How the VA Appraisal Value is Calculated

 

Deciphering the VA Lender’s Handbook Chapter 11 Part 3

 

Knowing how the value on the home you’re hoping to purchase is going to be established can answer a lot of questions, and help give you perspective and plan ahead. There are three approaches to establishing value that the Handbook outlines, but only one of which the VA relies exclusively on. The three ways the home’s value can be determined is with the Sales Comparison Approach, the Cost Approach, and the Income Approach. The VA relies exclusively on the Sales Comparison Approach. The only exception to this rule is when there are inadequate or nonexistent comparable sales.

 

The Sales Comparison Approach means taking comparable houses, analyzing what they sold for, and determine what a well-informed purchaser would generally pay for the price VA Home Valuesof “…acquiring a similar property of equal desirability and utility without an undue delay.” The Cost Approach is not commonly used for home appraisals, because the real estate market does not base their sales off of how much it cost to build the home or replace it. As such, the VA will only allow the Cost Approach to be used to add support to an appraised value with weak sales comparisons in the area. For example, if you are buying a new manufactured home in an area with normal homes or much older manufactured homes, there may not be a whole lot of sales the appraiser can compare the home to. Lastly, the Income Approach only applies to multi-unit property, also known as an income-producing property (you can make income from rent payments), and the property’s ability to produce income will be factored along with the sales comparison approach in determining the home’s value.

 

So how does it all work? If the appraiser is just basing the sale price of the home off similar homes, why does he or she bother coming to the house at all? More importantly, when I sell my home, what’s the point of upgrading my home or making improvements? Here are what you need to know about the steps an appraiser goes through:

  • Pre-visit research: an appraiser will look up the history of the property, what it has sold for in the past and any records on what improvements have been made to the home.
  • The visit: The appraiser needs to visit and inspect the home for a few very simple reasons:
    • The appraiser needs to know what homes would be considered comparable, and whether the comparable homes are just a little better or just a little worse than the home being appraised.
    • The appraiser is also responsible for making sure that the home meets the VA’s minimum property requirements, and no amount of comparable homes will tell them that.
    • The seller or buyer of the home can inform the appraiser of improvements to the home that no records exist for that might affect the value of the property.
  • Post-visit research: this is the phase where the appraiser will look for comparable sales. Armed with knowledge from the visit, the appraiser can determine what really qualifies as a comparable sale, and determine what the house should sell for based on what similar homes have sold for, while accounting for the differences between the comparables and the home being sold.

 

The reason the Comparable Sales Approach is so widely used is because it is the best indicator of how much a home can reasonably be sold for; just because a home would cost $500,000 to rebuild doesn’t mean it can sell for that much. If you’re the buyer, you can know that the appraised value is a fair asking price based on the current housing market and is not more than you’d be paying for a similar home in the area. If you’re a seller, you can plan ahead to try not to spend more money on improving the house than the improvements will add to the fair market value. In the next article we’ll tell you how appraisers are required to select comparable sales to be used in the appraisal, as well as more information on the requirements for comparable sales. If you have any situation-specific questions, please reach out to us here at Low VA Rates and we’ll do our best to answer them.

 

Properties Not Eligible For VA Appraisal

 

Deciphering the VA Lender’s Handbook Chapter 10 Part 5

 

There are some cases where a property is not eligible for a VA appraisal. This might have to do with the condition of the property, where the property is located, or the way ownership of the home is managed. Obviously, if the home is not eligible for the VA appraisal, it certainly will not be eligible for the VA guaranty. Even if a home is eligible for the appraisal, it still has to pass before it can be eligible for the guaranty. In all cases of a property not being eligible for a VA appraisal, the reasoning comes down to the VA’s commitment to making sure that veterans obtain suitable housing at better terms than they could otherwise afford. To be suitable, the VA requires that the home be in good condition, be permanently located, and give the veteran a certain level of autonomy in regards to ownership of the property.

 

A property that is not likely to meet the VA’s minimum property requirements is generally not eligible for the VA guaranty. If you’re looking for more information on what the minimum property requirements are (there are quite a few), check out our previous articles in which we discussed them. Not all the minimum property requirements are immediately apparent, but many are, and if the home is obviously not meeting them, then a VA appraisal will not be provided. The exception to this rule is if the VA agrees that there is a reasonable likelihood that the property can be repaired, altered, or improved to meet the requirements before the loan closes. There are also location-related issues that could disqualify a home from getting a VA appraisal.

Veterans get new home

One of these issues is if the home is in a Special Flood Hazard Area and either is proposed or new construction with the elevation of the lowest floor below the 100 year flood level, or flood insurance is not available for the home for whatever reason. Also, if the home is in an area subject to regular flooding for whatever reason, even if it is not in an SFHA, it may not be eligible for a VA appraisal. If the home is located is a Coastal Barrier Resources System area, an airport Noise Zone 3 (and is proposed or under construction), or within a transmission line easement involving high-pressure gas, liquid petroleum, or high voltage electricity. A home located in an area subject to earthquakes, landslides, or other geological instability may not be eligible if there is no evidence that either the home is in a specific place where it will not be affected by the geological instability or that the engineering of the home satisfactorily addressed it.

 

The VA maintains a list of approved condo projects; these are condo projects whose documents, agreements, and contracts are approved by the VA. If a condo project is not approved by the VA, then none of the condo units in it are eligible for the VA appraisal. If the condo project has been submitted to the VA for approval but approval has not come through yet, an appraisal can be conducted, but in order to avoid unnecessary appraisal fees, lenders and borrowers are counseled to be confident that approval will be granted by the VA before requesting the appraisal.

 

The VA loan program is intended to assist borrowers in purchasing homes, or in other words, to gain ownership of suitable housing. Therefore, in cases where the ownership of the property is not as straightforward as a typical home purchase, the property may not be eligible for an appraisal. These are cases like leaseholds, cooperatives, and ground rental arrangements. The VA must specifically approve each arrangement before an appraisal can take place. In order to submit the property ownership arrangement for approval, the lender needs to submit details of the ownership arrangement, copies of leases or other instruments creating the estate, and recommendations of the VA office of jurisdiction. These items need to be submitted to the VA Central Office. These sort of situations don’t come up too often, and it’s usually simpler just to find a different home that has a more conventional ownership agreement.

 

VA Loans – How to Request an Appraisal

 

Deciphering the VA Lender’s Handbook Chapter 10 Part 2

 

Below is a chart provided by the Handbook that numbers and explains the basic steps of requesting a VA appraisal. This information is generally meant for lenders, but is important for anyone planning on requesting an appraisal to know. These are the basic steps, so more details on these steps will be provided in more articles on the VA Appraisal. The Chart:

Steps  
1 Ensure that the property is eligible for appraisal and all other appraisal requests can be satisfied. Contact the VA office of jurisdiction for the property if there are:

  • questions about the property’s eligibility, or
  • if the property is not eligible for appraisal but is already the security for a VA loan

Note: Every property eligible for the Lender Appraisal Processing Program (LAPP) should be processed under LAPP. If a LAPP lender fails to process an eligible property under LAPP, the request for VA guaranty must include a detailed explanation.

2 Access TAS, and provide all necessary information about the case.
TAS will:

  • Assign
    • a case number (in liquidation cases, this will be the existing VA loan number for the property, as provided by the requester)
    • an appraiser (since VA is required by law to select the fee appraiser on a rotational basis from a panel maintained by VA), and
    • an inspector, if appropriate, and
  • issue a complete VA Form 26-1805-1, VA Request for Determination of Reasonable Value, which includes the above information

Note: LAPP lenders and loan holders/servicers who wish to have the appraisal report e-mailed to them must provide an e-mail address in Item 5 of the appraisal request.

3 The same day as the assignment is made e-mail, fax or mail the TAS-generated VA Form 26-1805-1, and any other required documentation, to the appraiser assigned.
For liquidation appraisals, include the name and telephone number of the current or last known occupant. If the property is vacant, aso include the keys to the property, or sufficient information to enable the appraiser to gain access to the property; for example, the name and telephone number of a local person to contact.
If appraised as “Proposed or Under Construction.”

  • ensure that the construction exhibits meet the requirements
  • mark the case number assigned on the outside of each set of the construction exhibits
  • include a set of the construction exhibits with the appraiser’s VA Form 26-1805-1. This will be considered the VA file copy, and
  • send the inspector, if assigned, a copy of VA Form 26-1805-1 and a set of the construction exhibits.

If the veteran is acting as the general contractor in building a home for his or her own occupancy, include:

  • any construction exhibits needed for appraisal purposes, and
  • the veteran’s written agreement to pay for any special VA fee inspections that may be needed to ensure that the work meets VA Minimum Property Requirements for existing (not proposed) construction.

Ordering a VA Home Appraisal

Now, the above steps assume that TAS is available for use, which is true in most cases. However, if TAS is unavailable, you can still submit a request for an appraisal. Complete step 1 in the chart above as normal, then, instead of getting on TAS, fill out VA Form 26-1805, VA Request for Determination of Reasonable Value. VA Form 26-1805 needs to be typed and completely filled out in order for the request to be processed. There are only three exceptions for this:

  • properties already listed on a valid VA Form 26-1843a, Master Certificate of Reasonable Value
  • loans for alterations, improvements or repairs of $3,500 or less, or
  • partial release of the security for a VA-guaranteed loan

 

If the property is being appraised under LAPP, the put “LAP” as the prefix for the case number and write “LENDER APPRAISAL PROCESSING PROGRAM” under the lender’s name.

 

That is the basic process for requesting a VA appraisal. As you can tell, it’s somewhat complicated, but can be done by parties other than the lender if necessary. There are more specific instructions, but they have to do with an appraisal for a property to be liquidated, which means that it isn’t something borrowers will ever really deal with. If you are looking for more information on this, feel free to check out the text of the Handbook on the VA’s website.

 

FAQ Refinance Appraisal

Do I Have to Get an Appraisal for a VA Refinance?

 

You might; it depends on what type of refinance you’re getting. This can be a major factor in which type of refinance you choose to use. Even on a conventional loan, the inspection that determines the fair market value of the home can sometimes throw a wrench in the works. If the value comes in too high, the seller may decide to raise the price of the home, and be unwilling to sell it for lower. If the price comes in too low, the seller may not be willing to lower the price of the home and if you still want to buy it, then some of your down payment will have to go towards getting the price down to what the lender is willing to make a loan for. If the seller is willing to lower the sale price, then the only major downside is that the home you’re buying isn’t worth as much as you thought it was.

 

With the VA loan program, a home must be appraised by an official VA appraiser. The appraisal is very similar to a normal home inspection, but with two specific focuses: determining the fair market value of the home, and making sure that the home is safely inhabitable and suitable for the veteran’s needs. Where a conventional inspection just determines the fair market value and leaves it up to the borrower, a VA appraiser has the power to put the kabosh on the whole thing. Because of this extra level of power that the VA appraiser has, the appraisal process is often a point of stress, frustration, and complication in getting a VA loan. Needless to say, borrowers looking to refinance want to know if this rather onerous step is one that can be skipped. The answer, as mentioned above, depends on what kind of refinance you are getting: an Interest Rate Reduction Refinance Loan (IRRRL), or a cash-out refinance.

 

The IRRRL is the VA’s streamline refinance option, and as such, it makes speed, ease, and affordability its highest priorities. If you use an IRRRL to refinance your home, then a new appraisal on the property is not necessary. There’s a catch to this, though, and that is that really the only thing an IRRRL can be used to do is get a better interest rate – anything else you want to use a refinance to do will have to be done with a normal refinance. What makes an IRRRL so much faster is that it reuses much of the underwriting information from the original loan, with the assumption that none of that information has changed much. Because it would require a determination of the current value of the property, as well as other underwriting information, an IRRRL cannot used to get cash-out on the equity in the home.

 

Do I need and appraisalOn the flip-side, any other type of VA refinance requires a new appraisal, and totally new underwriting, which is what enables them to offer such options as cash out. Generally speaking, if a VA refinance is not an IRRRL, it is referred to as a cash-out refinance. This is somewhat misleading, however, since the term refers to not only actual cash-out refinances, but cash-in refinances and debt consolidation loans. If you’re getting anything other than an IRRRL, you will be required to get your home appraised again by a VA appraiser. In many cases, this actually works to your advantage – if you’ve added $10k to the value of the home since you bought it, you want that reflected in the amount of equity you have in the home. Why? Because you can only get as much cash out as you have equity in the home. This is also why a new appraisal enables a borrower to get cash out on the refinance – because the current fair market value of the home must be established in order to calculate how much equity the borrower has in the home.

 

In summary, if you use an IRRRL to refinance your home you will not be required to get it re-appraised, but you also have significantly fewer options with your refinance. If you use a cash-out refinance, you will need to get a new appraisal, but you can do a lot more with your new loan.

 

The Dirty (sometimes Clean) Truth Behind VA Appraisals

While it can often go unmentioned in discussions about the VA loan program, there really is nothing more central to the program than the VA appraisal of the property. The VA Lender’s Handbook, also known as the VA Pamphlet 26-7, has all of the information anyone would ever want to know about VA appraisals. You can find the VA Lender’s handbook online as a matter of fact, on the VA loan section, then under the lenders section, and download and read it for yourself. In the Handbook, there’s a full chapter that is dedicated to nothing else but VA appraisals and related rules and guidelines.

approved

The chapter that covers appraisals is Chapter 10. Chapter 10 explains the primary purpose of the appraisal as their way of making sure the home is worth at least as much as it’s being sold for, and that the home is an acceptable condition for a veteran to live in. From the Pamphlet: “An appraisal is required to help ensure that any property which will become the security for a VA-guaranteed loan:

– has a value of at least as much as the loan amount, and
– is in a condition acceptable to VA.”

Like everything else in today’s world, a VA appraisal is not free. Paying for and dealing with the official VA appraisal is the privilege of the VA-eligible borrower who is hoping to purchase the home in question. Hopefully the expense for the VA appraisal is only for the initial appraisal; any follow-up inspections by the appraiser that are required as a condition for approval are also charged to and paid for by the borrower. Follow-up inspections are called “compliance inspections” and become part of the picture when the original appraisal found things that would need to be repaired or changed before the home could be compliant with VA standards, known as the VA Minimum Property Requirements, or MPRs.

When it comes to initiating the appraisal, this task usually falls to the lender. The lender is the preferred source of initiation primarily because the lender is usually the one who knows best how to go about requesting one. A borrower or any other party to the transaction would likely have to find a number for the VA online, call it, and hope for the best. In the event that some other party would like to make the request, such as a mortgage broker or real estate agent, the lender needs to make sure that the agent or broker understands all of the requirements for the home in order to pass the appraiser. From Chapter 10: “VA prefers that the appraisal be requested by the lender, although it can be requested by any other party to the transaction, provided the appraiser is assigned by VA. Lenders must ensure that agents and mortgage brokers requesting VA appraisals on their behalf are familiar with the requirements in this chapter.”

It’s important to know that there are requirements in order for a home to be eligible for a VA appraiser. Those requirements are also found in Chapter 10 of the pamphlet, where it also states that any questions on the requirements or for situations where the home is not eligible for appraisal but is already the security for a VA loan to please contact the local VA office. Things that can flag a home as ineligible for a VA appraisal is if it is clearly deteriorating or in obviously bad condition, unless there is some way of assuring that the home can be repaired to meet the VA MPRs. For homes that already have a valid appraisal, a new appraisal can be requested. From the Pamphlet: “No new appraisal can be requested on property which already has a valid VA value determination…Property is ineligible for VA appraisal if any party of interest to the transaction, other than the purchaser, is debarred Government-wide, or otherwise excluded from participation in the Loan Guaranty program due to a VA-imposed sanction for substantially prejudicing a veteran by either

-failing to correct justified construction complaint items
-violating VA Minimum Property Requirements
-deviating from plans and specifications without VA approval
-failing to honor other contractual obligations on houses previously built and sold with VA -financing, or using a sales contract or marketing method or practice which VA considered to be unfair or unduly prejudicial to the veteran involved.”

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