Building a new house can be very costly, and that's a fact. From materials to labors – you probably think twice if this is worth enough to pursue. If you are a veteran who wants to own a new home, maybe buying one has crossed your mind. But then you ask yourself, “Should I buy a newly constructed house or purchase a foreclosed one instead?”
So, you end up thinking about your finances. And you thought that you are financially strapped or very frugal with purchasing a new home. Now, you are looking for smart ways to buy a home without shelling out a hefty amount of dollars.
Well, the good news is, you can use a VA loan to buy a foreclosure. Yes, you read it right! You can absolutely use your VA loan when purchasing a foreclosed house. However, it is not that easy.
But don't get disheartened! The process may be complicated but tell you what – it is certainly possible.
You may ask, “Why is it difficult to buy a foreclosure with a VA loan?”
Before diving into that topic, let’s discuss the main points of the VA loan.
What Is a VA Loan and Its Benefits?
VA loan is a home loan program of the Veterans Administration guaranteed for veterans, service members, and their surviving spouses. This program provides benefits and assistance to help the eligible borrowers to build, improve, keep, and purchase a residential home.
VA offers two types of loans: the VA direct home loan and VA-backed home loan.
With VA direct loan, VA will serve as your mortgage lender. They will assist you directly with all the processes for your home loan. The Native American Direct Loan or NADL provides better terms than private lenders. As VA stated, the benefits of NADL include:
- No down payment
- No need for private mortgage insurance
- Limited closing costs
- A low-interest, 30-year fixed mortgage
- A reusable benefit – you can get more than one NADL
- The ability to borrow up to the Fannie Mae/Freddie Mac conforming loan limit
To get an NADL, you must be a Native American or a Non-Native American who married a Native American. There are also certain requirements that you should meet to be eligible. You can check the requirements here.
On the other hand, a VA-backed home loan guarantees a portion of your loan from a private lender. This will benefit you in so many ways! Some of them are:
- Less or no down payment at all.
- It provides less risk for the lender in case you defaulted your loan, thus may give you better terms.
You have other financing options to choose from based on your financial needs. There are 3 VA-backed home loan types: purchase loan, Interest Rate Reduction Refinance Loan, and cash-out refinance loan.
Conventional vs. FHA vs. VA loans
Are you feeling torn with the other mortgage loans? Then, let’s make comparisons on the benefits that each of these loans can give you. Bankrate listed the basic facts to compare the three major loan types:
Conventional Loan
- 3% minimum down payment; 20% to avoid private mortgage insurance (PMI)
- 620 minimum credit score
- No PMI upfront, but fees monthly if putting less than 20% down
- Best for borrowers with excellent/good credit
FHA Loan
- 3.5% minimum down payment
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- 580 minimum credit score with 3.5% down; 500 minimum credit score with 10% down
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- 1.75% PMI upfront, with fees yearly
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- Best for borrowers with lower credit scores or high debt-to-income ratios
VA Loan
- No minimum down payment
- No minimum credit score
- 1.25%-3.3% funding fee upfront
- Best for service members and veterans and their spouses
Conventional and FHA Loans – Would You Go for These Alternatives?
For veterans, service members, or their spouses, it's clear that the VA loan is the best choice. You don't need to be a first-time buyer of a property, plus VA loan offers highly competitive rates. You don't need to worry about having a perfect credit because the Department of Veterans Affairs supports VA loans. This guarantee gives the lenders the confidence to provide you better terms and favorable rates.
What Are the Other Benefits of VA Loan?
Generally, the primary benefit of the VA loan is to give housing assistance for eligible borrowers with most favorable terms. But hey, the VA loan guarantees not only the residential homes, but also multi-unit buildings! Yes, you can own a building using your VA loan as long as:
- You occupy one of the units.
- The property has not more than one commercial unit and four residential units.
Now that you have an overview of the VA loan and its benefits, let’s talk about foreclosure.
How and Where Can You Buy Foreclosed Homes?
Foreclosures are properties with defaulted loans. The lender takes ownership of the property, then sells it to recover the amount owed by the borrower. Typically, the lender, or the bank, will offer the foreclosed property through an auction on the county courthouses. And as what everyone knows, the highest bidder will get the property.
However, there are times that the foreclosed home fails to sell at the auction to a third party. In that case, the foreclosure will become an REO or “Real Estate Owned” property. The bank will then make the REO available through real estate listings such as MLS. Another way is the bank will get an agent that will help them to sell it.
Now, let’s go back to the question – can you buy a foreclosed home with VA loan? As mentioned above, yes. You can buy foreclosure as long as you are eligible for the VA loan.
But can you go bid a foreclosure at the auction and use your VA loan? Well, theoretically, yes. But that process will be very difficult.
Why Is It Difficult to Use VA Loan to Buy a Foreclosed Home at an Auction?
In an auction, there is a requirement that the bidder must pay in cash. If you are the bidder and the bid is accepted, you need to deliver the cash payment within 48 hours. If you fail, the property will go to the next bidder. It’s pretty impossible to close a loan within 48 hours. VA loans cannot be processed with a large amount of money with such a little time.
Is It Easier to Use a VA Loan to Buy a Foreclosure When It Becomes an REO Property?
Well, it is less complicated, but the process is not quite simple. Once a foreclosure gets listed as an REO, it becomes just like any other mortgage. Banks also often sell these foreclosures in the listings “as is”. It means that almost all of these foreclosed homes need repairs – sometimes, an extensive one.
Take note that VA loan has Minimum Property Requirements. This standard serves as the guidelines of VA for the home loan programs. The foreclosed home you are eyeing at should meet these criteria for your VA loan to get approved.
Most of the foreclosures that you find in the listings may have very affordable prices. Here is a fact. Banks are willing to sell these foreclosed homes at a lower value because they don’t want it in their books. They don’t want it because they are after lending money, not owning a property.
So, the risk here now is the repair costs that you may incur. Of course, you don’t want to spend on repairs more than the value of the property. That will be a huge loss on your part. When you are looking at a particular foreclosed home in the listing, it’s better to consider these important factors:
Condition of the house
What is the present condition of the house? Is it damaged? How much repair costs do it need to make it livable?
Location
Does the location have a safe and adequate pedestrian? Is there vehicular access from public or private street?
Neighborhood
Are there a lot of foreclosed homes in the area? What do you think about the neighborhood in general?
How Long Does It Take for VA Loans to Close?
The standard length of time for the mortgage industry for most VA loans is around 40 to 50 days. So, whether you use NADL or VA-backed loans, you can anticipate the closing between this period.
There is no specific length of time for the VA loan to close because all lenders have different time-frames. But you can inquire with your lender about their specific closing turn-times. So that you know until when you need to wait and expect your VA loan.
Why Should You Buy a Foreclosed Home Despite the Risks It Might Have?
It’s not a secret that you will incur unpredictable expenses when you buy a foreclosed home. There may be underlying damages that can be costly if repaired. Additionally, the process of purchasing a foreclosure often requires a long period of time. Some buyers may end up turning their back.
However, despite all these risks, buying a foreclosure can still be a great deal. If you are hands-on searching, then it's not impossible to find a desirable home that suits your finances and preferences. Just imagine – you can have a new home by just spending below the average cost of a house!
But the advantage doesn’t stop there. Here are some of the pros of buying a foreclosed home:
- The banks are willing to negotiate the price, down payment, closing costs, and escrow length. Remember, as mentioned earlier, the bank intends to lend money, not to own a property. That is why they want the foreclosures off their books.
- You will get a clear title of the house. You will not take any mortgages, liens, back taxes, or any obligation of the previous owner.
- There’s a likelihood that the value of the property will appreciate over time. When you make betterments in the foreclosed house, the market price won’t be the same as when you bought it. It will definitely be higher!
Can You Use Both FHA Loan and a VA Loan at The Same Time When Buying a Foreclosure?
Combining two mortgage loans to purchase a home is possible. However, not all loan types are applicable for this kind of consolidation. And for FHA Loan and VA loan – you cannot use both of these to buy a foreclosure. Why?
The Government Accounting Office made it clear in its report way back in 2012 about the consolidation of these programs. It doesn’t recommend the combination of the VA Home Loan program with other Federal housing programs such as FHA programs. In addition, it also stated:
“VA reiterated its position that while collaborating and coordinating with other housing programs could be beneficial, combining VA’s unique home loan guaranty program with other housing programs would go against the statutory intent that established an earned benefit for veterans.”
The Bottom Line
When dealing with a foreclosed home, you may feel a bit overwhelmed with all the processes required for a VA loan. But as a veteran who served the country, lenders will certainly provide you the most favorable terms that you deserve.
Additionally, VA assures to provide all veterans, service members, and their surviving spouses the world-class benefits and assistance. This is the utmost way they can give to you to honor the services you contributed to the country.
You can reach out to a VA loan expert or your lender to have a friendly VA advice for your VA loan process. They will surely be more than happy to help you with getting your ideal home.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
