Buying a foreclosed home is an appealing choice for many homebuyers looking for a bargain. It’s not only possible for veterans and active-duty service members to use a VA loan to purchase these properties; it’s also a great benefit unique to military members. However, there’s a lot that goes into going through this process and you should know about the unique challenges and considerations.
Understanding VA Loans and Foreclosed Properties
VA loan refers to a mortgage backed but not issued by the U.S. Department of Veterans Affairs (VA) through private lenders. Advantages of VA loans include zero down payment, low-interest rates, and no requirement to pay for private mortgage insurance (PMI). These characteristics make VA loans especially attractive for financing for the purchase of foreclosures.
Foreclosed properties, also called Real Estate Owned (REO) properties, are homes that have gone back to the lender like a bank or the VA after a foreclosure auction fails to sell the property. These properties are often sold ”as-is,” which can create both challenges and opportunities for potential buyers.
VA Loans & Foreclosure
When a major financial hardship happens in life, and you find yourself not being able to make your mortgage payments, if this goes on long enough you may find yourself facing foreclosure. Foreclosure is what happens when a homeowner cannot make their mortgage payments and defaults on the loan. In this case, the lender will choose to take possession of the property so they can recover some of the loss.
This is a stressful time for you, as you lose your home and your credit score goes down, sometimes by as much as 160 points; this can take months or years to repair. Since the VA has more flexible requirements for credit scores, you may not have to wait until your credit has gotten back to what it was before you defaulted on your loan.
Avoiding Foreclosure
There is a lot of time and money involved in the foreclosure process for the lender, and in some states, they even have to involve the court system. To avoid all of that, some lenders will give you alternatives to foreclosure. The VA can help you retain your home and avoid foreclosure. The VA has free mortgage counselors available who can help you and give you advice to help get you back on track with your mortgage. They will work directly with your lender to help negotiate an alternative to foreclosure for you.
A repayment plan is one of the options the VA has, which means you will continue making your mortgage payment, plus a little extra to make up for what is missing. You may be able to get special forbearance, which will stall the foreclosure so you can make your missing payments.
Sometimes, a loan modification is available, that creates a new payment schedule, which includes your missed payments. You may be able to have a deed-in-lieu of foreclosure, where you hand the deed back to the lender instead of foreclosing. The last option is a short sale, where the lender lets you sell the home for less than you owe on the loan. If you go with the short sale or deed-in-lieu of foreclosure, they will still harm your credit, and there will be a waiting period before you can obtain a new home loan.
Getting a New VA Loan After Foreclosure
Since the VA loan is set up a little differently than other loans, if it has been at least two years since the foreclosure, they can disregard it when looking at your qualifications for the loan. If you had a foreclosure from an FHA loan, there is a three-year waiting period. This waiting period will allow you to rebuild your credit after the foreclosure.
Your VA loan entitlement will be reduced by the foreclosure, which will limit the amount of money you can borrow without a down payment. You can get your entitlement back if you pay back the VA in full. If you did not use all of your entitlement on the home that was foreclosed upon, you can use what you have remaining on your new loan.
Eligibility and Funding Options
It is a common misconception that VA-foreclosed homes can only be purchased by veterans. In fact, VA REO properties are not just for veterans, they are open to veterans and the general public. However, to qualify to use a VA loan to purchase any type of property, including a foreclosure, the buyer must meet certain eligibility requirements under VA guidelines.
Veterans with VA-foreclosure properties are offered Vendee Financing, which is a VA loan program available to veterans and nonveterans alike. Perks include low or no down payment, interest rates that can be competitive, and flexible loan terms at 15 or 30 years. Moreover, this financing has no mortgage insurance and allows the seller to pay toward closing costs. While Vendee Financing does have many benefits, keep in mind that it is only for the purpose of purchasing VA REO properties.
Minimum Property Requirements (MPRs) and Property Condition
If you’re buying a foreclosed property using a VA loan, the home has to meet the VA’s Minimum Property Requirements (MPRs). These requirements are designed to make the property safe, sound, and sanitary. “Good” MPRs include a well-maintained roof, proper working heating and cooling systems, and no lead-based paint hazards.
Many foreclosed homes have gone neglected or have been vandalized and could need repair and maintenance to be habitable. These homes are often sold “as-is,” so in general the VA won’t perform repairs on a buyer’s behalf. As a result, prospective buyers must do their due diligence and be ready for possible renovation expenses. VA renovation loans may require some reading into but can be a big help to finance necessary repairs through the mortgage.
Navigating the Purchase Process
There are several important steps to take when buying a foreclosed property with a VA loan:
- Obtain VA Loan Pre-Approval: Get pre-approved for a VA loan to establish your budget and showcase your commitment as a buyer to sellers.
- Find a Foreclosure: Search for homes in pre- or post-foreclosure that meet your needs. The VA has a REO properties list that can be a useful resource.
- Use Professionals: Hire a real estate agent who has experience with VA loans and foreclosed properties. Also, have a good home inspector check out the property.
- Making an Offer: You can make an offer on a property. Be ready for little wiggle room to negotiate, as banks often price foreclosures competitively.
- Appraisal and MPR Compliance the VA will order an appraisal to confirm that the property meets MPRs and is appropriately valued. If the property does not adhere to MPRs, you must determine whether to make plans to complete any necessary repairs, or whether to walk away from the purchase.
- Closing Process: When all conditions are satisfied, you can go to closing, where you will complete the loan and take possession of the property.
Challenges and Considerations
Although buying a foreclosed home with a VA loan can be beneficial, there are some elements to be mindful of:
- Condition of property: Foreclosures may have remained unattended for a long time, resulting in mold, pests or even structural damage.
- As-Is Sales: Foreclosed property sellers, including the VA, will usually sell homes “as-is,” meaning they won’t make repairs or offer credits toward repairs.
- Competition: The list of foreclosed properties may attract many bids due to cash purchases and investors, creating a competitive bidding process.
- Long Timelines: Buying a repossessed home may also take longer as it might involve extra paperwork and negotiating with banks or government agencies.
Conclusion
Using a VA loan to finance a foreclosed home is a great option for eligible homebuyers looking for a path to homeownership with benefits like no down payment requirements and competitive interest rates. Nonetheless, it’s important to know all of the ins and outs and take proper care because foreclosed houses have their own sets of challenges. If you do your due diligence by hiring experienced experts, performing proper inspections, and allowing for some repairs, you’ll likely have a smooth transaction. With the right real estate wisdom on how to work through the maze of foreclosures, the benefits of VA financing, and your knowledge of the sacrifices that veterans and active-duty service members make, you can uncover hidden wealth within the real estate market.