Using Your VA Loan To Buy Foreclosed Homes: Things To Know

Buying a foreclosed home is a good way to purchase a home below market value. And if the house meets the minimum property requirements, you can use a VA loan to do it. This article outlines everything you need to know about using a VA loan for foreclosed homes.

Can You Buy A Foreclosed Home With A VA Loan?

You can buy a foreclosed home with a VA loan as long as all VA guidelines are met. Many people are interested in purchasing a foreclosed home because it can cost considerably less than a similar home that hasn’t gone through foreclosure. VA loans come with many benefits, including no down payment requirements, minimal credit requirements and no required private mortgage insurance (PMI).

VA Loan Requirements For Foreclosures

All applicants must meet the VA’s requirements to qualify for a mortgage. The Department of Veterans Affairs has minimum property requirements (MPRs) in place to protect the best interests of veterans.

However, it can be difficult for distressed properties to comply with VA minimum property requirements. If the property falls short, the seller needs to make any necessary repairs for the VA loan to be approved.

Here are the VA guidelines for buying a home:

• Must be a residential property
• Must be big enough for basic living needs
• Must have a roof with no major defects
• Must have any broken windows fixed or replaced
• Must not have any lead-based paint on the property (homes built before 1978 may be assumed to have lead-based paints and must be scraped and repainted)
• Must have all major mechanical systems (including heating, air conditioning, plumbing and electrical) in good working condition
• Must be free of fungus, dry rot and pests, like termites
• Must have safe and sanitary sewage disposal
• Must have accessible and properly ventilated attics and/or crawl spaces
• Must have access to all-weather public or private streets

What To Consider Before Buying A Foreclosed Home

You can save money by buying a foreclosed home, but there are potential drawbacks to think about. Some of these homes have been neglected for a long time and may come with problems that aren’t immediately apparent.

Here are some of the main drawbacks to consider before purchasing a foreclosed house.

No Disclosures

When you buy a home from a seller, you’ll receive a Seller’s Disclosure statement, which outlines the property’s history. But when you buy a foreclosed home, you won’t receive a Seller’s Disclosure because the bank owns the property.

That means you won’t have a complete picture of that home and any potential problems that come with it. For instance, you won’t know if the roof needs to be replaced soon or if the home has foundation issues.

Potential Updates And Maintenance

Foreclosures are generally sold as-is, meaning the property might not be in good condition and may require additional repairs, making it a more costly investment. And it’s easy to underestimate the full extent of the repairs needed.

Closing May Be Difficult

A foreclosure could take longer to close on than a traditionally sold property because the seller is a bank. You could be dealing with a major bank that’s located in another state. That means the paperwork could take longer to complete than if you were dealing with a local seller.

Competition

Buying a foreclosed property can be very competitive – investors will often come in with all-cash offers because the price is so low. That can make it hard for the average buyer to compete. Investors bought 24% of all single-family homes purchased in 2021.

Problem With Liens

When you buy a foreclosed home, you’re also taking on any lien code violations that come with it. And liens and title issues may not be immediately apparent. To avoid this issue, you can work with a real estate attorney to ensure there are no title defects or liens before closing.

Advantages Of Buying A Foreclosed Home With A VA Loan

If you qualify, there are many benefits to using a VA loan to buy a foreclosed property. Unlike conventional and FHA loans, VA loans don’t require a down payment, and there’s no mandatory PMI.

• Here are some of the biggest benefits to consider:
• No down payment required
• No monthly mortgage insurance premiums
• No prepayment penalties
• Competitive interest rates
• Low closing costs
• Streamline interest rate reduction program

FAQs On Using A VA Loan For Foreclosed Homes

If you have more questions about using a VA loan to buy a foreclosed home, the following frequently asked questions may help.

Should I buy a foreclosure?

It depends on your preferences and goals for homeownership. Buying a foreclosed home can be a unique opportunity to buy a home well below market value. But you should do your research before making an offer on a foreclosed property, and be prepared for a lengthy closing process.

Is a preforeclosure or short sale the same as a foreclosure?

No, in a short sale, the owner owes more on the mortgage than the market value of the property. A preforeclosure happens when the homeowner is more than 90 days late on their mortgage and the bank has started the foreclosure process.

Once a home is in foreclosure, the bank has taken possession of the property. A short sale could also be in preforeclosure, but they aren’t the same thing.

How does VA loan financing work?

The VA doesn’t originate loans but instead backs a portion of each loan. This lowers the risk for lenders and allows them to offer better terms and rates for veterans. So you’ll apply with a bank or online lender, and the VA will have some additional requirements you need to meet.

Can you use a VA loan to purchase a foreclosed home as an investment?

Yes, but if you use a VA loan for an investment property, it must also be your primary residence, because VA loans are designed to help veterans purchase a full-time residence. This means that to qualify for a VA loan on an investment property, the borrower has to live on that property full-time while renting out a spare room or a detached apartment.

The Bottom Line: Using A VA Loan For Foreclosed Homes Can Be A Great Option

You can use a VA loan to buy a foreclosed home, but it’s a good idea to do your research and be aware of the potential downsides that come with foreclosed property. If you’re ready to apply for a home loan, start the process today.