Distressed properties, such as Housing and Urban Development (HUD) homes or short sales, may seem like more complicated purchases. So, when you layer a Veterans Affairs (VA) loan on top of an already unconventional purchase, it’s easy to assume the answer is just “no, don’t bother.”
But that’s not necessarily quite right. Under certain circumstances, eligible veterans and active-duty service members can use a VA loan to buy both HUD homes and short sale properties. The issue is less so whether it’s allowed and more so whether the property can hold up its end of the bargain.
In this article, we’ll explain what you need to know about buying a HUD or short sale home with a VA loan.
What Is a HUD Home?
A HUD home is a property that was originally purchased with a Federal Housing Administration (FHA) loan. When the borrower was unable to keep up with mortgage payments and defaulted, the FHA paid the outstanding balance to the lender and took ownership of the property. The U.S. Department of Housing and Urban Development (HUD) then sells those homes, typically at or slightly below market value, through a public bidding process.
Expect HUD homes to be sold as-is. That means HUD will not make repairs before the sale. For buyers using a VA loan, that detail can make or break the deal.
Can You Use a VA Loan to Buy a HUD Home?
Yes, VA loans may be able to be used to purchase a HUD home, but the home must meet the VA’s Minimum Property Requirements (MPRs) before the loan can be approved.
The VA requires that a VA appraiser evaluates every home before finalizing the loan. That appraiser is looking for two things: (1) that the purchase price is reasonable for the market, and (2) that the property is safe, structurally sound, and sanitary. Safety, soundness, and sanitation are the main pillars of every VA appraisal.
HUD homes, because they’ve been through foreclosure and are sold without repairs, sometimes have condition issues that fall short of those standards. Common examples include:
- Damaged or aging roofing that won’t keep out moisture
- Non-functioning heating, electrical, or plumbing systems
- Structural concerns such as foundation cracks
- Evidence of water damage or pest infestation
If the VA appraiser identifies issues that don’t meet the MPRs, those repairs must generally be completed before the loan can close. That doesn’t mean it’s impossible to buy a HUD home with a VA loan, but it does mean you need to go in with realistic expectations.
A HUD home in good condition can potentially work with a VA loan. One with significant deferred maintenance is likely to run into hurdles.
The VA Appraisal vs. a Home Inspection
As a quick aside, it’s worth calling out the difference between a VA appraisal and a home inspection.
A VA appraisal is required. It evaluates the home’s value and confirms it meets the VA’s minimum standards. A home inspection is not required by the VA, but it is strongly recommended, especially for a property like a HUD home.
A home inspector takes a much deeper look at the physical condition of the home: the foundation, roof, attic, major appliances, HVAC, plumbing, and electrical systems. A VA appraiser is not required to test systems or climb into attic spaces. They are checking habitability standards, not performing a full diagnostic.
For a HUD home purchase, a home inspection is especially valuable because it can reveal issues the appraiser might not catch. Knowing the full picture before you commit might save you from an expensive surprise after closing.
What Is a Short Sale?
A short sale is a different situation from a HUD home. In a short sale, the homeowner still owns the property but owes more on their mortgage than the home is currently worth. Facing financial hardship, they ask their lender to approve a sale at a lower price than what’s owed, agreeing to accept the shortfall rather than push the borrower into foreclosure.
Unlike a HUD home, a short sale involves a private seller (often still living in the home) and requires approval from the seller’s lender before the transaction can close. This adds steps, paperwork, and time to the process.
Can You Use a VA Loan to Buy a Short Sale Home?
Generally speaking, yes. VA guidelines do not prohibit the purchase of a short sale home. But similar to a HUD home, there are things that can complicate the process.
1. The property still has to pass a VA appraisal
The same Minimum Property Requirements apply. You can learn more about the MPRs and VA appraisal process here. Short sale homes are sometimes in better shape than foreclosures since the seller is typically still occupying the home, but condition varies. If the VA appraisal turns up issues, repairs will need to be addressed before the loan can close.
2. The timeline can be longer
Short sales require approval from the seller’s lender, not just the seller. That process can take weeks or even months. Your VA loan application will go through its normal steps, but the overall timeline from offer to close might be extended compared to a traditional purchase. If there are multiple lienholders on the property, each one needs to sign off, adding additional layers of complexity.
3. Not all lenders finance short sales
While the VA allows it, individual lenders may have their own guidelines around short sale transactions. Working with a lender experienced in both VA loans and distressed property purchases is an important step before you make an offer.
Key Takeaways
- VA loans can potentially be used to buy both HUD homes and short sale properties, but the home must meet the VA’s Minimum Property Requirements in either case.
- HUD homes are sold as-is, which means any condition issues flagged by the VA appraisal will likely need to be resolved by the buyer, not HUD.
- Short sales often involve extra steps and a longer timeline because the seller’s lender must approve the transaction.
- A VA appraisal is not the same as a home inspection. Getting an independent home inspection is strongly recommended to understand the full condition of the home.
Final Thoughts
HUD homes and short sales can sometimes be a good opportunity for VA loan-eligible homebuyers who are willing to do a bit more homework.
If a home passes the VA’s MPRs and the transaction structure works for your timeline, using your VA loan home financing to buy a below-market property could be a way into homeownership. If the condition is uncertain, getting a home inspection before going too deep into the process may save you time, money, and frustration.
The path to your first home doesn’t have to be conventional. But it does need to be informed. If you’re exploring your options as an eligible veteran or active-duty service member, speaking with a loan officer experienced in Veterans Affairs (VA) home loans is a strong first step.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
