Peeling paint is a specific problem for FHA/VA loans on exterior surfaces exposed to the weather where the surface is designed to be covered from the weather, ie., stain is not a problem, but paint is. These loans do have specific hot buttons to consider and your mortgage person can make you aware of the issues before you consider a particular property. You won't have a problem with REO/short sale properties more than other regular sale properties. The difference is that owners of REO/short sale properties will not likely be interested in dealing with the required repairs specified by the appraiser. The repairs are the buyers' responsibility, but sometimes have to be completed BEFORE transfer when the buyer does not have the money to do the work because they're putting all of their available funds into the transaction. Therefore, sellers sometimes make the repairs just to get the property sold.
You should be able to work a 203k style loan for these properties in most circumstances so that the repairs are completed after transfer and the cost is rolled into your loan.
The biggest advantage to VA is usually the lack of down payment requirement. If you do have downpayment money available, you may find it easier to go with another loan program. Sellers aren't necessarily against accepting a buyer using these programs but with competing offers they may find it easier to accept a buyer without these limitations. It may take a couple of weeks longer to process the transactiln/loan with these loans, but the time required isn't excessive.
My area is tipping towards a Seller's Market at this point due to extremely low inventory, and buyers are now more competitive with each other. We're used to VA/FHA loans and not afraid of them.