VA Loan Articles
The VA Loans Escape ClauseWhen a first-time homebuyer applies for a VA loan and gets pre-approved for the VA mortgage amount, it's time to start looking for a property. The next steps in the process include finding the right house, making an offer, and getting it accepted. Then an escrow account is set up, money is deposited and the house hunter is close to becoming a homeowner.
Before the sale can be finalized, buyer and seller must wait on a VA appraisal of the property to determine its value. The Department of Veterans Affairs must issue a Notice of Valuation, which lists what the VA has determined as the fair market value of the property.
This is an important step in the VA home loan process-the Department of Veterans Affairs only guarantees the loan according to its own estimation of the fair market value of the house.
If the home is appraised for less than the selling price, the buyer must decide whether to pay the additional amount out of pocket or terminate the sale.
For example, if a home is selling for 300,000 but the NOV comes back listing the fair market value at $250,000, the VA loan amount will be $250,000. The veteran must decide whether to pay the additional 50 thousand or cancel the deal and let the house go back on the market.
The VA will approve whichever amount is LOWER. If the home is appraised for $300,000, the VA won't approve a loan for $300K, it will guarantee a VA mortgage for the purchase price of the home instead. There's no way to "come out ahead" on the loan amount. That's an important point in an age where home equity loans and ad campaigns for such loans have led people to view a home (until the housing market slump began) as an investment that can be cashed in upon.
But what does a veteran do if they decide they don't want to fund the additional expense? What if the veteran has already signed paperwork committing to the sale? Can a buyer with a VA home loan be held to the agreement even though the NOV says the home isn't quite worth as much as the asking price?
No. The buyer has the right to cancel the sale if the NOV comes back saying the price is different than the market value. The buyer is allowed to waive this right and proceed with the purchase if so desired. But the buyer is not forced to buy the home in these circumstances. The buyer is also protected from forfeiting the money held in escrow if the sale is cancelled because of a difference between the NOV and the sale price of the home.