For many first-time homebuyers, the journey to homeownership starts with a dream — a vision of the perfect house in the right neighborhood at an affordable price. Yet, the reality of finding a home that checks all these boxes can sometimes be challenging, especially given budget constraints.
Foreclosed homes and VA Real Estate Owned (REO) properties can be a great option for Veterans and service members eligible for a VA loan on a tight budget. Lenders reclaim these homes due to a previous borrower defaulting on their loan. As these loans weren't repaid as agreed upon, foreclosed homes are typically put back on the market at a lower price to recover some of the loan amount the lender would otherwise lose.
Absolutely. However, the home must meet the VA's minimum property requirements (MPRs). MPRs are designed to ensure a home is safe and secure for eligible VA loan borrowers. Due to their comprehensive standards, MPRs can sometimes become an obstacle when considering foreclosed properties.
Foreclosed homes and VA REO properties can vary when it comes to condition, closing procedures and ability to meet VA and lender requirements. Knowing the potential benefits and drawbacks when considering a foreclosed home or VA REO property is essential.
The most upfront benefit of foreclosed homes and VA REO properties is that they are typically priced lower than their market value. Lenders take a loss when a home is foreclosed on, and the property may suffer from a lack of upkeep.
VA loan lenders are eager to recoup some of their investment and resume payments from a VA loan borrower who will maintain the property. As a result, many foreclosed homes are auctioned off with expedited closing procedures, which allows successful bidders to move in quickly.
Foreclosed homes and VA REO properties purchased with a VA loan are also eligible for all the usual VA loan benefits, which include:
Foreclosure is the result of highly challenging financial situations. Confronted with many hard decisions, homeowners facing foreclosure might neglect property maintenance, leading to degradation.
Many foreclosed homes are sold "as-is" to account for the property damage and needed repairs, which could cause a home to fall short of the MPRs' safety and livability standards.
Additionally, many foreclosed homes are sold at auctions and demand cash-only transactions, which might not sit well with VA loan lenders.
If a foreclosed home or VA REO property doesn't meet MPRs, you may still be able to purchase it with a VA vendee loan, also known as VA vendee financing. As opposed to standard VA loans, VA vendee loans are accessible to both military and non-military borrowers and are usable for purchasing primary residences and investment properties.
They also include the previously mentioned VA loan benefits, as well as:
However, these properties come with a disclaimer. As they are sold "as-is" and lack VA loan guarantees, they might not be suitable for buyers who can't undertake extensive repairs.
In conclusion, whether purchasing a foreclosed home or VA REO property with a VA loan is right for you depends primarily on your financial situation, the property condition and what your VA loan lender feels comfortable with. If you have the cash on hand to make the required repairs, purchasing a foreclosed home or REO property with a VA loan may be your route to home ownership.