You might think the sales price you and the seller agreed upon is the value of your new home. If you offer say $200,000 and the seller says, “Sure” and you both sign the sales contract, that’s how much the home is worth in an open market, right? Maybe. But your VA lender establishes value with an appraisal, what the VA terms a Certificate of Reasonable Value, or CRV.
An appraisal is ordered and an appraiser compares recent sales of similar properties in the area, at least three of them that have closed within the previous 12 months. The appraiser will make adjustments for square footage, amenities and overall condition of these recent sales then compare the values to your potential purchase. The kicker is the lender will use the lower of the sales price or appraised value. If the sales price is $200,000 and the value is at $210,000 the veteran just got a pretty good deal it appears.
But if the sales price is $200,000 and the appraisal concludes $190,000 the lender will use $190,000 as the value. In such a relatively rare instance, the veteran would be responsible for the difference between $200,000 and $190,000. Sales contracts typically have a clause that allows the veteran to cancel the transaction due to the lower appraised value and still get an earnest money refund. Or, the veterans can ask the seller to reconsider the sales price to $190,000. If the seller refuses and stands firm on the value, most often the deal is over.