The VA appraisal is a crucial, part of the home buying process. One part of the appraisal is to ensure the property meets all health and safety standards, known as the Minimum Property Requirements. The other major piece of the VA appraisal is determining the home’s value.
Borrowers can try to combat a low valuation before it’s even official. Before finalizing the appraisal report, VA appraisers can notify the lender that it looks like the home’s value will come in below the purchase price. This is known as invoking the “Tidewater Initiative,” or Tidewater for short.
The appraiser can’t discuss details of the appraisal except to explain that the recent comparable home sales being used don’t support the sale price. At that point, the lender has two days to provide the appraiser with additional comparable home sales that support the purchase price.
Lenders will typically turn to the buyer’s real estate agent or listings agent for help in finding good recent comparable sales. The appraiser will take those additional comps and issue the final appraisal report. If the Tidewater process doesn’t lead to a sufficient increase in value, the appraiser is required to provide a written explanation as to why. Typically, a lender’s Staff Appraisal Reviewer, or SAR, issues a final Notice of Value (NOV) on the property based on the appraiser’s report. The NOV makes the home’s value official for the VA’s purposes. Once the property’s lower appraised value is official, buyers can seek a more formal appeal through what’s known as a Reconsideration of Value.
The Reconsideration of Value
The VA recognizes that appraisal mistakes can happen. Value-adding features can be overlooked or suitable comps may have been left out. Appraisers might have made a mistake calculating square footage or used a comp in the original appraisal that isn’t truly comparable (maybe recent renovations weren’t known or factored into the equation). That’s why the VA set up an appeals process known as the Reconsideration of Value. The ROV is certainly no guarantee of good results. But it does at least give buyers a shot at a higher appraisal value and a successful VA purchase. Talk with your lender about how best to proceed with a Reconsideration of Value.
Generally, with the help of your real estate agent, lenders will be looking to document:
- Comps not used in the initial appraisal. You can submit up to three recent comparable home sales that weren’t included in the appraisal and that closed prior to the appraisal report’s effective date. This information needs to be inputted into a Reconsideration of Value grid, and you’ll need to include printouts from the Multiple Listing Service (MLS) for each of the comps Also, write a brief summary of why these comps are better than the ones used by the VA appraiser.
- Evidence of errors. Have your agent scrutinize the original appraisal report. Does the report contain faulty information? Were old sales used? Are all comps similar to the subject home in size, age and condition? You’ll need both a narrative summary outlining the perceived problems and evidence to support your claims.
- A letter from the borrower. This is a written request for the Reconsideration of Value along with the borrower’s thoughts on why the appraised value should be increased and what they think the value should be. The
The first stop for an ROV is with the lender. Typically, a Staff Appraisal Reviewer (SAR) will review the reconsideration request and, if it has merit, send the documentation to the appraiser or to the appropriate VA Regional Loan Center.
If the ROV fails, you typically have three options if that happens:
1) Ask the seller to lower their asking price.
You can point to the low valuation and suggest the seller’s home isn’t worth quite what they were hoping. Not all sellers will bite, but it might be an option worth exploring depending on your situation. Talk with your real estate agent about how best to negotiate a lower purchase price.
2) Make up the difference in cash.
Buyers can pay the difference between the purchase price and the appraised value out of pocket. This isn’t always easy or without risk -- part of the consideration is do you want to pay more than a home might be worth? If you ultimately decide to make up the difference in cash, you may be able to lower your VA Funding Fee if you’re putting down at least 5 percent.
3) Walk away from the deal.
VA loans protect a buyer’s earnest money if the home fails to appraise. This safeguard comes in the form of a unique document called the VA Amendment to Contract, which allows prospective buyers to get their earnest money deposit back if the appraisal comes in low.
Talk with your loan officer if you have questions about VA appraisals and how to handle a low valuation.
Cross Your Fingers
Appraisal values can be tough to predict (and tough to challenge). What’s certain is that with so many military buyers choosing the 100 percent financing offered by VA loans, a low appraisal value can be a devastating surprise.
There is no set time for how long the ROV process may take but, beyond a solid CMA and a good contract, there’s little to do besides wait and hope for the best. With a little luck, your client’s appraisal value will meet or exceed the VA loan value, and you’ll soon be celebrating your latest sale.
**UPDATE TO POST:
As of January 1, 2020, veterans seeking to obtain what are commonly referred to as jumbo loans, or Veterans living in higher-cost markets, will no longer be subject to the Federally-established VA loan limit aka Conforming loan limit maximums. This means veterans may obtain no-down payment VA-backed loans in all areas of the country, regardless of home prices.