VA loans, which are available to military members and veterans, have their own unique set of rules and requirements. Most of these requirements come from the U.S. Department of Veterans Affairs, which manages and oversees this program.
One of the most important requirements for VA loans has to do with the home appraisal. Any home being purchased with a VA-guaranteed mortgage loan must be appraised by an approved property appraiser to determine its value.
Home appraisers can estimate the current market value of a property in a number of ways. But when it comes to VA loans, they typically use comparable sales to determine the market value for a particular property.
As a home buyer using a VA loan, you don’t have direct involvement or control over the appraisal process. It happens without you. But you should still understand how the process works, since it has a direct influence on whether or not the loan can be approved.
Understanding VA Loans, Appraisals and ‘Comps’
Let’s start by covering some of the terminology being used in this article, just so we’re on the same page:
VA loans are a unique kind of mortgage loan designed to help military members, veterans, and eligible surviving spouses achieve homeownership. These loans are offered by private lenders but are backed by the U.S. Department of Veterans Affairs. VA loans typically provide more favorable terms and lower down payment requirements compared to conventional mortgages. In many cases, borrowers can finance up to 100% of the purchase price.
Home appraisals are professional assessments conducted by licensed appraisers to determine the market value of a property. These evaluations provide an objective and unbiased estimate of a home’s worth. Appraisers consider various factors such as the property’s condition, location, comparable sales in the area, and current market conditions. The Department of Veterans Affairs requires all homes purchased with a VA loan to have a property appraisal.
Comparable sales (or “comps” for short) are similar properties that have sold recently in the same or nearby neighborhoods. Comps can be used as a benchmark for determining the value of a specific property. Real estate professionals often use comparable sales data to assess how a subject property stacks up in terms of price, condition and features. The Department of Veterans Affairs encourages home appraisers to use comparable sales when determining the market value of a property.
How These Things Are Connected
So, if you want to buy a home using a VA loan, the property must be evaluated by an approved home appraiser to determine its current market value. This is a standard requirement for VA-backed mortgage loans. And the appraiser will use comparable sales as part of the evaluation.
While individual appraisers might go about their work in different ways, the process usually flows like this:
Step 1. Identify Comparable Sales
The first step in the appraisal process is to identify properties that are similar to the one being purchased with a VA loan. These similar properties, or comps, should ideally be in the same neighborhood or a similar location and have comparable features, such as the number of bedrooms, bathrooms, square footage, and overall condition.
Step 2. Collect Property Data
The appraiser collects detailed information about the selected comparable sales, including the sale prices, sale dates, and specific characteristics of each property. This data is gathered from various sources, such as local real estate databases, public records, and real estate agents.
Step 3. Visit the Subject Property
The home appraiser will usually visit the home being purchased with a VA loan to evaluate its condition, features, etc. To do this, they must coordinate with the homeowner to gain access to the home’s interior. For some properties, a “desktop appraisal” might be allowed. This means the appraiser does not have to visit the property and can instead evaluate it through digital and web-based tools.
Step 4. Make Necessary Adjustments
Since no two properties are identical, the appraiser must adjust the comparable sales data to reflect any variations between the subject property and the comps. For example, if the subject property has an additional bedroom compared to a comp, the appraiser would adjust the comp’s sale price to account for this difference. These adjustments help create a more accurate comparison for valuation purposes.
Step 5. Consider Market Trends
Appraisers also consider current market conditions and trends, such as whether property values in the area are appreciating or depreciating. This information can affect the final valuation.
Step 6. Make Final Valuation
After collecting and adjusting the data, the appraiser arrives at a final valuation for the subject property. This valuation is grounded in the real estate market’s realities and reflects what a knowledgeable and informed buyer would be willing to pay for the property.
If the appraiser determines that the home’s market value is equal to or higher than the amount the buyer has agreed to pay, the loan will likely move forward. On the other hand, if the appraised value falls below the agreed-upon purchase price, the buyer might have to make up the difference out of pocket or renegotiate with the seller.
What the Official Handbook Says on This Subject
The Department of Veterans Affairs publishes a document called “VA Pamphlet 26-7.” This is basically the official handbook for mortgage lenders who offer VA home loans.
Here’s what that publication says about home appraisals and comparable sales:
“VA relies exclusively on the sales comparison approach to value, except in very unusual circumstances involving inadequate or nonexistent comparable sales or an extremely unique property. The VA value estimate should never exceed what has been indicated through the sales comparison approach.”
In this context, the “sales comparison approach” uses comparable sales to determine the market value of a property, as we just discussed. This is the primary method for estimating a home’s value when it comes to VA loans.
This handbook also goes on to describe two of the most important features of a comparable sales. The comps should be fairly recent and located close to the property being purchased.
“Comparable sales should be recent sales, typically within 6 months and generally not more than 12 months old,” the guide states. It also encourages appraisers to choose three comparable sales when conducting their valuation.
As a home buyer using a VA loan, there’s not much for you to do during the appraisal process. It will take place without your direct participation or involvement. But it helps to understand how that process works, since it can affect your loan approval process.