Minimum Property Requirements for a VA Loan

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. As such, we’ll use this article to discuss minimum property requirements for a VA loan.

Specifically, we’ll discuss the following:

• VA Loan Overview
• VA Loan Minimum Property Requirements
• Common Minimum Property Requirement Issues with VA Loans
• Final Thoughts

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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.

But, 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 his or her loan, the VA will reimburse the lender a portion of the outstanding loan balance.

This VA backing significantly reduces risk to lenders. As a result, these 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
• 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. Accordingly, the loan comes 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. To meet this threshold, the VA imposes certain minimum property requirements that must be met before a lender can approve a VA loan. According to the Department’s documentation, these minimum property requirements exist to protect the interests of veterans, lenders, servicers, and VA.

From a practical perspective, the VA enforces these property requirements through its appraisal program. Every property purchased with a VA loan must receive an appraisal by a VA-assigned professional appraiser. Similar to all loan closings, 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 in homes:

• Safe and functional mechanical systems
• 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 have two options: 1) they can ask the seller to fix the issues, or 2) they need to walk away from the deal.

Common Minimum Property Requirement Issues with VA Loans

To help avoid a problem with a minimum property requirement, veterans should understand some of the following common issues. Ideally, veterans will recognize major issues before going under contract on the home. That way, veterans save time, money, and heartache by not trying to purchase a home that likely won’t meet the VA’s minimum property requirements.

Condo Approval

When purchasing a condo with a VA loan, the VA must approve the entire condo development. While not a habitability issue, per se, this minimum property requirement can quickly derail a purchase. Prior to making an offer on a condo, veterans should review the VA’s searchable database of approved developments. You can request that the VA add a development to its approved list, but this can be an extremely time-consuming – and not guaranteed – process.

“As-is” Properties

When a seller lists a property “as-is,” it means he or she 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 typically come at a steep discount, but that’s generally because of major damage or needed repairs. As a result, most as-is properties will not meet the VA’s minimum property requirements. And, if the seller won’t fix those issues, the veteran would need to pay for them himself or herself prior to closing.

Foundation Issues

Cracks in foundations can cause massive structural damage to a property. These issues will absolutely act as red flags on a VA appraisal report. And, fixing these problems to get them to VA minimum property requirement levels can be extremely expensive. You may need to hire a structural engineer, and then the actual repairs could cost too much to justify buying the home.

HVAC Problems

The VA does not mandate new heating, ventilation, and air conditioning (HVAC) equipment. But, the existing equipment needs to A) function, and B) 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 still technically working. A situation like this likely wouldn’t pass VA requirements. And, many sellers wouldn’t replace an HVAC unit preemptively just to meet a buyer’s VA minimum property requirement.

Roof Issues

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.

Significant Improvements

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. And, retroactively seeking permits can be extremely 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 shouldn’t consider buying a foreclosure or short-sale property. In addition to not meeting VA minimum property requirements, most of these homes won’t meet any traditional lender’s habitability standards.

Final Thoughts

Even after reading this article and doing some additional research, most veterans won’t be experts in the VA’s minimum property requirements. As a result, if you plan on using a VA loan, you should absolutely work with a real estate agent familiar with these loans – and the associated minimum property 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.