3 common pitfalls of VA loans
& How Best to Navigate Them
Just because VA loans are intended to help veterans doesn’t mean that every VA loan is as helpful as the next. Not only is every loan different, but there are also general pitfalls that can cost you. Here are the most common pitfalls along with some tips and tricks to navigating them.
1. Uncertain Interest Rates
While VA loans are backed by the Department of Veteran Affairs, they’re funded by private organizations. Among other things, this means no “default” interest rate is set by the VA. Instead, lenders set rates based on their own evaluations. According to Zillow, “rates offered for VA loans, while often among the lowest, have the widest spread between the typical minimum and maximum quote, at 109 basis points.”
If you’re not careful, you may end up overpaying by accepting a higher rate than you’re actually eligible for. See our solution below to avoid this mistake.
Pro Tip: Shop AroundBecause everyone’s scenario is different, the best way to figure out whether someone is offering you a good deal is to compare it to other offers. Therefore, get multiple quotes before settling on a single lender. Also, make sure when getting a quote to ask about not only the rate, but its breakdown over the next few years as well as other terms and fees, as this will all affect your payments.
2. RESTRICTIVE PROPERTY REQUIREMENTS
While VA loans are less strict when it comes to credit and debt-to-income, they have their own set of rules when it comes to appraisals. Most appraisals just estimate the value of the property in order to prevent buyers from paying more than a house is worth. To pass a VA appraisal, however, properties must also meet a set of Minimum Property Requirements (MPR), which also ensure the house is “move-in ready.”
While these MPRs protect buyer interests, they are also restrictive and may limit your property choices. For example, if there’s a broken light fixture, a lack of stair railings, or any number of other flaws prohibited by the VA, you may not be able to secure funding until these issues are addressed. What’s more, you may only discover that the home is unqualified after you invest some time and money into securing it.
Pro Tip: Order A Home Inspection
Pick a realtor who is familiar with VA loan requirements so as to avoid wasting time on homes that would not qualify. Once you’ve found a property you like, consider ordering a home inspection before an appraisal. While it’s not a requirement, an inspection will uncover hidden problems with the home and verify its integrity, beyond just the requirements of the VA. An appraisal, by contrast, only looks at features that affect its valuation, such as square footage, number of bedrooms, etc.
If your home inspector discovers any significant defects with the property, you can use that information in two ways:
- Negotiate with the seller to have them perform repairs or reduce the price, or
- Reevaluate whether this house is worth further pursuit— if the property is not likely to pass the VA appraisal, you can save yourself both the trouble and the cost of ordering it. Overall, when it comes to securing VA funding, it pays to be prepared.
3. Seller Prejudice
Some sellers may prefer a buyer with conventional rather than government-backed financing. This comes from residual fears that VA loans come with a lot of red tape. For instance, they’re perceived to take longer to obtain and to have a higher likelihood of undervaluing properties.
Another thing that may give sellers pause is “non-allowable” fees, which the VA does not permit borrowers to pay. This includes attorney fees, commissions, second appraisals, and more. However, someone has to pay for these expenses and often it ends up being the seller.
Overall, VA loans have traditionally come with stipulations that could present barriers for both buyers and sellers. As such, some sellers may approach veteran buyers with caution, especially if there are other offers. The good news is that there are ways to navigate these concerns that could preempt some of these issues if not resolve them completely.
Pro Tip: ADDRESS MISCONCEPTIONS AND NEGOTIATE
If the seller expresses hesitation on account of “red tape”, assuage them with the facts: While VA loans used to take much longer than conventional loans, this is no longer the case. Since the VA is no longer involved with the actual loan, there is less back-and-forth required to complete the transaction. Therefore, as of 2018, the average VA loan closed in 50 days, only two days slower than other loan types.
If what gives the seller pause is “non-allowable” fees, consider the following: Ask your lender if they’d be willing to waive these fees to help you be more competitive. If this isn’t an option, don’t be shy to ask the seller if there’s another way you can sweeten the pot (especially if there are multiple bidders). Things that have helped veterans in the past was offering to be flexible with dates or offering to pay a little over asking to help the seller recoup their costs.
Lastly, demonstrate your eligibility by getting a pre-approval letter before making an offer. This can give you a leg up over other buyers by confirming what you can afford and establishing your readiness and commitment.
- VA loan interest rates have a wider spread between the lowest and highest quotes than any other loan.
- Many homes do not meet the Minimum Property Requirements set by the VA, which may cost you time and money.
- Aspects of VA loans such as “non-allowable” fees may bias sellers towards buyers with conventional financing.
The Bottom Line
VA loans remain an excellent option for home financing, boasting some of the best rates and terms on the market. However, if you’re not careful, there are also pitfalls of VA loans that can cost you. Make the most of your benefits by knowing your rights and putting the tips mentioned above to use.
When you’re ready to explore your financing options, turn to our mortgage marketplace. With just one application and zero origination fees, we can help you compare offers from multiple lenders.