Buying a Foreclosure With a VA Home Loan
According to recent statistics, the average discount nationwide on a foreclosed home is 32.6%*. That means someone buying a foreclosure can potentially pay only 67.4% of the open market price for the home purchase.
Granted, these are national numbers and all real estate is local but the home buying numbers don’t lie and definitely show a pattern.
That indicates that deals are certainly out there, how do you go about buying a foreclosed home?
Buying a foreclosed home
Are you thinking of buying a foreclosed property but don’t know where to start?
Keep in mind that foreclosures are cheap for a reason. Here are some things to remember about foreclosures:
- They are often paid for in cash by seasoned investors
- There is often high competition for them, and non-cash buyers may never land a foreclosure
- Foreclosures are often in disrepair and sold as-is, without a home inspection
Let’s dig a little deeper.
When a lender initiates the foreclosure process on a home and the previous owner hands over the keys, the first stop for the lender is to put the home up for auction.
Typically, foreclosure sales happen at the auction. Different states have different auction rules so make sure you contact the appropriate agency to find out where and when auctions are held.
If it’s your first time at an auction, you may want to sit back and watch a few before bidding and get a firm grip on the auction process. Some states require you to provide a cashier’s check for the full amount at the auction while other areas let you put down a deposit to arrange financing if you’re the successful bidder.
Drawbacks of buying a foreclosed home
There are drawbacks when buying a foreclosed property on the auctioneer’s steps. One, it’s likely that you won’t be able to inspect the property. Either it’s still occupied by the original owner or the lender has a lock on the door. You might be able to get an outside look at the house but you may not be able to find out the foundation is faulty.
It’s also just as important to find out if there are other liens on the property such as property tax or income tax liens, back child or spousal support payments, or other liens that can’t be dissolved through a foreclosure. You can contact a real estate attorney or a title insurance company to perform a search, but they’ll charge a fee.
Can I buy a foreclosure with a VA home loan?
It is possible to buy a foreclosure with a VA home loan. Active-duty service members and veterans looking to use their VA benefit to purchase a foreclosed home will have to make sure they meet a few extra steps in the process. It can be complicated. You’ll have to buy the foreclosure at an auction that allows for financed sales, and you’ll need to be preapproved by your lender to bid on a home.
Possibly the most difficult aspect for VA borrowers would be making sure the new home meets VA’s minimum property requirements. These are requirements from the Department of Veterans Affairs to ensure any property purchased using the VA home loan benefit is livable and has a market value consistent with the loan amount. Without a thorough inspection prior to bidding, you wouldn’t know if the property was even eligible for VA financing.
Beyond these initial hurdles, VA does not have any restrictions against purchasing a foreclosure with a VA home loan. But…
Buying an REO (Bank Owned) property may be a better option
If the lender doesn’t get their minimum bid for the home or decides to forego the auction process altogether, the bank places the property in their Real Estate Owned, or REO department.
REO properties may be more feasible for the standard home buyer to purchase.
Buying directly from the banks’ REO department is likely your safest bet. When banks take back homes they prepare them for sale. The property is fully inspected, repaired, and prepared for the buyer’s market. Yes, you’ll pay a bit more for such homes but it will still be below similar homes in the area and you’ll have an easier time buying one with a mortgage loan.
Lenders typically contract with a local real estate broker who agrees to market the home This real estate agent holds open houses and shows the home to prospective buyers.
Most banks today have a spot on their website dedicated to their REO properties. So do government agency mortgage giants Fannie Mae and Freddie Mac on their respective websites. Here you can search the foreclosed home inventory from all 50 states. Fannie’s site for selling such properties is called HomePath and Freddie’s label is HomeSteps.
Should you buy a foreclosure?
There’s no doubt that buying a foreclosed home could mean a great discount but it’s not without risk. A loan officer who is experienced with the VA loan program can help you get started on your journey to becoming a homeowner.
Go ahead and get preapproval from your mortgage lender for the loan as a first step. Do more research about foreclosure proceedings in your area. There may be a chance that you could pick up a great deal.