Veterans Can't get the Mortgages They Need | John Burns Real Estate Consulting

Veterans Can’t get the Mortgages They Need

Our survey of 188 home building executives last month turned up a very interesting, and disturbing, finding. More builders are shying away from selling homes to Vets because VA appraisers have become so conservative that the homes rarely close. In addition, the low appraisals impact the value of future community sales, costing the builders significant money. Particularly disturbing are some of the VA procedures that make it difficult to challenge mistakes, as well as the impact the appraisals are having on other homes available for sale in the community. All of the builders we spoke with love selling homes to Vets, but many have grown so frustrated with the process that it is becoming financially questionable to continue.

The appraisals required to close VA loans are intended to protect veterans from overpaying, but end up preventing many from buying the homes they want. When the appraised value comes in significantly below the contracted sales price of the home, and well below the appraisals for FHA and conventional loans for like homes, builders are likely to cancel the sale. Because of the timing, veteran families can be devastated by a cancellation of their home purchase only days before their scheduled closing and move-in.

Across the country, builders tell us the VA appraisal program is broken, and so frustrating that some may eliminate sales to buyers using VA financing. The fact that the low VA appraisal affects a community’s sales for six months adds insult to injury. Builders shared these common complaints about the VA appraisal process:

  • Appraisers lack market knowledge – Builders see a higher incidence of VA appraisers from outside the metro area, and who lack local market knowledge and experience. This rarely occurs for appraisals supporting FHA and conventional loans. A builder stated in our monthly survey, “The biggest problem has been with incompetent appraisers that are on the VA approved appraiser list. We’ve seen significant FACTUAL errors.”
  • VA appraisals take longer – The appraiser typically has 14 days to establish the value, and the VA appraisals tend to come in at the end of this period, while appraisals for FHA and conventional loans come in faster. The timing is a problem because it is so close to the closing and moving day.
  • Focusing on the lowest comps, not most relevant – The VA appraisers focus on the lowest comparable sales within the range they were given or researched, often ignoring more relevant comps that support a higher price. They may also ignore adjustments to the comps to account for differences that support a higher value. A survey participant added, “The appraisal issue is mainly with VA appraisals. The values are coming in at the low end of the comps; the appraisers don’t use an average. We are considering restricting VA sales.”
  • No value given to options – The VA appraisers refuse to assign any value to the options buyers have selected, if they don’t add space. This refusal used to be limited to more unusual options and upgrades, but now seems to be across the board.
  • A feedback gap – The VA appraiser is required to notify the lender of a low value that doesn’t support the loan at least three days prior to closing, but not the scope of the gap. The builder can rush around finding additional comps, with a very low likelihood of impacting the final result. For FHA and conventional loans, builders see the whole appraisal with an opportunity to point out errors and provide additional information.
  • Effectively no way to correct or modify the appraisal – The VA appraisal is final by the time the builder and lender receive it, and the process to refute the value or correct factual errors is ineffective. The builder or lender has to appeal to the Department of Veterans Affairs, which takes a minimum of 60 days and rarely results in a change in value. One builder adds, “You can’t go to a second lender if you get a low appraisal on a VA.”
  • Low value impacts all appraisals for the next six months – The builder is stuck with the low appraised value at that community for six months, and the value impacts the FHA and conventional loan appraisals as well. Realtors and resale home sellers also complain about this, and sometimes will resort to delisting a home until the clock runs out. The dollars can be significant. In one recent example, an appraisal was short $11,000 or 8% on a $138k California home. Another appraisal was $14,000 off an affordable Washington D.C. townhome, and the builder has seen appraisals $60-70k short for detached homes. In both cases, using average comps instead of the lowest comps would have established the needed value to close.
  • Lenders can’t avoid specific VA appraisers known for lowball values – Lenders have some say over which appraisers within an assigned panel will be used for FHA and conventional loans, but no input regarding VA appraisers. The lender and builder can both get stuck with a string of loan applications that won’t close, costing time and money.

Builders point out that veterans do the same diligence in assessing housing choices as other buyers, and are willing buyers at the contracted prices. Qualified families want to buy with VA financing because they can do so with no down payment or mortgage insurance premiums. As a result, only a small percentage can be redirected into FHA programs to successfully complete the home purchase.

The VA appraisers believe they are protecting veterans from overpaying for homes, and have stated this to our builder contacts. We believe they are also interested in protecting the agency, and ultimately taxpayers, from losses that could arise from these no down payment loans. We contacted managers at the VA home loan program, who stated they are not permitted to address our concerns.

Jody Kahn If you have any questions, please contact Jody Kahn at (603) 235-5760 or by email.