When selling their homes, some people choose to cut costs by not using a real estate agent. These homes are known as for sale by owner, or FSBO, properties. And, for veterans using their VA loans to purchase homes, they should understand the unique considerations for this type of sale. As such, we’ll use this article to provide an overview of VA loans & for sale by owner (FSBO) properties.
- VA Loan Overview
- What Does FSBO Mean?
- Pros of Buying a FSBO Home with Your VA Loan
- Cons of Buying a FSBO Home with Your VA Loan
- Additional VA Loan Considerations
- Final Thoughts
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VA Loan Overview
VA loans provide veterans an incredible path to homeownership. Administered by the Department of Veterans Affairs, the VA loan offers the following outstanding terms:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
However, when applying for a VA loan, borrowers don’t actually seek loans from the VA. Instead, the VA approves designated lenders (e.g. banks, credit unions, and mortgage companies) to issue VA loans. And, as a veteran or active service member, you’ll apply for a loan from one of these VA-approved lenders.
What Does FSBO Mean?
Occasionally, eligible VA loan borrowers will put an offer in on a FSBO property. As the name suggests, this is simply a home that a seller chooses to sell without the support of a licensed real estate agent. Instead of using an agent to market the home, these sellers list and market the property personally.
Typically, sellers go the FSBO route to save costs on real estate agent commissions. In a standard home sale, the seller pays the real estate agent commissions – for the seller’s and buyer’s agents. And, the standard for this is 6%, with 3% going to one agent and 3% to the other. Avoiding the seller-portion of this expense can save sellers a lot of money on a sale. For example, seller agent commissions on a $300,000 property would total $9,000 ($300,000 x 3%). This is a large enough amount for some sellers to choose the FSBO route.
From the buyer’s perspective, purchasing a FSBO property with a VA loan comes with both opportunities and challenges. We’ll outline both the pros and cons in the below sections.
Pros of Buying a FSBO Home with Your VA Loan
Here are a few of the potential pros to purchasing a FSBO property with your VA loan:
Better Deal
Frequently, FSBO sellers will price a portion of their savings on real estate agent commissions into their asking price. Using the above example, assume the seller will save $9,000 in commissions by going the FSBO route. He or she may incorporate half of that into the asking price, potentially offering you significant savings.
“Face-to-Face” Information
In a typical home purchase, buyer and seller have no direct interaction. Rather, their agents communicate with each other. This can lead to buyers and sellers having less information. When you remove the seller’s agent, you bring down a barrier to communication, which can significantly improve the flow of information between parties. And, this improved communication can result in far more creative structuring of purchase agreements to support the goals of both parties.
Regular Involvement
When real estate agents represent sellers, these professionals have other real estate responsibilities. On the other hand, when sellers list their properties directly, that’s their only real estate responsibility. That is, as a buyer, you won’t need to compete with other clients – you’ll be the focus.
Cons of Buying a FSBO Home with Your VA Loan
While benefits certainly exist for VA loan buyers pursuing FSBO properties, drawbacks do, as well. Here are some of the major cons to buying a FSBO home:
Real Estate Agent Commissions
The FSBO savings on real estate commissions can be a double-edged sword. As stated, the seller typically pays agent commissions – for the seller and buyer. As a result, if they’re trying to save costs through the FSBO approach, some sellers will refuse to pay the buyer portion of the real estate commission, as well. The VA doesn’t allow buyers to roll agent commissions into their loan principal, so this could potentially result in a large out-of-pocket expense.
Compliance
A home purchase is a major transaction. For most buyers, this represents the largest purchase of their life. As such, it entails a ton of legal and regulatory paperwork. Typically, real estate agents walk the sellers they represent through this process. With a FSBO deal, you have to assume that A) your agent will catch everything, or B) the seller knows what he or she is doing when it comes to putting together sales contracts. With this in mind, veterans buying FSBO properties may want to include a real estate attorney – rather than just a closing agent – in the process. This will help ensure you cover all your compliance bases.
Interaction Overload
While dealing directly with a seller can provide extra information, it can also provide too much interaction. When selling a home with a FSBO approach, that sale is likely the seller’s primary focus in life. This may result in a nightmare closing process for a buyer, with the seller wanting to discuss topics every single day. With average VA loan closing timelines between 50 and 55 days, this can lead to an extended period of interaction overload for buyers.
Additional VA Loan Considerations
In addition to the above pros and cons, VA loan users need to consider a couple other VA-specific requirements that could potentially affect a FSBO deal.
VA Appraisal
VA loans require a VA appraisal. This entails both a fair market value determination and a surface-level property inspection. If the appraisal notes any major property issues, the VA will withhold loan approval until those issues have been resolved. Real estate agents generally understand this process. And, they’ll explain to the sellers they represent that identified issues need to be fixed. A FSBO seller may refuse to address these issues, leaving buyers one of two options: 1) pay to make the repairs themselves, or 2) walk away from the deal.
MPRs
Related to the appraisal, the VA mandates properties have a certain level of habitability. As a homeownership program, the VA loan program wants to make sure that buyers can immediately move into their properties, and it enforces this by outlining certain minimum property requirements (MPRs) that a home must meet. If major MPR issues exist with a property, the VA will not approve a loan.
Most real estate agents have some familiarity with MPRs. As such, they typically work with the sellers they represent to resolve major MPR issues before they list the properties for sale. With a FSBO seller, there’s a good chance that the owner will not have taken these preemptive steps. This failure to account for MPR conditions can lead to buyers ultimately having their VA loans denied.
Final Thoughts
Using a VA loan, you absolutely should not be dissuaded from purchasing a FSBO property. However, this sort of sale includes some unique considerations – and associated pros and cons. As a result, before pursuing a FSBO purchase, it’s important that VA loan users familiarize themselves with the above factors.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
FAQs
Can you use a VA loan to buy from a private seller? ›
Hire a Buyer's Agent
If you're using a VA loan, remember that the seller must pay your agent's commission. Make sure your seller and your agent are fully aware of this fact before signing a purchase contract.
One of the downsides to a VA loan is having to pay the VA funding fee cost of 0.5% to 3.6%. The funding fee is charged to offset the cost of the VA loan program to taxpayers and is typically rolled on top of the loan amount, even if you make no down payment.
How do I avoid closing costs with a VA loan? ›- Making a down payment to reduce the VA funding fee.
- Applying to eliminate it, if you qualify.
- Negotiating so that the seller pays most of the closing costs.
- Purchasing discount points to reduce the interest rate on your loan.
There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile. For more information, see the complete VA credit guidelines at www.benefits.va.gov/warms/pam26_7.asp. How Can You Start the Process?
Why would a seller not want a buyer with a VA loan? ›Why don't sellers like VA loans? Many sellers — and their real estate agents — don't like VA loans because they believe these mortgages make it harder to close or more expensive for the seller.
How much extra does a seller pay for a VA loan? ›Seller Contributions Are Allowed
But the Department of Veterans Affairs limits the amount of money a seller can contribute toward the buyer's VA loan closing costs. In California, and nationwide, these “seller concessions” are usually limited to 4% of the loan amount.
Dave breaks it down to the fact that VA Loans are more expensive with fees and interest rates that you end up paying more than you should ever have had to pay. Another reason that people gravitate to the loans is because they allow you to get a house with nothing down.
What is the average credit score for a VA loan? ›There is no minimum credit score requirement for a VA loan, but most mortgage lenders want to see a FICO credit score of at least 620. Some lenders approve lower scores, but borrowers may meet additional scrutiny and requirements. At Veterans United Home Loans, we typically look for a credit score of 620.
Do VA loans have closing costs? ›The exact amount that you'll pay in VA loan closing costs will vary based on the home you choose and the details of your loan. However, you should expect closing costs to be 3% – 6% of the total value of the loan.
Who pays for VA appraisal? ›VA appraisal fees
As with most loan appraisals, the buyer is responsible for paying the VA appraisal fee. However, a seller may agree to take on the appraisal fee and other closing costs during negotiations.
What is the VA 1% rule? ›
38 C.F.R. 36.4813 limits the fees that a veteran may pay when obtaining a VA-guaranteed home loan. Veterans may pay a maximum of a one percent origination fee charged by the lender (plus reasonable discount points) as well as reasonable and customary amounts for certain itemized fees.
Why do sellers not like VA loans? ›According to The Mortgage Reports, owners and their real estate agents can think that VA loans cost sellers more and are more challenging to close than other loans. They might believe that sellers have to pay for the buyer closing costs and that appraisers are always slower and undervalue homes as a matter of course.
What will cause VA loan to get disapproved? ›The most common reason why VA home loan applications get denied is because of errors on the application itself. Lenders can't issue loans unless they're sure that your personal and financial details are correct. Before you submit your application, take the time to review each statement you make and numbers you enter.
Are VA loans hard to get approved? ›If you're eligible, VA loans are fairly easy to qualify for, since there's no down payment required, no minimum credit scores, and no maximum limit on how much you can borrow relative to income.
Can you get a VA loan with 2 credit scores? ›The VA does not set a minimum credit score for the VA loans it guarantees. Instead, it asks lenders to look at the full loan profile of the person applying for a VA loan. Lenders can establish their own minimum credit scores for VA loans, however, which is why you might see different lenders requiring different scores.
Is seller required to make repairs for a VA loan? ›These loan programs do not specify whether the buyer or seller needs to make the repairs. Often the buyer will request that the seller make the repairs—after all, the seller is the owner of the home and would generally be expected to make repairs to make the house habitable and desirable to buyers.
What is the seller responsible for in a VA loan? ›The VA loan program allows the seller to pay up to 4 percent of the home's price in closing costs. The seller isn't required to pay that much. If you'd like the seller to help cover your closing costs, be sure to let your real estate agent know before you negotiate a purchase contract.
Do VA appraisers lowball? ›Like any other type of appraisal, VA appraisals can come in lower than you expected. The unfortunate reality is that some homes are overpriced by the seller. According to Fannie Mae, appraisals come in low around 8% of the time. With that, borrowers seeking a VA loan may find their appraisal comes in low.
How much are closing costs in VA? ›How Much are Closing Costs in Virginia? According to ClosingCorp data, buyer closing costs in Virginia come to approximately 1.55% to 2.06% of the final home sale price. This is the median price for the entire state, however.
What fees are VA buyers not allowed to pay? ›Here are the VA non-allowable fees that you need to consider. Real estate attorney fees: Attorney fees are not allowed for VA home loans. Real estate broker fees: You cannot pay for real estate broker fees when buying a home with a VA loan. Agent or REALTOR® fees: VA borrowers cannot pay real estate agent fees.
Is it hard to sell a house with a VA loan? ›
The short answer is “no.” It's true VA loans were once harder to close — but that's ancient history. Today, you're likely to have roughly the same issues with a buyer who has this sort of mortgage as any other. And VA's flexible guidelines may be the only reason your buyer can purchase your home.
What will fail a VA home inspection? ›A VA home inspector will look for any issues with the property that may affect its value or habitability. This includes issues with the foundation, roof, electrical systems, plumbing, and HVAC systems. The inspector will also check for any health and safety issues, such as lead-based paint or asbestos.
Does credit score affect VA loan rate? ›You may be able to get a VA home loan with bad credit, but you'll pay a higher interest rate and may end up with a higher monthly mortgage payment. A credit score of 740 or higher will earn you the most competitive interest rate offers.
Does credit score affect VA loan interest rate? ›Better credit score = better rates and terms
Although a low credit score won't necessarily prevent you from getting a VA loan, a higher score may mean better interest rates or loan terms. As with other types of mortgages, lenders generally offer the best rates to borrowers with excellent credit.
The VA doesn't have a minimum credit score. Instead, lenders can set their own requirements. At Rocket Mortgage, the minimum qualifying credit score is 580. Keep in mind, you can qualify for more favorable terms with a higher score.
What is the max loan amount for VA? ›If you have full entitlement, you don't have a home loan limit. Eligible Veterans, service members, and survivors with full entitlement no longer have limits on loans over $144,000.
Can you be denied a VA home loan after pre approval? ›Yes, it's possible to have your loan application denied after getting preapproved for a mortgage.
Do I pay mortgage insurance with a VA loan? ›There is no monthly mortgage insurance with VA loans. Unlike regular loans, which require mortgage insurance if you put less than 20% down, VA loans do not add this cost to your monthly mortgage bill. However, there is a VA funding fee that serves a similar purpose.
What is the VA funding fee for 2022? ›2022 VA Funding Fees For Purchase And New Construction Loans
For a cash-out or standard mortgage refinance, first-time borrowers will pay a 2.3% funding fee, while subsequent borrowers pay 3.6%.
With VA mortgages, you can technically sell the home whenever you want. The VA has no requirements when it comes to the timeframe of selling the home. Your lender may prefer you to stay in the home for at least a year, but you can sell before that time period with a legitimate reason such as a PCS.
How tough is a VA appraisal? ›
VA appraisers aren't necessarily harder on homes than conventional appraisers, but they do evaluate properties against different standards. The VA has strict requirements for properties it will finance, both to ensure the homeowner's safety and the property's value in the long run.
How much does a VA appraiser charge? ›Nationwide, maximum VA appraisal fees range from $425 to $875 for single-family homes, condos and manufactured homes. Appraisers can ask for permission to charge additional fees for mileage and the extra time required to evaluate complex properties.
What will fail a home appraisal? ›Some common problems that can lower an appraised value include miscalculation of square footage or failure to include out buildings or recent renovations.
What is the VA 55 age rule? ›Revaluating VA Disability Ratings
Once you turn 55, you are typically "protected" and will no longer have to attend an exam to prove that your condition has not changed unless there is reason to suspect fraud. This is sometimes called the 55-year rule.
If the Veteran's eligibility was due to a service-connected disability rated as totally disabling, they must have had this rating: For at least 10 years before their death, or. Since their release from active duty and for at least 5 years immediately before their death, or.
What is the 5 year rule VA benefits? ›The VA disability 5 year rule allows the VA to ex-examine your VA disability rating within 5 years of your initial examination if your condition is expected to improve over time. However, the VA may still change your disability rating past the 5-year deadline if your condition has significantly improved.
Do people get denied VA loans? ›VA loan denial isn't uncommon. According to HMDA data, 12% of VA loan applications received a denial in Q2 of 2022, compared to 17% of FHA loans. While not uncommon, many scenarios may be preventable.
Can you offer over asking price with a VA loan? ›Sellers and their real estate agents will know you're a qualified buyer. Other VA loan strategies include offering above asking price, not asking the seller to cover your closing costs, and putting down earnest money.
Can a VA loan be denied at closing? ›Can My VA Loan Still Be Denied After Clear to Close? While it's very rare for a lender to deny a loan at this point, it can happen. In most cases, a denial after being cleared to close happens due to a major change in your financial circumstances.
Why are so many VA claims denied? ›The VA requires significant evidence to grant disability benefits. This includes an official diagnosis, extensive medical records, and any other information and documentation relevant to your claim. If you or your doctor do not provide enough evidence to support your claim, you will likely be denied.
Are VA loans automatically approved? ›
There are two ways a lender may process VA home loans: "prior approval" or "automatic." When the loan is processed on a prior approval basis, the lender takes your application, requests VA to appraise the property, and verifies your income and credit record.
How long does it take the VA to approve a loan? ›How long does it take to get preapproved for a VA loan? The circumstances of each loan are different, but it doesn't take any longer to get approved for a VA loan than it would for a conventional or FHA loan. If you're buying a home and your documentation is in order, we can get you a Verified Approval within 24 hours.
What is the minimum FICO score for a VA loan? ›There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile. For more information, see the complete VA credit guidelines at www.benefits.va.gov/warms/pam26_7.asp. How Can You Start the Process?
What credit score do you need for a VA loan Bank of America? ›Bank of America requires a minimum credit score of 600 to qualify for a mortgage. That applies to VA and FHA loans. For a conventional loan from Bank of America, you'll need a credit score of at least 620.
Can I use my wife's credit score for VA loan? ›Does my spouse's credit score affect my VA loan? In many states, the lender won't consider your spouse's credit score if they aren't on the loan. But if you add your spouse as a co-borrower, their credit score will affect your VA loan.
Why do sellers shy away from VA loans? ›According to The Mortgage Reports, owners and their real estate agents can think that VA loans cost sellers more and are more challenging to close than other loans. They might believe that sellers have to pay for the buyer closing costs and that appraisers are always slower and undervalue homes as a matter of course.
Can my dad use his VA loan to buy me a house? ›The joint VA loan program allows Veterans and/or active-duty military members to use a joint borrower who is not a spouse or other Veteran. Most lenders won't allow these kinds of loans and will block Veterans from buying a home with a sister, brother, mother, father, son, daughter, or someone who is unrelated.
How do I get a seller to accept a VA loan? ›- Add a personalized letter. ...
- Offer above the asking price if you can. ...
- Put down more earnest money. ...
- Ask your loan officer to vouch for you. ...
- Be flexible. ...
- Get creative. ...
- Have your agent contact the seller's listing agent.
Yes, VA loans allow co-borrowers on the loan. Acceptable co-borrowers include a Veteran and non-veteran spouse, two married Veterans where only one Veteran uses their entitlement, two married Veterans where both Veterans use their entitlement, and two non-married Veterans where both Veterans use their entitlement.