Can You Buy A Foreclosure With A Va Loan
Yes, it is possible to use your VA loan benefit to purchase a foreclosure or otherwise distressed property as long as it meets the VAs broad property condition guidelines.
Buying a foreclosure can look different from your run-of-the-mill home purchase. Foreclosures typically go through an auction with the county sheriff. In the event it fails to sell, it may go to a third-party auction.
Here are four key things that prospective buyers need to know about using their VA home loan benefit to buy a foreclosure.
Can You Buy A Foreclosed Home With A Va Loan
This is a really good question that I got from a Veteran in California. Emmett asks me: can a veteran buy a foreclosure or a pre-foreclosure home?
The simple answer is yes, it is possible to buy a foreclosed home using a VA loan, as long as that property meets the VAs minimum requirements.
And thats where the challenge comes in.
Now a foreclosure obviously would be a home that the previous owner defaulted on, potentially the bank owns it or an investor potentially owns it now. That makes no difference with a VA loan.
Now, what you may run into And this was very, very common quite a few years ago. I dont see this as often. But back when the mortgage industry collapsed in 2009, there were a lot of foreclosures.
What would happen is these foreclosures, the banks would take the foreclosures, theyd put them back on market, and they would have a special addendum to the purchase contract that said that the property was sold as-is and they would not put any work into it. They wouldnt put any upgrades, they wouldnt do any repairs.
They had never lived in the home because obviously, they were the bank that foreclosed, and they werent really interested in throwing good money after bad. They were already in a situation where the owner defaulted, and they were just trying to get their money back.
Final Thoughts: Buying A Foreclosed Home With A Va Loan
VA loans may make buying a foreclosed home tricky. You must ensure that your future home meets the list of requirements for loan approval. While that complicates things, it ensures you and your loved ones move into a safe and secure home. Its vital you evaluate any potential foreclosed property for its benefits and drawbacks before purchasing.
If youre planning to buy a home, many concerns may be on your mind. Be sure to review some helpful articles from our Home Buying Resources. That way, youre prepared for anything that may come your way.
Get approved to refinance.
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Tip : Look For Homes In Good Shape
Foreclosed properties have a reputation for being in less-than-pristine condition, but the VA sets property standards for health, safety and structural integrity that generally need to be met before you can close on a home. You may run into trouble if you have to ask the seller to complete or allow repairs.
The best solution for a VA buyer is to simply avoid homes that are in poor condition. As a rule of thumb, the VA home loan is meant for turnkey properties. Educate yourself about VA requirements before you start shopping foreclosures, and avoid properties suffering from deferred maintenance and vindictive damage.
Lenders and real estate agents who truly understand the VA loan process can be a tremendous asset when youre starting the home search. More importantly, getting prequalified and preapproved for a VA loan before you start house hunting is critical.
VA loan preapproval gives buyers a clear sense of their purchasing power and prepares them to spring into action.
Can I Use A Va Loan To Buy A Foreclosure
As long as the VA guidelines are met, VA loans can be used for buying a foreclosed property. Foreclosures are controlled and usually sold in two different ways by the servicer of the loan. In most cases, a foreclosed property will first be offered to the highest bidder via auction by the county sheriff.
If the home fails to sell at auction to a third party, the home may be acquired by the lender and made available through typical real estate listings such as the local MLS.
If a VA loan-eligible borrower bids at a foreclosure sale auction on a foreclosed property, he or she may find that a large sum of cash should be delivered as soon as 48 hours after buying or accepting the bid.
A VA borrower with sights set on a certain foreclosure may want to see if that home fails to sell at auction because of the cash requirement often associated with auctions and is offered by the lender. The property can be closed within a more typical timeframe, typically 30 or more days, once offered through a regular real estate listing.
Also, foreclosures are often sold AS IS. All homes funded with the VA guaranteed home loans must be in safe living conditions due to the VA owner-occupancy requirement. Also, the banked owned properties are often sold AS IS.
If repairs are required before the home can pass the VA assessment/inspection, the buyer will often pay for them and take the risk. On a home that does not appraise its sales price, the VA will not give its guarantee.
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Mortgage Relief During The Coronavirus Outbreak
Homeowners with VA-guaranteed loans can get a COVID-19 forbearance, a temporary suspension of payments. But a forbearance isn’t the same as forgiveness, and you’ll eventually need to get caught up on those skipped amounts. On July 23, 2021, the White Houseannounced that VA borrowers that have been financially affected by COVID-19 have more options after a COVID-19 forbearance, including the following:
COVID-19 Refund Modification. Borrowers might be eligible to get up to a 20% reduction in the principal and interest portion of their mortgage payments with a COVID-19 Refund Modification. Under the COVID-19 Refund Modification, VA can purchase a veteran’s past-due payments and amounts of unpaid principal, depending on how much assistance is necessary, subject to specific limits. The loan servicer will also modify the loan. Like with VA’s COVID-19 partial claim option , the veteran’s deferred indebtedness from a COVID-19 Refund Modification will be a junior lien on the property that doesn’t accrue interest, won’t require monthly payments, and only becomes due when the property is sold, the VA-guaranteed loan is paid off, or the VA-guaranteed loan is refinanced.
Loan deferment. Under a loan deferment, the servicer defers repayment of the arrearages to the loan maturity date or until the borrower refinances the loan, transfers the property, or pays off the loan.
VA expects all COVID-19 forbearance periods to end by September 30, 2022.
Getting A Va Loan After Chapter 7 Bankruptcy
The VA loan qualification guidelines for individuals with a prior bankruptcy vary depending on the type of bankruptcy.
With Chapter 7, the VA requires that an individual wait no less than two years from the bankruptcy discharge date before qualifying for loan approval. Additionally, the individual must provide a full explanation of the Chapter 7 bankruptcy and have re-established good credit. Proof of job stability will also be necessary for approval.
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Work With A Real Estate Agent
Few professionals know the specific ins and outs of a property market, and what a great opportunity or bargain looks like, like a local REALTOR®. Noting this, youll want to work with a trusted real estate agent, who can help you identify and hone in on properties to purchase, as well as keep you up to date on trends in the area. As part of their support and services, your real estate agent can help you find VA foreclosures using the multiple listing service .
The Savings Can Be Big
Foreclosures can present buyers with a significant savings opportunity. Every market is different, but distressed properties typically sell for less than other homes available.
Todays white-hot housing market has cut into those savings a bit. Homes in foreclosure cost about 86% of market value, according to recent data from Auction.com.
Still, a discount is still a discount, and with home purchases youre still looking at saving thousands or even tens of thousands of dollars.
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Can You Buy A Va Foreclosure With A Va Loan
If you are an eligible servicemember, veteran or surviving spouse, you can buy a VA REO home using a VA loan. In fact, there are many benefits to doing so. For example:
- You can buy a home with no money down.
- You dont have to pay for private mortgage insurance , although there is afunding feefor most of which can be built into the loan.
- You may use the VA IRRRL to refinance to a lower rate.
- The seller may contribute to the closing costs.
- VA mortgages are assumable.
My Va Loan Was Foreclosed On Can I Get Another Va Loan
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In a Nutshell
One of the most common questions veterans have is whether they can still get a VA home loan after foreclosure. The answer is often yes, but the size of the loan will be affected by the previous foreclosure and what your remaining entitlement benefits are. It’s much better for the service member, and the VA, to avoid the foreclosure in the first place. Read on to learn what options you have for avoiding foreclosure, and what you can do to get a new VA loan if foreclosure was unavoidable.
Written byNatasha Wiebusch, J.D..
Military service members receive many benefits through the Department of Veterans Affairs , a federal government agency charged with assisting service members and their families. One of these benefits is assistance with buying a home through the VA Home Loans program.
Unfortunately, every year some service members experience serious financial hardship causing their VA loans to be foreclosed on. Many of these service members wonder if theyâll ever be eligible for another VA loan. The short answer is probably, but it depends on the circumstances.
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Tips For Buying A Foreclosure With Your Va Home Loan
by Chris Birk, Director of Education, Veterans United Home Loans
In a sellers housing market, many VA buyers turn to foreclosures to try and make the most of their homebuying budget. Its often true that foreclosures and other bank- or agency-owned properties are priced lower than standard listings.
But closing on distressed properties can be tough. The process can take months, and banks tend to sell these homes as-is, meaning theyre not willing to make or allow repairs needed to satisfy the VA appraisal process.
For VA buyers, purchasing a foreclosure property can be challenging, but not impossible. Follow these tips, and you could walk away with a great home at a good price.
Other Considerations And Final Thoughts
One thing to keep in mind if you defaulted on a VA loan is how much VA loan entitlement you have. If youre a veteran thats eligible for a VA home loan, it means you have a VA loan entitlement, which is a financial commitment from the VA to repay part of your loan in the event that you default. You can use a part of this entitlement whenever you purchase a house. You lose this part of your entitlement that you used on your house if you default and the only way to get it back is to prepay the VA in full.
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What Is The Best Way O Determine If A Home Will Qualify For A Va Loan
Who Handles Va Foreclosures
The Department of Veteran Affairs handles all VA properties while a local listing agent is responsible for managing the sale.
That’s why you need to go through available foreclosure listings if you want to invest in VA properties.
You can then contact the listing agent as soon as you find a VA foreclosure that interests you. They will provide you with the details of the property and arrange for an inspection.
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Preventing Foreclosure On A Va Loan While Keeping Your Home
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Repayment Plan
Repayment plans allow borrowers to prevent foreclosure by paying an extra amount every month to catch up on previous missed payments. For many individuals whose homes are at risk of foreclosure, this may not be the right solution. However, if you missed payments because of some circumstance that has since passed, this may be a good way to prevent foreclosure.
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Forbearance
A forbearance is where your loan servicer allows you to stop making payments for a certain number of months to avoid delinquency. For example, if your employer has placed you on furlough for a certain number of months, you can ask your servicer for a forbearance during these months. Although you’re allowed to miss a few payments during this time, you will still need to catch up later.
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Loan Modification
There may be situations where making up missed payments at a later time is not an option. In this case, your lender may be willing to modify the loan. This is where the terms of the loan are changed to make your monthly payments more affordable.
Using A Va Loan After A Conventional Or Fha Foreclosure
For military borrowers using the VA Home Loan Guaranty program, your success in financing a home after a foreclosure will be affected by the type of loan on which you defaulting.
For example, veterans and active duty members who lose a conventional mortgage to foreclosure typically must wait a minimum of two years before being eligible for a new VA loan.
For homeowners defaulting on an FHA loan, the wait could be as long as three years.
Therefore, if youre a military borrower who defaulted on a conventional or FHA loan, rather than rush the process, you may find that your time is best spent mending finances and repairing credit.
A foreclosure could slash as many as 120 points from your credit score, according to credit scoring firm FICO.
However, with time and attention to your score, you can potentially reclaim those points in time to be homeloan eligible with the Department of Veterans Affairs.
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How Va Home Loans Work
Private lenders, like banks and mortgage companies, make VA-guaranteed home loans. The VA guarantees a portion of the loan so that the lender can offer more favorable terms to the borrower, as well as provide loans to people who otherwise might not qualify for a mortgage.
VA-guaranteed loans are less risky to the lender because VA will cover the losses if the borrower defaults.
Foreclosures Can Be Tough For The Va Appraisal
The VA appraisal process has two pieces. The first focuses on determining the propertys fair market value, like any other residential appraisal. The second piece is meeting the VAs broad property condition guidelines, known as the Minimum Property Requirements.
These high-level guidelines look at things like the remaining life of the homes mechanical systems, access and space requirements, water supply and more. The goal is to help ensure Veterans purchase homes that are safe and sound.
Some of these guidelines can pose a challenge for distressed properties that might not be in prime selling condition. Some foreclosures might sit empty on the market for months or even years.
Just having issues come up during the appraisal isnt an automatic deal-breaker. Normally, sellers or even VA buyers can pay to make repairs in order to keep the loan moving forward. But foreclosures are often owned by banks or other entities that will not make repairs or even allow them to be made to the property.
Many of these properties are sold as-is, meaning no repairs can be made before closing. That can be a major problem for VA loans in some cases.
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How Foreclosure Affects Va Entitlement
For a refresher, VA entitlement is the monetary amount the government backs or guarantees in the event of foreclosure and is typically 25 percent of the loan amount. That backing from your VA entitlement is what allows lenders to provide a mortgage with $0 down.
However, when you default on a VA loan, you basically forfeit whatever entitlement was used to obtain that loan. The ability to get a new VA loan with $0 down with a prior foreclosure can depend on the home price, the county you purchase in and your remaining entitlement.
Let’s look at an example.
If a Veteran purchased a home for $300,000, theyre typically using about $75,000 of their entitlement, which represents a quarter of the loan. If the home later gets foreclosed on, the Veteran loses that $75,000 in VA loan entitlement.
If, down the road, the Veteran looks to purchase again in a county with a standard loan limit, they’ll only be able to buy a home up to $347,200 without a down payment. The math looks like this:
- 25% x $647,200 = $161,800
- $161,800 – $75,000 = $86,800 in remaining entitlement
- $86,800 x 4 = $347,200
If the home price falls above the Veteran’s entitlement, they would need a down payment equal to 25 percent of the difference between their max entitlement and the purchase price.
Veterans using their second-tier of entitlement must also borrow a minimum amount of money. That minimum is $144,001, and it can include financing the VA Funding Fee into the total loan balance.
