Certificate of Reasonable Value: Definition & Purpose

Instructor: Kat Kadian-Baumeyer

Kat has taught college Management and Hospitality Management and has a Master's degree in Organizational Leadership and Management

When a veteran uses his or her VA benefits to obtain a home loan, an appraisal of the home is done to determine its value before a Certificate of Reasonable Value can be approved.

What is a Certificate of Reasonable Value?

Sergeant Harry Hampton was in the market for his first home. He returned from a deployment and turned his attention to hiring a real estate agent to assist him in his search for the perfect pad. After looking at several homes, he settled on a 3-bedroom ranch located just outside the city. Priced at $300,000, it seemed like a fair deal. So, he moved forward with an offer and a contract to purchase the home.

Now that Sgt Hampton has found his home, he wants to apply for a Veterans Administration (VA) loan. Since a typical VA loan requires no down-payment, he will finance the entire price of the home. Confident that everything will go smoothly, he relaxes while the loan is processed. What he does not know is that before the loan can be approved, the home must undergo an inspection to determine its value. The Veterans Administration requires that the home value be equal to or lower than the loan amount.

Once the inspection is complete and the home passes the inspection, the Veterans Administration will issue a Certificate of Reasonable Value. This certificate establishes the highest amount of money the VA will loan to the borrower based on the value of the home.

How is Reasonable Value Established?

There are good reasons for the VA performs an appraisal. The home value must be at or below the amount of the desired mortgage. In other words, the VA wants to be sure that the price of the home does not exceed its value. The lender wants to be sure that they are making an investment that meets the bank and VA criteria.

Let's look at how this happens.

First, an appraised value must be determined. Think of this as fair market value. Fair market value is the price at which a buyer and seller agree upon, having all of the facts of the home. In other words, it is a reasonable price for the property. One of the things an appraiser looks at are comps. Comps refer to comparable sold or listed properties for features such as size, age, location, and lot size.

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