This week’s Q&A column is written by Rebecca McCullough of McEnearney Associates Realtors®, the leading real estate firm in Alexandria. To learn more about this article and relevant Alexandria market news, contact Rebecca at 571-384-0941 or email [email protected]. You may also submit your questions to McEnearney Associates via email for response in future columns.
Question: What are VA Loans?
Answer: Happy Memorial Day weekend! That sentiment has always struck me oddly. This is the weekend we bow our heads and remember those who gave their lives for service to their country. A solemn and proud weekend where we appreciate those we lost for their bravery that allows us to live as we do. For that I am truly grateful for their sacrifice.
So, with veterans on my mind, I thought it would be an appropriate time to dive into the world of VA Loans. The government backed mortgages that only active military personnel, veterans, and their family members are entitled to.
There are special protective features of VA Loans that are meant to benefit people who have and currently provide military service to our country. They are:
- All VA loans are backed by The Department of Veterans Affairs (VA).
- No downpayment is required.
- Typically, they can get a better rate than other mortgage programs.
- Less stringent credit requirements, higher allowances for debt-to-income ratios.
- Limited closing costs.
- No mortgage insurance.
- It’s a lifetime benefit that can be reused (up to the eligibility amount each time).
- There are assumable loans which can have additional value for a potential purchaser of a home if the veteran no longer needs the entitlement.
- The funding fee can potentially be included in the mortgage.
- The veteran retains the right to void a contract if the appraisal does not meet the sales price.
- The funding fee may not be charged for veterans with service-related disabilities.
- If the veteran has a 100% service-related disability, they do not pay property taxes in Virginia.
VA loans are excellent products and highly preferred by veterans. However, there are a couple of potential drawbacks. The same protections that the veterans benefit from can potentially hurt them in the home buying process.
As I mentioned above, the Veteran can void a contract if the appraisal price does not meet the sales price. This is determined by statute and not the contract. Even if the veteran waives financing and appraisal, they still have the right to void the contract. This can be very unsettling for a seller.
In a competitive market this may deter a seller from accepting a contract with a VA loan, especially if there are other contracts without VA Financing. This makes it more difficult for the veteran to be competitive in a hot market and is something we’ve been experiencing a lot in recent years. They can promise up and down they won’t void, but the reality is they can, and some sellers just don’t want to take the risk.
Even if the veteran is putting 50% down, and the seller feels great that the appraisal doesn’t matter, the veteran can still walk. Why would they do this? After they ratified maybe another house they love even more comes on the market and they use this clause as their out. Of course, this is never anticipated or expected but it can happen.
VA Loans in Relation to the Recent NAR Settlement
If you’re reading this then you’re probably aware of the recent NAR Settlement. There are two key changes that will be implemented in August 2024. They are:
- All buyers must sign a representation agreement with a broker, which details what the buyer will pay their agent for their services. (We’ve been doing this in Virginia for a very long time.)
- The commission/concession the seller may be willing to pay a buyer’s agent will no longer be made public through the MLS. Sellers will have the right to negotiate whether or not they wish to pay a buyer’s agent a commission, or if they would prefer to have the buyer pay any commission directly to their buyer’s agent.
How do these changes affect the VA borrower?
- Currently, the VA does not allow the veteran buyer to pay an agent commission for their services. There is a long list of charges the VA does not allow the veteran to be charged. We’ll focus on this one for now. Therefore, the veteran can’t pay their buyer’s agent if they want a VA loan.
- If a seller doesn’t offer compensation to the buyer’s agent, and the veteran is not allowed to pay their agent, they will not be able to get their own representation.
That means the veteran has two choices:
- Buy the home without representation, or
- Request the listing agent represent the seller and the buyer. This is dual agency. I personally won’t do it. How can I represent the buyer and seller at the same time while keeping both of their interests as a priority.
Interestingly this is scenario our industry faced at the turn of the century, and we evolved into the system we have today to try and make it a fair system where everyone is eligible for representation. Sellers get more eyes on their property as buyers can pay their agents by adding the cost of the service to the price of the home. However, most of the time it’s the seller that feels they are paying the buyer’s commission, and they are, but because the buyer is bringing the money to the table. Chicken and egg. You decide.
In summary, VA loans are amazing products, however in some situations the very protections that the VA put in place to protect the veteran can end up hurting them.
Real estate is an eco-system of individuals adapting to meet the needs of their clients. We will see if the new settlement will force the VA to adapt their policies to the new laws, and how sellers and buyers will negotiate commissions.*** (see note below)
Personally, I wouldn’t be surprised if sellers and buyers continue to operate similar to the way it is now, but just looks different. At least here in Virginia I believe that to be the case. Here we have been signing representation agreements and negotiating commissions with sellers for a very long time.
Finally, to all veterans and their family members, I say thank you for your service and sacrifice and wish you a very lovely Memorial Day weekend.
*** NOTE: As I was about to hit send to my editor for publication, a lender sent me a notice that says, “VA to implement temporary solution for buyer agent commission issue.” Announcement to be made June 12. It was announced by Michelle Corridon from the VA at the Mortgage Bankers Association Conference in NYC. Fascinating! Stay tuned, the eco-system is at work.
Rebecca McCullough has built a successful real estate business in Alexandria and Northern Virginia by providing excellent service to her clients. If you would like more information on selling or buying in today’s complex market, contact Rebecca today at 571-384-0941 or visit her website RebeccaMcCullough.com.
If you would like a question answered in our weekly column or to set up an appointment with one of our Associates, please email: [email protected] or call 703-549-9292.
McEnearney Associates Realtors®, 109 S. Pitt Street, Alexandria, VA 22314. www.McEnearney.com Equal Housing Opportunity. #WeAreAlexandria
