loan the value “is what it is” once the report is published.
Third is the sloppy execution by national big box lenders. Many call center type lenders make a big show out of advertising to draw Veterans to their “easy” pre approval. Usually that is only a prequalification, does not require confirmation of the Veteran’s eligibility for a VA loan and is only marginally documented, if at all. The fact is, like every other loan type, headset jockey lenders deserve their lousy reputation. This is not specific to Veterans or the VA loan.
Bottom line, the VA loan is a great solution for the Veteran. For the seller and their agent, who have priced their house competitively, VA financing may actually be the loan that is more likely to close when the Veteran is working with a trusted local loan officer that understands the VA loan product and whose company is committed to delivering a first class home loan experience!
