By Mandy Rebmann
When I heard the voicemail left by my real estate agent, a chill ran through me. We knew the VA appraisal had been completed, and were waiting to hear if there were any major issues. Anyone who has been through the home-buying process knows the appraisal step can often go wrong.
Thankfully for us, the news was good. The appraisal came in “at value,” meaning the appraiser concluded the value matched the purchase price, and only required one small repair. I breathed a sigh of relief. Having a background in mortgages while applying for one has to be a little like becoming sick when you’re a doctor. You have so much more knowledge of what can go wrong.
A VA appraisal serves two major purposes- to ensure the house is worth what you’re buying it for (and what the bank is lending you), and to make sure the house is sound, safe and immediately livable.
When you enter into a contract to purchase a house, you and the seller are agreeing on how much the house is worth. An appraisal makes sure that number is accurate. There are generally two methods of determining a house’s value: a Sales Comparison and a Cost-Based Approach. A Sales Comparison looks at the price similar houses in your home’s area have sold for within the last 12 months, and determines value based on their sales prices and features. A Cost-Based Approach determines land value and how much it would cost to build your home from scratch. A VA appraiser uses the former approach, and adds or subtracts value by taking a closer look at the differences between the nearby, comparable homes.
An appraisal will rarely deem the house more valuable than the sales price; however, an appraiser may value it lower. This can be a major problem in the process and may even kill the deal. Let’s say the purchase price of your home is $150,000 and the appraisal comes in at $140,000. The bank will only lend based on and up to the appraised value. This means either the seller would have to agree to lower the sales price, or you would have to come up with the extra $10,000. Often, neither of these options can be agreed upon and the contract is voided.
Our appraisal is requiring a handrail be installed on the main staircase; this was expected and minor. Unlike an appraisal for a conventional loan, a VA appraisal may require certain repairs be made to the property prior to closing. The appraiser ensures the overall safety and soundness of the property. It’s why you’ll never see a home advertised as a “handyman’s special” able to get VA financing. Rotting wood may have to be replaced, or older, peeling paint, possibly containing lead, may need to be scraped and repainted. A heating system may need to be completely replaced. Extensive repairs may also spell trouble for the deal. A seller may not be willing to complete the expensive repairs, even if it means the house the house will go back on the market. Another purchaser may be able to pay cash or use a different type of loan that may not have the same repair requirements. This is one reason why it’s a good idea to work with a real estate agent familiar with VA loans; they may be able to steer you away from any properties that the VA would find issue with.
It’s important to remember, even though you pay for the appraisal, it actually belongs to the bank and the VA, and protects their interest in the transaction. A home inspection, although not required, is strongly recommended for your own benefit. The home inspection we ordered was much more detailed about the structure and systems of the house, reducing the risk something unexpected and costly will occur.
Now that the appraisal is done, we’re one step and one PCS move closer to our first house!
