Can you buy a foreclosure with a VA loan?
You can buy a foreclosure with a VA loan, but foreclosures sold at auctions may be out of reach. Photo by George Pak via Pexels.
Can you buy a foreclosure with a VA loan? Yes, but you may encounter a few bumps in the road.
There’s a lot of opportunity to be had with foreclosures if you manage to find the right one— especially if you qualify for a VA loan and pair the two together.
Why work so hard to use a VA loan?
VA loans don’t require mortgage insurance, don’t require a down payment, are insured by the federal government, and often have lower interest rates than conventional loans. If you’ve earned the right to use a VA loan, it should be your number one mortgage choice..
The only real downside to VA loans is that they can take a bit longer to process than other mortgages, which is the biggest single issue if you want to buy a foreclosure.
Why is this such an issue? Let’s talk about it.
Can I buy a foreclosure with a VA loan?
Yes, you can, and many people do so every day. However, certain types of foreclosures are easier to buy than others with a VA loan.
If you’re new to thinking about real estate, let’s do a quick mini lesson on the stages of the foreclosure process:
Pre-foreclosure: Preforeclosure begins after the lender has issued a notice of default and lasts until the property is sold at a public or private auction. During preforeclosure, the borrower can still work out a solution with their lender to prevent foreclosure.
Notice of Sale: If the borrower fails to reach an agreement with their lender during the pre-foreclosure period, the lender will issue what is called a ‘Notice of Sale,’ which is legal jargon for putting the home up for sale at an auction.
Foreclosure Auction: The property is auctioned off to the highest bidder. In some states, it’s done at a public auction, while in others, it's handled privately. If the property is not sold, ownership is officially transferred to the lender.
Real Estate Owned (REO): When a property doesn't sell at an auction, it becomes Real Estate Owned (REO), or a bank-owned property. When this occurs, the property is often listed on the open market, but the lender may still try to sell it at an auction.
You can technically buy any type of foreclosure with a VA loan during any stage of the process. However, while it’s theoretically possible, it’s not always the best idea.
Which stages are the best to buy a foreclosure with a VA loan?
Pre-foreclosure and REO properties are the easiest foreclosure properties to buy with a VA loan. The main reason is time. With pre-foreclosures and REO properties, there is more time for your lender to go through the underwriting process. With auction foreclosures, you have roadblocks that, in many cases, simply make using a VA loan too risky.
That said, even pre-foreclosures and REOs can present some difficulties.
Buying a pre foreclosure with a VA loan:
The key thing you have to keep in mind when approaching a homeowner who is in preforeclosure is that their home is not technically up for sale yet. They are behind on payments, and it’s looking like the bank is going to assume ownership of the home, but none of that has happened… yet. So if you contact the homeowner, there may be some emotions involved and there may be a few misconceptions about what you’re willing to do for them.
For example, they may grow angry at the thought of selling their home, which is why you should use an agent to communicate with them, or they may think their home is worth more than it is.
If you approach a homeowner who is in preforeclosure, and they are in interested in moving forward with selling their home, the following might happen:
Direct Negotiation with the Homeowner and Lender: The current homeowner will need to contact their lender and communicate with them about your offer. For the lender to agree to the sale, your purchase must satisfy any unresolved debt the current homeowner has. Otherwise, the foreclosure process may keep moving forward.
Short Sale: If the homeowner is unable to maintain mortgage payments and owes more on the mortgage than the property is worth, they may consider a short sale. In a short sale, the lender agrees to accept less than the full amount owed on the mortgage, which will allow the property to be sold. As with the above, you will need to negotiate with both the homeowner and the lender to reach a purchase agreement. Here again, we strongly recommend working with an agent.
Buying an REO with a VA loan:
The main issue with REOs is competition, so time is once again of the essence. Well priced and well kept REOs often sell fast. If your bid is accepted, however, you shouldn’t have any issue using a VA loan to finance the purchase.
REOs are the easiest types of foreclosures to buy with a VA loan.
Can you buy a foreclosure at an auction with a VA loan?
It depends.
VA loans take 30 to 50 days to process, which is often much longer than most auction houses are willing to allow— between 1-7 days is the national average. Meaning, if you place the winning bid on a foreclosure, you only have a few days before you have to get the auction house the full purchase price.
Next is the deposit requirement required by most auction houses. While some auction companies don’t require immediate payment, many still require a deposit from the winning bidder— which is often 20-30% of the purchase price.
A 20-30% deposit goes against the the best thing VA loans have going for them— the 0% down payment. Buy a foreclosure at an auction house and you would be losing this advantage.
Therefore, the biggest reason you should think twice about using a VA loan to purchase a foreclosure at an auction is the fact that you may lose your deposit if your VA loan isn’t processed fast enough— meaning the 20-30% deposit would be lost and you wouldn’t have any ability to get it back.
But, if you’re willing to take the risk…
If you understand you’re at risk of losing your deposit, here’s what you need to do before you start attending public auctions:
Task 1: Speak with your lender and tell them you want to buy a foreclosure at a public auction using a VA loan: While there aren’t federal or state laws forbidding homebuyers from using VA loans at auctions, your lender may have its own internal policies that conflict with what you want. Therefore, your first step may not even be informing your lender about what you want, but instead finding a lender that is willing to finance an auctioned-foreclosure purchase in the first place.
If you find one, ask the following:
What is your maximum bid amount?
How do you verify a home meets VA livability standards?
How long do they anticipate it would take to close?
Tip: Try to find a lender within 14 days so the credit inquiries are grouped together in a ‘rate-shopping’ window. Each hard credit inquiry outside of the rate-shopping window may drop your score around five to ten points.
Task 2: Find an auction house that is willing to accept VA financing: Not every auction house has the same rules. If you find one selling foreclosures in your desired area, your next task is to find out:
How much of a deposit do you need to make if you make the winning bid?
How long do you have before full payment is required?
What is the fee for placing the winning bed? FYI, this amount likely cannot be financed into the loan, so you’ll need extra cash.
If your VA loan is not financed fast enough, what happens to your deposit? Will you be able to recoup any of it?
So a lot of variables are involved, but it is possible to buy a foreclosure at an auction with a VA loan. If you pull it off, you will have essentially lassoed a unicorn. If there were an awards ceremony for homebuyers and real estate investors, you’d get a standing ovation and take the gold.
Conclusion
Can I buy a foreclosure with a VA loan? Yes, you can buy a foreclosure with a VA loan. You may have difficulties buying a pre-foreclosure with a VA loan, but REO foreclosures are easily done. We don’t recommend pursuing auction-foreclosures with a VA loan, but auction-house rules are not universal. Some allow mortgages while others do not.
If you’re looking for a foreclosure, we recommend foreclosure.com because its database is refreshed every day, and it’s easy to sort foreclosures by what stage of the foreclosure process they’re in. Just want to see REOs? You can do that. Only want to see pre foreclosures? You can do that, too.
And if you’re looking for a step-by-step guide to buying a home, consider checking out our Homebuyer’s Workbook. We discuss every aspect of the homebuying journey, and even go into a deep dive on finding downpayment assistance programs in your area, as well as bidding strategies for both buyer’s markets and seller’s markets.
FAQ
Can I buy a foreclosure with an FHA loan?
You can buy a foreclosure with an FHA loan, but it depends on a few factors. The lender needs to verify that the property meets FHA standards and it needs to appraise the home to verify that it meets the loan-to-value ratio. Like VA loans, FHA loans can take underwriters between 30-60 days to process, which is an issue because many auction houses require payment within 1-7 business days. It can be done with some auction houses, but it’s financially risky because you may lose your deposit with the auction house if you’re unable to close fast enough. Many auction houses require cash-only bids, which, while disappointing, ultimately protects average homebuyers.
Can I buy a foreclosure with a USDA loan?
Yes, you can buy a foreclosure with a USDA loan, but as with VA and FHA loans you may have issues depending on what type of foreclosure you want to buy. There isn’t technically a federal or state law that forbids homebuyers from using a USDA loan on a foreclosure, but rules and regulations make it difficult. A USDA loan is easily done with REO properties, but with pre-foreclosures and auctioned-foreclosures, the biggest issue is time. Because it takes so long for USDA loans to process (once again, 30 to 60 days), this conflicts with many auction house requirements and seller needs, and you may have issues verifying that the house meets livability standards. With auctions, the biggest danger is losing your deposit, which is often 20-30% of the purchase price.
Should I buy a foreclosure for my first home?
Buying a foreclosure for your first home has both pros and cons, but let’s just focus on the benefits. You will likely save money with a foreclosure, which, in turn, gets you immediate equity. Equity is powerful when it comes to the world of finance. If you have enough equity in your home, you can take out a home equity loan or line of credit, both of which often come with APRs MUCH lower than other debt products. Plus, there’s the obvious benefit of selling the home for a greater profit one day should you decide to move. So, from our standpoint, the benefits are pretty awesome.