A VA home loan represents a fantastic option for eligible homebuyers. But a VA offer is sometimes frowned upon by a home seller, who may assume that VA financing will slow down the process and involve more red tape than conventional loan offers.
The truth is, VA loan financing can be good for sellers, too, for several reasons. Take the time to learn why and how both sellers and purchasers can benefit from a VA loan.
Should I accept a VA loan offer?
VA home loans, which are backed by the U.S. Department of Veterans Affairs, provide several advantages to qualified borrowers who meet the eligibility requirements, including active-duty servicemembers in the armed forces, veterans, and some surviving spouses.
That’s because if they have full entitlement benefit available, they may qualify for a VA loan with 0% down payment, no loan limits, and no annual mortgage insurance requirement (though there is an upfront VA funding fee). VA loans also typically have competitive interest rates.
But what’s in it for sellers? Quite a lot, actually.
Related reading: VA Loan Limits: No Maximum Loan Amounts in 2021
A seller may consider the fact that a VA loan doesn’t require a down payment as a serious drawback. They can interpret this as the buyer having very little skin in the game when purchasing a home. Or they might assume the buyer is financially strapped or has poor credit.
However, zero down doesn’t mean the borrower lacks funds or is not creditworthy. A VA borrower could have a healthy income, great credit, and low debts and opt for a VA loan to take advantage of the option to put 0% down upfront.
From a seller’s perspective, that could mean the homebuyer has more cash on hand and therefore more flexibility when negotiating the sale.
Here’s another boon for sellers: VA homebuyers who have been preapproved are already vetted by a mortgage lender.
“Many VA home buyers are reliable purchasers who come preapproved. A buyer who is approved for a VA mortgage is a pretty solid buyer, in most cases,” Gelios said. “VA loans are backed by the government and, therefore, easier to get closed, too.”
By contrast, borrowers who have simply been prequalified may be less likely to close, even if they are prequalified for conventional loans.
Typically, preapproval means a borrower’s application has received a conditional underwriting approval, minus a sale contract and title search. A lender has verified their income, employment, and overall finances and determined that they’re creditworthy.
Prequalifications often happen faster than preapprovals, but they’re based largely on self-reported financial information that hasn’t yet been analyzed by underwriting. That means there may be a higher risk of them being denied once their application is fully processed.
Financial peace of mind is important to sellers. But for some, so is the opportunity to honor our military members.
“One of the most rewarding things about accepting an offer with a VA loan is knowing that you are showing a veteran that you appreciate his or her service,” Serviss said. “It can seem like a small gesture, but it can have a huge impact on that service member or veteran.”
Consider that, as a seller, you can help a vet, active-duty service member, or surviving spouse purchase a home and put down roots.
It might be this person’s first entry into homeownership, enabling them to start a family. They may have recently returned from a deployment and look forward to homeownership as a way to ground themselves and start a new chapter. Whatever is driving them to buy a home, you can honor their military service by considering their VA loan offer.
Want further proof that VA loan offers are worth considering? These loans tend to close as often as FHA and conventional loans.
In fact, according to the most recent ICE Mortgage Technology report, the percentage of VA purchase loan applications that have closed in the previous 90-day cycle was 75.0%, compared to 76.9% for conventional loans and 75.1% for FHA loans.
“The inconveniences sellers typically associate with VA loans are not only minor but they are often offset by the above-average closing success rate exhibited by most VA buyers. If nothing else, preapproved VA buyers are more likely to bring a deal to the closing table than their civilian counterparts,” explained Than Merrill, founder and CEO of FortuneBuilders.com.
You may be thinking that 75% is not a very high closing rate. But this statistic doesn’t mean that your sale has a one in four chance of falling through. These numbers include applicants who don’t close because they choose another lender after applying or don’t close within 90 days for another reason. The pull-through rate is incredibly high for buyers who apply then get an accepted offer.
VA loans come with a more stringent appraisal process than conventional loans. Appraisers must be VA-approved and ensure that the home meets the VA’s minimum property requirements.
Sellers sometimes assume that these property requirements will make it more difficult for the loan to be approved, or that they will have to make costly repairs before the home can sell.
But if the home is in good condition, is safe, and has been well-maintained, it has a good chance of passing the appraisal. The VA’s goal is to ensure that military homebuyers are buying safe, livable properties, so the bar isn’t unreasonably high.
Additionally, because the VA backs the loans, they want to know that borrowers aren’t taking out mortgages for more than their homes are worth. That’s not all that different from conventional loans. Mortgage lenders require appraisals to make sure they’re not lending more than a home’s fair market value.
Again, veterans may have more cash on hand to make up for low appraisals due to the zero-down-payment requirement.
So while the VA appraisal process can be tougher than with conventional loans, it shouldn’t be a dealbreaker for sellers.
Should sellers accept VA offers FAQs
Some sellers believe an offer with a VA loan won’t close or will take longer to close, will involve a borrower who lacks funds and/or has poor credit, and will result in having to make repairs or lower their price due to strict VA property requirements. But the truth is that VA loans close at rates comparable to other types of financing, including conventional loans, and VA loan borrowers are often preapproved.
They also may have more cash on hand to cover appraisal differences and closing costs since they don’t have to make a down payment.
And the appraisal process isn’t unreasonably strict. It’s designed to ensure that VA borrowers are purchasing safe, livable homes, so as long as the property has been well-maintained and is in good condition, there’s a strong chance it will be approved.
Contrary to what many believe, a VA loan offer is not bad for sellers. Not having to make a down payment means a VA loan homebuyer may have extra funds to cover closing costs and appraisal differences if the appraisal comes in lower than the sale price.
These buyers often come to the table preapproved as well, which means a mortgage lender has already reviewed their finances and determined that they are creditworthy. A preapproved VA borrower may be more likely to close than a conventional borrower who is prequalified or who hasn’t yet gone through the preapproval or prequalification process.
Sellers pay the real estate agents’ commissions on VA sales, just as they do with other loan types. The VA borrower may request that the seller pay up to 4% of the loan cost in seller concessions, but the seller is not obligated to cover that amount.
They can negotiate with the buyer to find a number that works for both parties. However, the seller must pay a portion of the buyer’s escrow fee, according to REALTOR® Nicole Serviss, and the cost can vary from state to state.
VA offers have long gotten an unfair rap from sellers. But VA offers can offer real advantages to buyers and sellers alike.
“The single greatest reason sellers should strongly consider entertaining VA loan offers is their success rate. The lack of a down payment is in no way reflective of the buyer’s financial standing and shouldn’t be viewed as a red flag,” Merrill said. “In fact, many of today’s VA loan borrowers are highly qualified with pristine credit histories.”
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.