Are VA Loans Working for Troops?

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This past summer, Air Force Staff Sergeant Jason Goul hoped to buy a home for his family using a loan program backed by the U.S. Department of Veteran Affairs. As reported by in the San Francisco Chronicle, he wanted to have his wife and two children settled into their new home before he was sent overseas to the Middle East in August.

Goul and his wife Judith (seen at left) made several offers on foreclosed homes in California using their "VA loan," but none were accepted.

VA loans are guaranteed mortgages provided to the country's 25 million living veterans (or their surviving spouses) to purchase homes with little or zero down payments. It sounds like a great deal, but the loans do come with certain restrictions around appraisals and inspection that are shutting service members out of buying foreclosed properties.The Gouls lost a bid on this foreclosed home in Fairfield, Calif. The property was eventually sold to a cash investor who paid a lower price.

According to Guy Cecala, CEO of Inside Mortgage Finance, this is not unusual for buyers using VA loans.

"Usually the biggest problem with VA loans are the appraisals," says Cecala. The buyers may be willing to pay a certain amount for the home, but if the appraiser doesn't agree that the house is worth that much, the seller ends up accepting a lower amount.

At the same time, Cecala says, a lot of these homes may have problems that are not easy to detect. That causes issues with the financing as part of the VA inspection process.

"Any listing is going to minimize any potential problems," says Cecala. "As a practical matter, many of these distressed properties are being bought with cash, because conventional financing is not designed for this kind of property."

According to data from Campbell Survey's Real Estate Agents Report on Home Purchases and Mortgages - 2009, more than half of the foreclosures sold by banks are being bought by investors, who generally pay cash.

Because the VA buyers may not be putting money down, if the home needs thousands of dollars in repairs, which it likely does, the soldier could quickly end up in trouble and then default on the loan.

Some of these issues are not restricted to VA loans; FHA loans also have restrictions around appraisals and inspections.

Service members who are looking to buy their first homes did get some good news recently. The House of Representatives recently voted to extend the popular $8,000 first time buyer credit for another 12 months for members of the military, Foreign Service, and intelligence corps who served at least three months of qualified overseas duty in 2009.

According to the SF Chronicle, the Goulds are still searching for a home.
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