The VA loan provides an outstanding path to homeownership for veterans. However, not all properties will qualify for this loan as the VA wants to ensure a baseline level of habitability.
Here’s what you need to know about minimum property requirements for a VA loan.
- VA Loan Overview
- VA Loan Minimum Property Requirements
- Common Minimum Property Requirement Issues with VA Loans
- Final Thoughts
VA Loan Overview
The federal government created the original version of the VA loan to provide veterans returning from World War II an affordable path to homeownership. The Department of Veterans Affairs administers the VA loan in its current form.
It’s important to note that the VA doesn’t actually issue loans. Instead, it guarantees a portion of every loan issued by VA-approved lenders (e.g. banks, credit unions and mortgage companies). In other words, if a veteran stops paying their loan, the VA will reimburse the lender a portion of the outstanding loan balance.
This backing from the VA significantly reduces risk to lenders. As a result, lenders are able to issue VA loans with the following outstanding terms:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Guaranty can be used multiple times
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
VA Loan Minimum Property Requirements
As stated, the federal government views the VA loan program as a path to veteran homeownership – not real estate investing. Put simply, the program exists to help veterans find a place to live, so VA loans come with occupancy requirements.
Veterans using the VA loan need to move into and occupy a home for at least one year after purchase.
To support this occupancy requirement, the VA mandates that any homes purchased with a VA loan are actually habitable. The VA imposes properties to meet certain requirements before a lender can approve a VA loan.
According to the department’s Lender’s Handbook, these minimum property requirements exist “to protect the interests of veterans, lenders, servicers, and VA.”
The VA enforces these property requirements through its appraisal program. A VA-assigned professional appraiser must appraise every property purchased with a VA loan. As with any loan closing, this appraisal will confirm that the home is accurately valued. But, the VA-specific appraisal also inspects properties to make sure they meet minimum property requirements. Homes need to be safe for occupants, sanitary and structurally sound.
While not an exhaustive list, here are some of the broad property criteria appraisers look for:
- Mechanical systems that are safe to operate
- No signs of leaks in basements and crawl spaces
- No sign of termites, dry rot, or fungus growth
- Adequate heating systems
- Adequate roofing
- No lead-based paint (must be remediated if it existed in the past)
Following the appraisal, the VA will review the full appraisal report. If any issues with minimum property requirements exist, borrowers can ask the seller to fix the issues. If the seller refuses, borrowers may need to walk away from the deal.
Common Minimum Property Requirement Issues with VA Loans
To help avoid a problem with minimum property requirements, veterans should understand some of the following common issues. Recognizing major issues before signing a contract for the home, can help veterans avoid getting under contract on a house that may not meet the VA’s minimum property requirements.
When purchasing a condo with a VA loan, the VA must approve the entire condo development. While not a habitability issue, this minimum property requirement can quickly derail a purchase. Before making an offer on a condo, veterans should review the VA’s searchable database of approved developments.
Buyers can request that the VA add a development to its approved list, but the process can be extremely time-consuming — and not guaranteed.
When a seller lists a property “as-is,” it means they won’t make any repairs prior to closing on the sale. Basically, the seller is telling you to “take it or leave it.” These homes may come at a discount if they have major damage or are in need of serious repairs. As a result, most as-is properties may not meet the VA’s minimum property requirements. If the seller won’t fix those issues, veterans may need to pay for the repairs themselves prior to closing.
Cracks in foundations can cause massive structural damage to a property. These issues will be red flags on a VA appraisal report. Fixing these problems to get them to required standards can be extremely expensive and may cost too much to justify the home’s purchase.
The VA does not mandate new heating, ventilation and air conditioning (HVAC) equipment. But, the existing equipment needs to function, and have a reasonably long, expected future life. If a property’s air conditioner was installed 25 years ago, there’s a good chance it’s on its last legs – even if it is still technically working. A situation like this may not pass VA requirements. Remember that sellers may not choose to preemptively replace an HVAC unit just to meet the VA’s minimum property requirements.
Similar to HVAC systems, homes don’t need to have new roofs. But if roofs have major damage or are in imminent need of replacement, they likely will not meet minimum property requirements. Furthermore, a damaged roof can lead to major leak-related damage, so a buyer may want to avoid these properties anyway.
Just because the seller’s new living room looks great doesn’t mean it’s up to code. If a seller has completed any major improvements on a property, you’ll want to review all associated permits. If a paper trail doesn’t exist, the improvements may not meet the VA’s minimum property requirements. Additionally, seeking permits retroactively could be time-consuming and potentially expensive.
Foreclosure and Short-sale Properties
Frequently, these sorts of properties include significant damage and will not meet the VA’s minimum property standards.
As a rule of thumb, if you’re not an all-cash buyer or an investor, you may not want to consider buying a foreclosure or short-sale property. Homes that don’t meet VA minimum property requirements may not meet other traditional lenders’ habitability standards either.
Choosing properties that meet the VA’s minimum property requirements can save you time and money when you get under contract. But, the standards can be complicated.
If you plan on using a VA loan, you should work with a real estate agent familiar with these loans and the associated requirements. A savvy agent will spot red flags in properties before you make an offer, saving you the heartache, time and money of signing a contract on a home that will never meet VA standards.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
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