How to stay competitive using a VA loan in a sizzling housing market

• In a sizzling housing market, some military families with VA loans struggle to compete with other buyers and get offers accepted.
• However, VA loan buyers may stand out by working with a specialized lender, making a down payment or a stronger offer, real estate experts say.

In a sizzling housing market, some military families using VA loans are struggling to buy homes, real estate experts say.

VA loans, mortgages partly guaranteed by the U.S. Department of Veterans Affairs, financed 14% of home purchases from July 2019 to June 2020, according to the National Association of Realtors. The loans generally have no down payment, competitive interest rates, no private mortgage insurance and lower closing costs. 

However, today's red hot market has some sellers passing over government-backed mortgage offers, such as VA loans, expecting a faster or smoother closing with other options.

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"The seller wants the most amount of money with the least amount of hassle," said Cedric Stewart, real estate agent at Keller Williams in Rockville, Maryland, explaining that sellers worry certain mortgages, such as VA loans, are more likely to fall through.

Indeed, 94% of real estate agents said sellers are most likely to accept an offer with conventional financing over a government-backed loan, according to an April 2021 survey from the National Association of Realtors.

However, many of the concerns about VA loans are outdated, said Caitlin Turkovich, veteran and branch manager specializing in VA loans at Union Home Mortgage in Las Vegas.

Some 64% of home purchases with VA loans closed in August, according to mortgage software application company Ellie Mae, compared to 41% of conventional mortgages.

"VA loans are actually the easiest to qualify for if you have entitlements," said Turkovich, referring to the amount the VA will repay if the borrower defaults, based on minimum service requirements.

While it's tough to compete with cash offers, working with a lender who specializes in VA loans may help "level the playing field" against conventional loan offers, said Turkovich, who outlines her expertise and number of recent VA loan closings in her clients' mortgage pre-approval letters.

Make a down payment

One way to stand out is by making a 5% down payment, even though VA loans don't require one, Turkovich said, which matches the minimum for some conventional mortgages.

The 5% down payment also drops the VA loan funding fee from 2.3% to 1.65%.

In some states, sellers can see how much the buyer can afford to spend up front, and it may make a difference if they list the home for more than the property is worth, she said.

Here's why: if someone expects dozens of offers on their home worth $350,000, they may choose a $365,000 list price. And once offers roll in, they may be comparing buyers' down payments.

For example, let's say there's a conventional loan offer with a $20,000 down payment and a VA loan with 0%.

If the selling price is $365,000 but the property appraises for $350,000, the buyer with 0% down needs to find an extra $15,000 since the VA loan won't approve more than the appraised value, Turkovich said.

"As a seller, I'm going to assume [the buyer with 0% down] doesn't have it," she said, pointing to why accepting the conventional loan with $20,000 down may be more appealing.

Stronger offer

VA loan buyers may also compete with a stronger offer, Stewart said, such as paying more than the seller's asking price or waiving contingencies that allow a buyer to walk away under specific conditions.

Another move, making a higher "earnest money" deposit before closing — such as 5% versus the standard 1% — may also catch the seller's attention, he said.

"The large earnest money deposit is another instrument to communicate an ease in the relationship," Stewart added.

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