Disadvantages of the VA home loan program
But VA home loans also have several disadvantages.
First, any home being purchased with a VA mortgage must be evaluated by a VA appraiser who ensures the property conforms to the minimum property requirements: it must be structurally sound, safe, and sanitary. If the property does not meet these requirements, the seller must make repairs before the loan is closed. For example, if the roof is leaky, the loan cannot close. In comparison, conventional loans do not require home inspections, meaning a buyer could purchase a home in need of repairs at a discount.
VA appraisals often take longer than typical home valuations.In addition, if the appraisal value is lower than the sales price, the seller must reduce the price to the appraisal value, or the sale cannot proceed. For a conventional loan, however, the parties can renegotiate the price or the buyer can pay the difference between the renegotiated price and the appraised value. This gives the seller more flexibility if the home fails to appraise.
Because of these added obstacles, some sellers may be reluctant to sell to borrowers who rely on VA financing. Although the housing market has cooled since the pandemic, many homes still get multiple bids. When sellers have choices, they often avoid VA loans. Outside of persistent misconceptions about the program, sellers most often cite the home inspection requirements and the appraisal process as reasons they’re unwilling to sell to VA borrowers.
Finally, loss mitigation for distressed VA loan borrowers is less robust than for borrowers with GSE or FHA loans, which guarantee 100 percent of the loan amount, compared with a VA loan’s 25 percent guarantee. When a borrower with an FHA or GSE loan experiences financial difficulties, the borrower can pause mortgage payments for a time. These missed payments can be paid back immediately or in the short term, added to the end of the mortgage term, or combined with a modification plan to reduce the borrower’s payments.
During the pandemic, the VA offered similar programs on an emergency basis, but these programs effectively ended in 2022 (PDF). The VA will soon launch a new loss mitigation program, but the options it will provide for struggling borrowers are still more limited than those offered by other agencies. Expanding loss mitigation options for VA borrowers could help many active-duty service members and veterans avoid foreclosure and weather financial hardships.
Recent program improvements will remove barriers, but more action is needed
Since 2019, the VA has taken steps to reduce barriers created by the appraisal process. If an appraiser expects a valuation to be less than the sales price, the appraiser is required to notify the borrower and give the real estate agent, lender, or borrower 48 hours to supply additional information that supports the original sales price. If the resulting appraisal is still below the sales price, the borrower or lender can request a reconsideration of value from the VA. Additionally, in December 2023, the VA requested comments on rulemaking changes that would better align minimum property requirements with industry-wide property standards.
On May 31, 2024, the VA will launch the Veterans Affairs Servicing Purchase (VASP) program, which will allow the agency to purchase defaulted VA loans when all other loss mitigation options have been exhausted. These VASP loans will have a 2.5 percent interest rate, be held as direct loans in the VA’s portfolio, and be serviced by the VA’s special servicer. As a result, the program will allow stressed VA borrowers to receive a mortgage modification with a payment reduction. Still, some industry trade groups have expressed concerns about the mandatory compliance deadline for loan servicers (October 1, 2024).
Homeownership is critical to building intergenerational wealth in the US. To help more active-duty service members and veterans become and remain homeowners, policymakers should provide the VA with the authority and funding necessary to create loss mitigation programs that match the GSE programs.
