Buying a Foreclosed Home with a VA Loan

For military families and veterans, the VA home loan program is one of the most valuable benefits available. Offering little to no down payment requirements, competitive interest rates, and flexible credit guidelines, a VA home loan is an excellent option for buying a home.

But what if you’re interested in buying a foreclosure? Buying a foreclosed home with a VA home loan is indeed possible. Here’s what you need to know.

Understanding Foreclosures and the VA Loan

A foreclosed property is one that has been reclaimed by the lender, bank, or government agency (such as HUD or the VA) after a previous owner defaulted on their mortgage.

There are usually three main stages during the foreclosure process:

Pre-foreclosure: A delinquent homeowner receives notice the lender intends to foreclose unless the debt is settled.

Auction: The lender repossesses the property and offers it at auction to the highest bidder, with minimum bids usually starting at the remaining balance of the mortgage.

REO (Real Estate Owned): The home did not sell at auction or the lender (or agency) elected not to offer the home at auction and now owns the home. 

Auction properties are sold to the highest bidder and move very quickly, as the buyer is required to pay cash, usually on the same business day. Auction properties will not be a viable option for those looking to use a VA loan. However, properties that are now owned by the lender or agency as REOs could be. 

Foreclosures are often sold at a discounted price, making them appealing to buyers looking for a good deal. However, because foreclosed properties are typically sold as-is (meaning the seller will not make any repairs or correct any issues discovered upon inspection), these homes may have deferred maintenance, needed repairs, or even structural issues. 

A VA loan can be used to buy foreclosures, but in order to qualify for the loan, the property must meet VA Minimum Property Requirements (MPRs) to ensure the home is safe, structurally sound, and livable. 

Minimum Property Requirements (MPRs)

Minimum Property Requirements (MPRs) are in place to protect the interests of veterans and borrowers, lenders, servicing agencies, and the VA. 

Some common MPRs include:

• A functional heating, cooling, and electrical system.
• Access to utilities and hot water.
• A structurally sound roof and foundation.
• Safe and adequate plumbing.
• No major wood rot, termite or insect infestation, mold, or decay.
• Proper drainage around the home to prevent flooding.

Every VA loan requires a VA appraisal which determines not only the market value of the home, but assesses whether the home meets the VA’s MPR standards. These standards are in place to help protect a borrower from purchasing a home that is unsafe or identifying a home that requires extensive repairs. If the property fails a VA appraisal inspection, it will need repairs before a VA loan can be approved. 

This can be a major hurdle for buyers hoping to use a VA loan alone, which is where a VA Renovation Loan could be an option to close the deal. 

The VA Renovation Loan Option for Fixer-Uppers 

If the foreclosure you’re interested in needs repairs to meet VA standards or has failed the VA appraisal due to identified MPRs, the VA Renovation Loan, also known as a VA Rehab Loan, may be a financing option. This loan allows borrowers to finance both the home purchase and necessary repairs under one VA loan. 

Photo by sturti from Getty Images Signature via Canva.com

How a VA Renovation Loan Works 

• The loan amount is based on the after-repair value (ARV) of the home.
• A VA-approved contractor must complete repairs. DIY work is not allowed.
• The lender holds repair funds in escrow and releases them as work is completed.
• Generally, repairs must be completed with 120 to 180 days of closing.
• After you’ve gathered bids from approved contractors, a VA appraiser will review your proposal. The after-repair value of the home must be equal to or less than the total cost of buying the property. 

The total amount you can finance hinges on the estimated after-repair value of the home or the projected market value of the home once repairs are finished. A renovation loan requires that the home must be your intended primary residence once repairs are complete (no fixing and flipping), the renovations need to improve the home’s safety, use, and livability (not just cosmetic value), and contractors and builders must be a registered builder with

TIP: Find a list of VA-Registered Builders through the VA’s Home Loan Guaranty Program (LGY) Hub.

The biggest challenge is finding a lender that offers a VA Renovation Loan. There are actually quite a few reasons that a lender may be willing to work with you to develop a viable VA loan package, even if repairs are needed. 

Why Are Banks Motivated to Offload Foreclosed Homes at a Discount? 

Lenders generally do not want to hold on to foreclosed properties for a number of reasons, as their primary business is lending, not directly managing or selling real estate. And this is where opportunity can arise. 

Foreclosed Homes Are a Financial Burden 

Non-performing assset: A foreclosed home doesn’t generate income for the lender, specifically in the form of interest payments received over time. This reduces the flow of capital that could be used for new loans.

Property taxes and maintenance costs: Without a homeowner footing these bills, the responsibility now falls on the lender to cover property taxes, insurance, utilities, and any maintenance costs (such as lawn care, winterization, or security), until the home is sold.

Depreciating Value Over Time 

Deterioration: The longer a home sits vacant, the more likely it is to deteriorate, especially if it's not maintained, cleaned, and cared for.

Vandalism, theft, and squatters: Unoccupied properties are prone to vandalism, susceptible to squatters, and risk theft or damage of appliances, flooring, HVAC units, wiring, or plumbing.

Change in market conditions: Market conditions swing quickly, and if prices decline in a market, the bank risks selling the property for less and less as time passes in a troubled market. 

Pressure From Regulators and Investors

If a bank is holding too many foreclosed homes, it will eventually face regulatory scrutiny, particularly if the bank is a publicly traded company. Foreclosures directly impact cash flow, as they are not generating revenue through interest payments.

Shareholders and investors quickly note outstanding risks, and decreasing cash flow tops the list. A lender with decreasing cash flow and the inability to redeploy their capital, and with assets tied up as foreclosures, must find a way to recover financially or eventually face restructuring, bankruptcy, or insolvency. 

Foreclosures are often sold at a discount because lenders prioritize recovering their capital and cash flows, both to preserve the asset’s current condition and redeploy capital into new loans, which bring in new cash flow. The goal is to liquidate the property efficiently, rather than holding onto risky properties with the hope of a higher price later.

How to Find Foreclosed Homes for Sale

Photo by Fizkes from Getty Images via Canva.com

Real Estate Agents

Lenders often turn to real estate agents to help find buyers for a distressed property, and foreclosures are frequently listed in MLS and popular real estate search engines. Some agents also specialize in foreclosures and can help streamline the process if you discover a property of interest.

VA-Owned Foreclosures

The VA sells foreclosed properties that already meet Minimum Property Requirements (MPRs), and are marketed for sale through contracted property management services. 

The HUD Homestore and HUD Good Neighbor Next Door Program 

The U.S. Department of Housing and Development (HUD) offers two key avenues to search for foreclosures. A HUD-owned home is a property that HUD acquires after a foreclosure on an FHA-insured mortgage, and the HUD Homestore is the platform where all acquired homes are listed for sale.

The HUD Good Neighbor Next Door program is an initiative within HUD that offers significant discounts to specifically qualified applicants, such as first-responders, teachers, police officers, and military. In return, an eligible buyer must commit to live in the property for 36 months as their principal residence. However there is a clemency clause for active-duty military members if PCS orders arise.

Considerations Before Buying a Foreclosed Home with a VA Loan

Using a VA loan to buy a foreclosure can be a great way to finance your next home, but it can come with challenges.

Set yourself up for success by:

• Identifying an experienced lender and agent well-versed in VA loans and foreclosures.
• Getting pre-approved before searching for homes so that you can move quickly with an offer and have a solid grasp of your affordability budget.
• Being flexible and prepared for a longer closing process, particularly if additional repairs are needed with a VA Renovation Loan. 

A foreclosure can be a great investment, but doing your homework ahead of time will help you avoid unexpected surprises and make the process go smoother. With the right strategy and mindset, you can take advantage of your VA benefits and find a great deal on a home! 

If you’re a military member interested in learning more about the home buying process, don’t miss our free guides for home buyers.