Can You Use a VA Loan on a Foreclosure? Everything You Need to Know

Purchasing a foreclosed home can be an excellent way for buyers to get a great deal on a property. However financing a foreclosure purchase can be tricky. Many lenders are hesitant to provide loans for foreclosed properties. Thankfully VA loans offer a great option for veteran buyers interested in purchasing a foreclosed home. In this article, we’ll cover everything you need to know about using a VA loan to buy a foreclosed property.

Overview of VA Loans

The VA home loan program helps eligible military members, veterans and surviving spouses purchase build, repair, retain, or adapt a home. Some key features of VA loans include

No down payment required
No monthly mortgage insurance premiums
Flexible credit requirements
Ability to finance closing costs into loan amount

These features make VA loans one of the most competitive and borrower-friendly mortgage products on the market. The program helps veterans and service members purchase homes with no money down even if they have less-than-perfect credit.

Can You Use a VA Loan on a Foreclosed Property?

Yes, VA loans can be used to purchase foreclosed homes. The VA has special guidelines in place allowing borrowers to finance foreclosures with their VA home loan benefit.

However, it’s important to note there are some limitations when using a VA loan on a foreclosure:

The property must meet VA minimum property requirements. The VA needs to ensure the home is safe, sanitary, and structurally sound. Common issues with foreclosures like faulty electrical, plumbing, roofs, etc. could disqualify the property.
You may have a shortened financing contingency period. Typically buyers have around 15-30 days to secure financing when making an offer. On a foreclosure, this period could be shortened to as little as 5 days.
Closing may take longer than a traditional sale. Foreclosures require extra legal steps, which can extend the closing timelines.

As long as you are aware of these limitations, a VA loan can still be a great option for purchasing foreclosed homes.

How to Buy a Foreclosure with a VA Loan

Here are the steps to take if you want to purchase a foreclosure using your VA home loan benefit:

Get pre-approved for a VA loan. Work with a lender to get pre-approved. This shows sellers you can secure financing quickly.
Make an offer on the foreclosed home. Submit an offer with the shortest feasible financing contingency period. Cash offers may be preferred, so expect competition.
Order the VA appraisal. If your offer is accepted, order the appraisal quickly to avoid delaying closing timelines.
Work through any VA appraisal issues. If repairs are required for VA approval, negotiate credits or repairs with the seller.
Monitor closing timelines. Check in frequently with your lender to ensure all foreclosure paperwork is moving along smoothly.
Close on time. Foreclosures can revert to the lender if closing deadlines aren’t met, so push for an on-time close.

As long as you understand the limitations and act quickly, you can purchase a foreclosure using your VA home loan benefit.

Tips for Finding VA-Eligible Foreclosures

Not all foreclosures on the market may be eligible for VA financing. Here are some tips for finding VA-approved foreclosed homes:

Search for FHA, USDA, or conventionally financed foreclosures. These have a higher likelihood of meeting VA requirements than creatively financed properties.
Consider foreclosures in homeowners associations (HOAs). The HOA may have addressed some deferred maintenance issues.
Look for recently constructed foreclosures, which will likely have fewer structural/mechanical defects.
Review disclosure documents to understand known property conditions upfront.
Consider REO foreclosures returned to the lender. Banks often make repairs to maximize sale proceeds.
Drive by properties before making offers to spot any obvious deferred maintenance.

Taking the time to find eligible foreclosures will streamline the VA financing process.

Alternatives to Buying a Foreclosure with a VA Loan

If you aren’t finding any VA-eligible foreclosures in your target price range or area, here are two alternatives to consider:

1. Buy a non-foreclosed fixer-upper with your VA loan

The VA allows borrowers to finance repair costs into their loan amount through a VA Renovation Loan. Look for ugly but structurally sound properties to customize to your liking over time.

2. Rent for 1-2 years after a foreclosure before buying again

Give yourself time to rebuild savings and credit to improve your application strength. Renting also gives you flexibility to relocate easily for a new job.

Don’t settle for an unsafe, unsanitary foreclosure just to get a deal. Make sure you find the right long-term home for your situation.

Final Thoughts

Using a VA loan to purchase a foreclosure can enable buyers to get a great deal on a home, even following a previous foreclosure. However, buyers need to be aware of the limitations and act quickly throughout the buying process. As long as you find a VA-eligible property and work diligently alongside your lender, you can buy a foreclosed home with your VA loan benefit.

Tip 1: Foreclosures Must Meet VA Minimum Property Requirements

All properties in consideration for VA financing must submit to a VA appraisal, which evaluates a property’s safety and livability using a list of Minimum Property Requirements (MPRs). A distressed property is not inherently in poor condition. However, borrowers should know that homes that fail to meet each MPR cant be approved for VA financing.

MPRs aim to secure well-built, economically sound homes for Veterans. Homes must be move-in ready and free of safety hazards. Some MPR requirements include:

Roof: The home’s roof must be free of any major defects
Mechanical systems: All of the home’s major systems (heating, electrical, plumbing) must be in good working order and expected to remain that way into the foreseeable future
Windows: Broken windows must be replaced or repaired
Lead-based paint: Peeling paint at any pre-1978 house is assumed to be lead-based and must be scraped and repainted

We’ve created a full list of minimum property requirements you can use in your property search!

VA Reconsideration of Value

Luckily, VA loan buyers have recourse for erroneously low appraisals. The VAs reconsideration of value option allows buyers to petition for a secondary property appraisal. A second appraisal may be granted if the buyer can show that pertinent information was not used in the initial appraisers report.

Can I Buy a Foreclosure With a VA Loan in 2023?

FAQ

What property Cannot be financed with a VA loan?

You can’t purchase or build a vacation home or a purely investment property with a VA loan. New construction is possible, but veterans can’t simply purchase a plot of land with the intent to build a home some day. You also can’t use this as a business loan. Again, the focus is on primary residences.

Can you buy an auction home with a VA loan?

If the home doesn’t sell, the lender becomes the homeowner, and they can continue to attempt to sell it. If you’re purchasing a home with a VA loan, you’re probably buying it after it didn’t sell at the public auction. However, it’s possible to purchase it at a public auction if you’re aware of it.

What is the maximum amount the VA will pay the lender after foreclosure?

With remaining entitlement, your VA home loan limit is based on the county loan limit where you live. This means that if you default on your loan, we’ll pay your lender up to 25% of the county loan limit minus the amount of your entitlement you’ve already used.

Should you buy a foreclosed home with a VA loan?

While there are advantages for those buying a property with a VA loan, there are also some pitfalls. You may meet a few hurdles while buying a foreclosed property. For example, you don’t have to worry about updates or maintenance right away with a new home. But a foreclosed home will likely come with several features that need to be fixed.

Can veterans buy a home after a foreclosure?

Assuming veterans have remaining VA loan entitlement and can meet lender credit, debt, and income requirements, they can use their VA loan to purchase another home in as little as two years after a foreclosure – far better than the seven-year waiting period associated with conventional loans. Military Homebuyers Can Buy With $0 Down Payment.

What is a VA loan foreclosure?

A VA loan foreclosure is what takes place when the underlying mortgage is backed by the VA. VA foreclosure works similarly to any mortgage foreclosure process. There are limited cases in which you could be foreclosed upon much more quickly (for example, triggering due-on sale provisions).

Can you buy a house with a VA loan?

Rocket Mortgage ® lets you get to house hunting sooner. Can You Buy A VA Foreclosure With A VA Loan? If you are an eligible service member, 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.