A foreclosure occurs when a homeowner fails to make their monthly mortgage payments on time, leading the lender to repossess the home. Once in the lenders possession, they usually aim to resell the property at a lower price to quickly recover their investment. For potential buyers, this can offer a compelling opportunity to get more value for their money.
But if youre a rural homebuyer, you might be wondering, “Is it possible to buy a foreclosed property using a USDA loan?”
A short sale occurs when a borrower’s lender agrees to allow the sale of a property for less than the amount owed on the mortgage loan For rural homebuyers who utilize United States Department of Agriculture (USDA) loans, short sales present unique considerations due to program regulations This comprehensive guide examines everything you need to know about completing a USDA loan short sale.
Overview of USDA Loan Short Sales
USDA home loans serve low-to-moderate income borrowers in eligible rural locations across America. These government-backed mortgages feature 100% financing and flexible credit requirements to promote affordable homeownership.
If a borrower falls behind on their USDA mortgage payments, selling the home through a short sale may help them avoid foreclosure. With a short sale, the lender accepts less than the outstanding loan balance upon sale of the property. This path allows the homeowner to transition out of the home smoothly while minimizing damage to their credit.
For USDA loans, short sale policies aim to minimize losses for the government while providing options for struggling borrowers. Navigating this complex process requires careful adherence to USDA regulations and coordination between multiple parties.
USDA Short Sale Requirements
To complete a short sale on a USDA-financed property, the borrower and their servicing lender must take specific steps aligned with agency guidelines. Key requirements include:
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Obtain lender approval – The servicer must agree that a short sale makes the most financial sense before initiating the process
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Receive an appraisal – An appraisal determines current market value to inform the list price and minimum acceptable sale proceeds.
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List below market value – The home must be listed and sold for under market value per the appraisal.
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Allow inspections – The property must be accessible to buyers to perform inspections uncovering any issues.
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Review all offers – The servicer will assess all purchase offers and provide approval or a counteroffer.
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Pay subordinate liens – Proceeds must cover paying off any secondary loans or liens on the property.
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Settle remaining mortgage debt – Any deficit between sale proceeds and the USDA mortgage balance will require further action.
Meeting these stipulations ensures the short sale aligns with the USDA’s expectations.
The USDA Short Sale Process Step-by-Step
Completing a short sale on a USDA home loan involves careful coordination between the borrower, real estate agent, buyer and mortgage servicer. Here are the key steps:
1. Assess eligibility for a short sale – The servicer reviews the loan status, area home values and borrower details to evaluate short sale candidacy.
2. Obtain approval to proceed – The servicer issues initial consent for the borrower to list the property at fair market value or below.
3. Order an appraisal – An appraiser will visit the home and provide an assessment of current market value.
4. Determine list price and minimum sale proceeds – Using the appraisal, the lender will set parameters for the listing price and minimum acceptable sale proceeds.
5. Market and list the property – The borrower and their agent begin advertising the home for sale at an acceptable price.
6. Review and respond to offers – When an offer is received, the servicer will provide approval or request modifications to align with guidelines.
7. Finalize sale and receive proceeds – Once an offer is accepted, the real estate transaction proceeds like normal, producing the sale proceeds.
8. Pay off subordinate liens – Any secondary loans or liens against the property must be satisfied at closing.
9. Settle remaining USDA mortgage debt – If sale proceeds don’t cover the full mortgage balance, the deficiency requires further reconciliation.
With careful execution, this process allows for a short sale that meets USDA requirements.
How to Qualify for a New USDA Loan After a Short Sale
Following a short sale, the original USDA borrower must wait a designated period before pursuing a new USDA mortgage for their next home. Specific guidelines include:
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3 year waiting period – Borrowers generally must wait 3 years from the short sale’s closing date before reapplying.
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Credit counseling – Completing 6 months of housing counseling is required to demonstrate repaired finances.
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Reestablished credit – New positive tradelines and improved credit scores make approval more feasible.
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Document circumstances – Evidence is needed to explain the situation leading to the short sale.
Meeting these benchmarks — combined with sound finances — sets the stage for USDA approval after a short sale. An experienced lender can further advise you on requalification.
Alternatives to a USDA Loan Short Sale
Beyond a short sale, a distressed USDA borrower may also consider these alternatives:
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Loan modification – Adjusting loan terms through an official workout plan makes payments more affordable.
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Special forbearance – Temporary hardship programs provide reduced or suspended payments for several months.
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Partial claim – The USDA provides an interest-free second mortgage to bring the account current.
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Deed in lieu of foreclosure – This transfers property ownership to the servicer instead of foreclosing.
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Voluntary liquidation – Selling via a real estate agent yields maximum sale proceeds.
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Foreclosure – Failure to pursue other options can lead to forced foreclosure sale.
Thoroughly discussing all choices with the servicer is advisable before deciding how to proceed.
Finding the Right USDA Lender for a Short Sale
Connecting with an engaged, supportive lender vastly simplifies executing a USDA loan short sale. The ideal partner will:
- Offer clear guidance on meeting USDA short sale requirements
- Efficiently evaluate and respond to purchase offers
- Set realistic expectations throughout the process
- Treat you with compassion and respect
Neighbors Bank’s USDA mortgage specialists bring this high standard of care and service on every loan. Our hands-on approach strives to achieve the optimal outcome for the borrower and their unique situation.
What Happens After a USDA Mortgage Short Sale?
Closing on a short sale provides immediate financial relief through relinquishing the burdensome mortgage debt. However, it also brings long-term consequences to bear.
The most pressing post-short sale matter is resolving any remaining mortgage deficiency not covered by the sale proceeds. Options may include forbearance, repayment plans, or debt settlement.
Additionally, the short sale will severely harm credit scores and make obtaining financing more problematic. Expect the event to remain on your credit history for up to 7 years.
With careful planning, consumers can overcome these hurdles and work toward restoring their finances. Patience and diligently rebuilding credit are key principles for reestablishing stability.
Partner With Neighbors Bank for Your USDA Loan Short Sale
As a leading USDA lender, Neighbors Bank offers specialized guidance and support for completing short sales on government-backed mortgages. Our compassionate team focuses on finding the optimal solution for each unique scenario.
To discuss your specific situation and options, request pre-approval online or call 1-833-514-4190. Our USDA experts will help you navigate the short sale process with ease.
How to Buy a USDA-Backed Foreclosure
If youre considering purchasing a foreclosed property with a USDA loan, here are some factors you should consider:
Home search: The first step in securing a foreclosed property with a USDA loan is the home search. Bank websites, local newspapers or experienced real estate agents are great starting points.
Property eligibility: The foreclosed home must still satisfy the USDA minimum property requirements and be located in a designated rural area. Property listings will also often designate their acceptable methods of purchase, so keep an eye out for those deemed eligible for USDA financing.
Type of foreclosure: There are various types of foreclosures to consider when deciding which property is best for your unique circumstances.
Types of Foreclosure Sales
There are four distinct types of foreclosure sales to be aware of when searching for a foreclosed property for USDA financing:
| Type of Foreclosure Sale | Characteristics |
|---|---|
| Pre-foreclosure | The lender has notified the borrower of default on their mortgage but the property has not yet been auctioned for sale. |
| Short sale | The lender has agreed to “sell the property short” and list the home for less than the remaining mortgage balance. |
| Sheriffs sale auction | An auction occurring after the lender has notified the borrower of default on their loan and given them a grace period to make up missed mortgage payments. |
| Bank-owned properties | If a foreclosed home does not sell at auction, it returns to the bank as a real estate-owned property. |
In the pre-foreclosure phase, the original homeowner still legally possesses the property but has received a notice of default from their mortgage lender. This situation presents an opportunity for USDA borrowers who may consider purchasing the home directly from the original owner. To navigate these types of foreclosure sales successfully, it’s helpful to have the guidance of an experienced realtor who’s familiar with the local housing inventory.
When a property is listed for short sale, the lender has agreed to sell the home for less than the original borrower’s remaining loan amount.
If you’re considering purchasing a short sale property, you may run into obstacles during the home inspection or appraisal processes. Lenders or banks are often unwilling to complete necessary repairs themselves, resulting in less flexibility for the new buyer. Additionally, sellers may be unwilling to renegotiate the purchase price of the property to consider necessary repairs.
Also known as a trustee sale, a sheriffs sale auction is a public event where foreclosed properties are auctioned off to help lenders quickly recover earnings from defaulted mortgages. These auctions typically take place on the steps of the citys courthouse and are overseen by local law enforcement.
You can easily find information about these auctions by searching online or in local newspapers. However, in most cases, USDA borrowers won’t be able to purchase foreclosed properties during a sheriff’s sale auction. These properties are often sold “as-is” and do not allow for the mandatory USDA appraisal, limiting their availability for USDA financing.
When a home doesnt sell during its public auction, the bank assumes ownership of the property. Bank-owned properties are generally listed through local realtors, making them more accessible to potential buyers.
Similar to properties in sheriff’s sale auctions, bank-owned foreclosures are often sold as-is. However, they are generally a more suitable choice for USDA borrowers because they do allow for home appraisals, allowing buyers to meet the USDA loan requirements.
USDA Short Sales Done Right
FAQ
Can you do a 2 1 buydown on USDA?
Why would an USDA loan get denied?
Can my boyfriend live with me if I have an USDA loan?
What is the lowest credit score for a USDA loan?
Do you qualify for a USDA loan if you have a foreclosure?
USDA loan applicants in these situations may qualify for a credit exception if the foreclosure or short sale was related to a filed legal separation or divorce, where the property was given to the other party. To be eligible, the applicant must provide documentation that the loan had been paid prior to the legal separation.
How long after a foreclosure can I get a USDA loan?
After a foreclosure or short sale, applicants must wait three years before qualifying for a USDA loan without a credit exception. CAIVRS stands for Credit Alert Verification Reporting System and serves as a database of individuals who have defaulted on federal obligations. Lenders will verify your status using CAIVRS when you apply for a USDA loan.
How do you sell a house with a USDA loan?
First, the most common way is to negotiate your contract to have the home seller pay your closing cost. USDA Rural Development will permit the seller to pay up to 6% of the buyer’s USDA closing costs and prepaid escrow items. Another option is to roll your closing into your loan given the appraised value is high enough to support it.
Can I apply for USDA Rural Housing If I have a foreclosure?
USDA Rural Housing has other restrictions (set waiting periods) for applicants who have any past bankruptcy, foreclosure, short sales, or other serious financial hardships. Mortgage qualifying requirements have changed dramatically over recent years. Contact us today for the latest USDA approval requirements.