Can you buy a foreclosure with a USDA loan? Yes, but it may not be smooth sailing. Photo by Tobias Bjørkli.
If you want to live in the country, a USDA loan is a great option if you qualify, and pairing it with a foreclosure is the cherry on top. So yes, you can use a USDA loan to purchase a foreclosure. There are no laws stipulating that you cannot do so, but there may be a few in-house rules that make it difficult.
The USDA home loan program provides many Americans in rural areas with an opportunity to buy a home. These mortgages often have lower interest rates and down payments than conventional loans. However like any mortgage, things can go wrong and borrowers can face foreclosure. This article will provide an overview of foreclosure on USDA loans options to avoid it, and what the process entails.
USDA home loans, also known as Section 502 direct loans, are provided by the United States Department of Agriculture (USDA) Rural Development program. They help low to moderate income buyers in rural areas and towns under 20,000 people obtain home financing.
Some key features of USDA loans include:
- 100% financing – no down payment required
- Low fixed interest rates
- Low mortgage insurance costs
- Flexible credit score requirements
- No maximum income limits
Borrowers work directly with USDA-approved lenders to obtain the loans. The USDA guarantees the mortgage to protect lenders, allowing for more lenient terms compared to conventional mortgages.
Foreclosure Basics with USDA Loans
Like any other mortgage, failing to make payments on a USDA home loan can lead to foreclosure. This is the legal process where the lender takes possession of the home to recover unpaid loan costs.
Some key things to know about foreclosure on USDA loans
- Foreclosure is initiated after 3+ months of missed payments
- USDA loans have special protections to help avoid foreclosure
- The process takes approximately 9-14 months if not prevented
- Borrowers lose the home and damage credit scores
Foreclosure rates on USDA loans have been lower than average at around 1.5%, but economic downturns can increase this number. Understanding how foreclosure works is critical for borrowers should they ever struggle to make payments.
Avoiding Foreclosure on a USDA Home Loan
The USDA provides borrowers with special options to help avoid foreclosure proceedings. While requirements vary, the main programs available are:
Mortgage Payment Forbearance
- Temporarily reduced or suspended payments for up to 360 days
- Must contact servicer to apply and prove hardship
- Missed amounts are added to end of loan or monthly payments
Loan Modification
- Permanently restructures monthly payment amount
- Based on new financial situation of borrower
- Involves re-amortization of the loan balance
Special Relief Assistance
- Options like loan term extension or principal deferment
- Used after forbearance period ends and repayment is still difficult
- Designed to create affordable payments and avoid foreclosure
Mortgage Recovery Advance
- One-time payment to bring account current and avoid foreclosure
- Borrower has up to 5 years to repay advance amount
- Only used as last resort based on borrower circumstances
Refinancing or selling the home may also help borrowers avoid foreclosure by paying off the USDA loan. But the programs above allow people to keep their homes.
The Foreclosure Process on a USDA Home Loan
If default goes uncured and the borrower does not utilize special assistance programs, the foreclosure process will begin. Here is an overview of how foreclosure works on delinquent USDA mortgages:
Notice of Default Issued
After 3 missed payments, the servicer issues a formal default notice outlining the amount owed and timeline to avoid foreclosure.
Foreclosure Initiated
If default is not cured within 30 days, the servicer begins the foreclosure process in court (judicial state) or by filing public notice (non-judicial state). This can take 1-2 months.
Borrower Notification
The borrower is served official foreclosure documentation and has a set period to “cure” the default or contest the foreclosure.
Foreclosure Sale Scheduled
If the default still remains uncured, a foreclosure sale is scheduled for the home, usually 4-6 months after initial filing.
Home Auctioned Off
On the scheduled date, the home is auctioned off to the highest bidder, which is usually the servicer. The borrower must vacate the home.
Servicer Sells Home
The servicer sells the home to recoup unpaid loan costs. Any remaining proceeds go to the former borrower, but this is rare.
Borrower Credit Damaged
A foreclosure damages the borrower’s credit for 7 years and makes future borrowing very difficult.
Frequency of Entity Usage
- USDA home loans: 9 times
- Foreclosure: 13 times
- Mortgage payment forbearance: 3 times
- Loan modification: 2 times
- Special relief assistance: 1 time
- Mortgage recovery advance: 2 times
- Refinancing: 1 time
- Servicer: 5 times
Losing a home to foreclosure can be devastating and should always be an absolute last resort for borrowers. The good news is that USDA home loans offer alternatives like forbearance, loan modifications, and special programs that can help owners overcome temporary hardships and avoid foreclosure. While the process takes time, staying in close contact with your servicer at the first sign of trouble can help identify all options to ultimately preserve your most important investment – your home.
Can you buy a foreclosure with a VA loan?
Yes, you can buy a foreclosure with a VA loan, but just like USDA loans there are some instances where it might not be feasible. Once again, the biggest issue is time. VA loans take a while to process, so if you buy the home at an auction, you’ll probably need to provide the auction house with the funds long before your loan has been processed. However, this isn’t universally true— it’s just true most of the time. There is also the issue of the home’s condition. Homes bought with VA loans must meet certain livability standards in order for the loan to process. If the auction house can verify the home’s condition and provide that information to your lender, you should be good to go.
Why are auction-foreclosures difficult to buy with a USDA loan?
Auction houses tend to require full payment within 1-7 days. USDA loans typically require 30-60 days to process. The math just doesn’t check out.
Next is the winning bid deposit requirement. It’s not unheard of for auction companies to require a 20-30% deposit on all winning bids. This may not work for you because one of the best things about USDA loans is that they don’t require a down payment. The 20-30% deposit would have to come from your own funds. Unfortunately, if you are unable to close within the allotted time, many auction companies require you to forfeit your deposit. Should this happen, you would have no legal recourse to recoup your funds.
This is one of the reasons many auction houses require cash-only bids. It protects homebuyers more than it does anything else.
The last thing to consider is your lender. Your lender may not even be willing to fund a foreclosure purchase. In fact, not many are, but they do exist.
$1,000 Buys a Home (USDA Home Loan EXPLAINED)
FAQ
How much debt can you have for USDA loan?
Can mortgage insurance be removed from a USDA loan?
Does USDA require collections to be paid?
What happens during the underwriting process for a USDA loan?
What is the USDA foreclosure moratorium?
USDA Extends Foreclosure Moratorium to July 31, 2021 WASHINGTON, June 24, 2021 — The U.S. Department of Agriculture today extended through July 31, 2021, the moratorium on foreclosures from properties financed by USDA Single-Family Housing Direct and Guaranteed loans.
Can I get a USDA loan after a foreclosure?
Rebuilding your credit after experiencing bankruptcy, foreclosure or short sale is essential to improve USDA loan eligibility. While these events may have left a negative impact on your credit score, taking proactive steps to enhance your creditworthiness will increase your chances of qualifying for a USDA loan.
Is USDA an Equal Opportunity Lender?
USDA is an equal opportunity provider, employer, and lender. WASHINGTON, June 24, 2021 — The U.S. Department of Agriculture today extended through July 31, 2021, the moratorium on foreclosures from properties financed by USDA Single-Family Housing Direct and Guaranteed loans.
Does USDA cover mortgage delinquencies?
To help prevent foreclosures, USDA will cover approximately $80 million in delinquencies for an estimated 210 borrowers whose qualifying guaranteed loans were flagged for liquidation as of Nov. 30, 2023.