Deciphering the VA Lender’s Handbook Chapter 11 Part 6
The VA appraisal has two primary purposes: determine a fair market value for the home being appraised, and making sure that the property is suitable housing for the veteran. The first half of Chapter 11 in the VA Lender’s Handbook is dedicated to talking about how the fair market value is determined. Starting a bit after mid-way through the chapter, however, it starts to talk about how whether the home is suitable for the veteran is determined. The VA does this by evaluating the home based on a mostly comprehensive set of standards known as the Minimum Property Requirements (MPRs). Now, these MPRs are detailed in nature and broad in scope, and we’ll be covering exactly what they are in Chapter 12 of this series. In this article, we’re going to go over reading the VA appraisal after it comes back – and seeing if there are any issues with the MPRs.
For existing construction (a home that has already had at least one occupant before the veteran), the Uniform Residential Appraisal Report will be used by the appraiser. The URAR has a section titled ‘Reconciliation’ and it is in this section that you will find any information about where the house fell short on the MPRs. There are two classifications you might see on the report; “As is” or “Subject to the following repairs…” If the home is classified as “As is”, then the home unreservedly meets the MPRs and no repairs are required. The second classification is fairly self-explanatory – there are certain repairs that are required in order for the home to pass the VA appraisal. If you see this classification, what will follow is an itemized list of required repairs or improvements.
Now, appraisers are only able to require improvements if there is an apparent violation of the MPRs. The Handbook specifically says, “Appraisers must not recommend electrical, plumbing, heating, roofing or other inspections only as a measure of liability protection.” Inspections are not usually required – usually the requirement is that the issue be corrected, repaired, or replaced – unless the appraiser sees an indication of a complex problem that requires a professional opinion on how to fix. Things like pests, drainage issues, structural defects, code violations, and safety concerns are things that might first require a professional inspection and action on the fixes that the professional recommends. However, most issues are apparent enough that the appraiser is require certain repairs.
The appraiser is also going to be concerned about the remaining economic life of the property and any improvements. The remaining economic life is defined as the estimated amount of time it will take for the property or any improvements to “lose their ability to serve their intended purpose.” The VA requires that, in order to meet the MPRs, remaining economic life on the property and any improvements must be at least 30 years. If the appraiser deems that the remaining economic life is less than 30 years, they must provide a written explanation and the determination cannot be based on arbitrary information. This requirement on appraisers is for the protection of veterans and to make sure that the veteran is able to buy the home of their choice.
So here’s what the appraiser is going to consider in determining economic life:
- the relationship between the property and the economic stability of the block, neighborhood, and community;
- comparisons with homes in the same or similar areas;
- the need for a home of the particular type being appraised;
- the architectural design, style and utility from a functional point of view;
- the workmanship and durability of the construction, its physical condition, and probably cost of maintenance and/or repair;
- the extent to which other homes in the area are kept in repair; and
- in areas where rehabilitation and code enforcement are operating or under consideration, their expected results in improving the neighborhood for residential use.
The appraisal report will have the results of the evaluation, and if the economic life is less than 30 years, the appraiser must have a solid, concrete explanation. If the economic life is more than 30 years, the appraisal must provide an estimate (40 years, 50 years, etc.).