Veterans and VA Loans: Losing The War … At Home

It goes without saying: we owe our freedom to our vets. Their commitment and sacrifice have laid the foundations for all that we hold dear in America. This was never truer than after World War II. In an attempt to honor vets returning home to set up new lives, the Veterans Administration inaugurated VA loans to ensure that vets would get a shot at owning a piece of the country they’d served to protect.

Unfortunately, while vets may have helped win wars on foreign soil, their VA loans are losing the battle here on the home front in the Bay Area.

On the surface, VA loans look great. Introduced in 1944, VA loans enable veterans and other qualifying military personnel to buy a home with no money down. To ensure a decent living environment, the loans require homes being purchased to meet minimum standards for health, safety and property condition. Additionally, the properties must appraise for the sales price. Finally, sellers are required to pay a substantial chunk of the transaction closing costs.

Viewed separately, these guidelines, designed to protect and provide for veterans and their families, appear wonderful. Add them together, however, and they establish a formidable defensible perimeter difficult to assail here in Bay Area counties. In fact, it could be said that the very regulations designed to get vets into a decent home are actually keeping them from using VA loans to secure those very homes.

It is causing a lot of frustration.

Due to the current Bay Area market’s significant housing inventory shortage, almost every available property in the lower half of the market is garnering multiple offers. With bidding wars in full swing, it’s not unusual for offers to be driven higher than the value at which a property will actually appraise. While not a problem for cash offers, sellers entertaining VA loans must ensure that the price DOES NOT exceed appraised value. To add injury to insult, VA appraisers have been known to appraise on the low end of the scale. It's a lose, lose scenario.

Leslie Berkman, The Press-Enterprise states, “Some real estate professionals accuse VA appraisers of being too conservative, while others applaud them for exercising prudence that was lost in appraising during the real estate bubble.” Whatever the reason, and no matter how noble it may be, in the current Bay Area economy it most often means “no home.”

With sellers calling the shots and multiple offers to choose from, they typically select those providing the best price and terms. Strike One. Paying a vet’s substantial closing costs as required by VA loans also fails to pass muster. Strike two.

And then there’s strike three – property condition. Many homes being sold are foreclosures (REOs) or short sales. In both cases, they’re sold “AS-IS” by banks very unwilling to pay for any repairs required to bring properties up to VA standards. And it goes without saying that many REOs have issues that must be fixed BEFORE escrow can close.

It’s easy to understand the VA rules requiring homes to have both a Section 1 AND Section 2 clearance. However, VA appraisers have been known to be very tough when evaluating homes. In some notable cases, issues called out by VA appraisers that had to be repaired prior to close of escrow have included relatively minor items such as peeling paint. In many cases, vets have had to pay for repairs out of their own pockets BEFORE a property closes just to ensure that the deal will go through. And that violates the very concept behind VA loans.

While a great idea that has helped many vets across the country get a home of their own, here in the Bay Area, VA loans are not winning the day.

The bottom line is this: in multiple offer situations where VA loans are contending with other loans or cash offers, they get outflanked every time.

And that is just not right.