How to Purchase a Foreclosed Home With a VA Home Loan (2024)

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Co-authored byRyan Baril

Last Updated: May 25, 2021References

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   Search bank websites. After a bank forecloses on a property, it tries to sell it at auction. If the auction fails, then the bank lists the home on their website as a “Real Estate Owned” (REO) property. Type the name of a bank and “REO” to see what is available.

   • It’s hard to buy a foreclosed home at auction with a VA loan. In many states, you need to have cash available within 48 hours, which won’t give you enough time to close on a loan.
   • By contrast, buying an REO property from a bank allows for a more normal closing process (usually 30 or more days).^[1]
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   Work with a real estate agent. Agents will know which foreclosures are on the market. You can find a real estate agent by looking in your phone book or searching online. Make sure to call up the agent and ask about their experience with foreclosed properties.

   • Foreclosures can be difficult transactions, and having a seasoned realtor can make a huge difference in your experience.
   • Also get an agent who is familiar with VA loans. The closing process for VA loans is a little different than for traditional loans.
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   Look online for foreclosed properties. Some websites list foreclosed properties. Zillow, for example, lets you search their listings for free. However, other websites will charge a fee to access their listings, so know this ahead of time.

   • The VA also sells foreclosed properties. You can find them by visiting the Ocwen Federal Bank FSB website: http://www.ocwen.com/reo.^[2]
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   Pay attention to price. The VA doesn’t limit how much you can borrow. However, they will limit the amount they will guarantee.^[3]

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   Read the VA property requirements. The VA will only guarantee loans for homes that meet its Minimum Property Requirements. These requirements deal mostly with big-ticket problems that could immediately affect your health or safety.^[4] Common problems include the following:

   • Roof: the roof cannot have any defects, such as holes.
   • Windows: no windows can be broken.
   • Lead-based paint: any peeling paint in a home built before 1978 should be scraped and painted over.
   • Mechanical systems: all systems should be in good working order and stay that way for the foreseeable future. This includes heating, plumbing, and electrical.
6. See Also

   A Guide for Real Estate Agents Working with Military Home Buyers and Sellers | MilitaryByOwnerFirst-Time Homebuyer Loans And Programs | BankrateHow to Use a VA Loan for Home Improvements: A Comprehensive GuideVA Loans and Investment Property

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   Make sure the home is in good condition. When you locate a foreclosure, swing by the place to check it out. You want to make sure it is in good enough condition to pass the MPR standards, otherwise you won’t qualify for a VA loan.

   • You can’t tell structural defects by standing on the sidewalk. However, you can get a general sense of the home’s condition. If it is an absolute wreck, you can cross it off your list.
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   Have the home inspected. An inspection will reveal all problems with the home, big and small.^[5] Obtain a referral to an inspector from your real estate agent. You should get the bank’s permission to have an inspector visit the property.

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   A termite inspection is required for all VA loans. Some lenders will not allow the veteran to pay for this, ask beforehand to solidify the details. If the veteran cannot pay for it, it will normally have to be paid for by the seller or one of the realtors.

   • Go over the inspection report with your real estate agent. Check whether any defects will prevent it from satisfying the VA’s standards.
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   Ask the bank if it will bring the home up to standards. Some banks might be willing to simplify the process and help you get the home up to MPR standards. Talk to your agent, who might know which banks are willing to help you out.^[6]

   • You might need to pay for the repairs before securing your VA loan, which is certainly a risk.^[7] Think carefully before deciding to do so.
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    Estimate the value of the home. You don’t want to pay too much, so analyze comparable sales with your agent, who can run a comparative market analysis. Comparable sales (called “comps”) should have sold within the past three months and be similar in size to the one you want to buy.^[8]

    • Also account for any unique features of the home, such as a swimming pool or an observatory.

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   Confirm you are eligible. Veterans must have served on active duty for a certain amount of time to be eligible for a VA loan. The length of time differs depending on whether you served during war or peacetime, as well as your reason for discharge. You can check the requirements on the VA website: https://www.benefits.va.gov/HOMELOANS/purchaseco_eligibility.asp.

   • Spouses are also eligible for VA loans in certain situations.
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   Check your credit score. There is no minimum credit score necessary to get a loan. However, lenders generally want your score to be at least 620.^[9] Obtain a copy of your credit score by using a free service or buying your score from myfico.com.

   • You can improve your score the fastest by paying off high-interest debt, such as credit card debt, and correcting inaccurate information on your credit report.
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   Gather proof of sufficient income. To qualify for a VA loan, you’ll need verified steady income. Generally, this means working full-time, which is defined as at least 30 hours a week for an employer. Self-employed income and part-time income will also qualify, but you’ll need at least two years of steady income.^[10]

   • You also need sufficient income left over after paying your debts, including your expected mortgage payment. The amount you need will depend on where you live and the number of people in your household.
   • For example, a single person living in the South must have more than $400 left over each month. This is called the “residual income.” You can find residual income requirements by talking to a lender.
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   Apply for your certificate of eligibility (COE). A COE verifies for lenders that you qualify for a VA loan. You can apply by completing VA Form 26-1880. Submit it online, through the mail, or to a lender. Provide the following information:^[11]

   • Personal information, such as name, address, date of birth, and Social Security Number.
   • Military history information, such as your service number and the branch where you served.
   • Information about any previous VA loans.
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   Submit your supporting documentation. If you’re currently serving on regular active duty, then the VA can establish your eligibility by looking at its own data. However, in some situations, you might need to present a statement of service.

   • If needed, a service statement should contain your name, Social Security Number, your date of entry, and the duration of any time lost. The letter should be on military letterhead and signed by your military command.^[12]
   • Veterans should submit a copy of their DD-214.
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   Shop around for a mortgage. The VA doesn’t actually loan you money. Instead, they guarantee that the loan will be paid back. You get the loan from a bank, direct lender, or mortgage broker. Stop into several places and talk to a professional at each. You’ll want to compare the terms, including interest rate, repayment period, prepayment penalties, and fees.^[13]

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   Get preapproved for a mortgage. You can get preapproved in person or online. Provide information on your income, debts, and assets. If you meet the bank’s lending guidelines, they will issue a letter telling you how much you can borrow. This letter is good for a limited amount of time, usually 60-90 days.^[14]

   • You can submit a copy of the letter when you submit your offer for the foreclosed home.

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   Make an offer to the bank. When you’ve settled on a fair price, make your offer to the bank. Banks tend to move slowly when selling their REO properties, so don’t expect a quick acceptance or counteroffer. The bank might need to submit your bid to a committee, which needs to sign off on it. This can take several weeks.

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   Sign a purchase agreement. After you and the bank have agreed to the purchase price, you should sign a purchase agreement. This document will lay out the conditions of the sale and the events that lead up to the closing.

   • Your purchase agreement should have a VA Option Clause. This contingency allows you to void the contract if you can’t get a VA loan.^[15]
   • Depending on where you live, you might need to hire a lawyer to draft the purchase agreement. It’s also a good idea to have a lawyer look your agreement over to make sure your rights are protected. You can ask your real estate agent to recommend a lawyer or get a referral from your nearest bar association.
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   Have the home appraised. You’ll need a VA-approved appraiser to check out the home and determine its value. The appraiser also must confirm the home is safe to live in. Your lender should select the appraiser, but you will pay the appraisal fee as part of your closing costs.^[16]

   • The appraisal will also determine whether you need to make a down payment. If your purchase price is equal to or less than the appraised value, you won’t need to make a down payment.
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   Get a title report. Make sure the title is clear. Banks usually remove judgments and liens from the property, but you should double check. Your loan officer or realtor can do this for you.^[17]

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   Sign all paperwork at your closing. Your closing should take place at an attorney’s office, escrow office, or title company. At the closing, you need to sign legal paperwork, such as the deed. You will also sign paperwork related to your VA loan, such as the mortgage and the promissory note. If you have any questions, ask. When the process is completed, you walk away with the keys—and a house payment.^[18]

   • Also pay your closing costs. Generally, you can wire the money or pay with a cashier’s check.

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