Can You Use a VA Loan to Buy a Foreclosure?

Foreclosures can be attractive options for cost-conscious veteran homebuyers, as they typically sell below market prices. When paired with the benefits of a Veterans Affairs (VA) loan, a foreclosed home has the potential to be a bargain.  

However, that pairing can prove to be somewhat tricky. Though you can use your VA loan to buy a foreclosure, the home must first meet the Minimum Property Requirements (MPRs) set by the VA, in addition to other standard eligibility requirements, before the loan can close. As you will see, that can be the main stumbling block in these sorts of deals.  

In this article, we will explain how a VA loan can be used to buy a foreclosed property, as well as some of the drawbacks associated with this approach.

How VA Loans Work with Foreclosed Properties

While you can use your VA loan to buy a distressed property as you would a normal home, you are likelier to run into issues that can complicate or elongate your mortgage process. As you may know, foreclosed homes fall under the ownership of their associated lender, most commonly a bank.  

Oftentimes you might find that the bank is not as accommodating of the VA process as other sellers. Because these homes are usually selling under market value, banks tend to sell them “as-is.” That means they are unlikely to pay for repairs necessitated by the VA’s MPRs. 

Given that distressed properties are generally coming from owners who’ve experienced financial difficulties, a lengthy list of critical repairs is not uncommon. Now, what exactly does the VA require of a property, and how do they determine whether it has met their criteria?

VA Appraisal Guidelines and Minimum Property Requirements

The VA upholds firm property standards to ensure that the home you purchase is a safe, sound, and sanitary place for you and your loved ones. Although those requirements are important, they can at times complicate your home search—even more so when searching for foreclosures.  

Before you buy a home, the VA must appraise it to ensure the loan amount is aligned with the true market value and the home is livable. They send VA-certified appraisers to make those assessments. Note that this appraisal process is not the same as a home inspection, though they may find similar issues (non-functioning HVAC, exposed wiring, roof damage, etc.). 

The appraiser uses the VA’s MPRs to determine whether a home is eligible to be bought with a VA loan. You can find the full list of Minimum Property Requirements here. That list includes the following key requirements:  

• The property is residential and would appeal to most buyers. 

• The roof cannot have visible defects from the inside (The appraiser is not required to get on the roof to complete their assessment).  

• Major mechanical systems (such as heating, electrical and plumbing) are in good working order. The appraiser will not test these but rather note if they seem safe to use.  

• Broken windows must be fixed or replaced. 

• The property cannot have lead-based paint. If a home was built before 1978, it may be assumed to have lead-based paints. Therefore, any peeling paint must be scraped and repainted. 

• The property is an appropriate size to accommodate normal living needs. 

• The property is free of pests, fungus and dry rot. 

• There is a continuous supply of potable water, as well as sanitary sewage disposal.  

• All-weather public or private streets are accessible from the home.  

• Attics and/or crawl spaces are accessible and properly ventilated.

Renovation Options: Can You Finance Repairs?

Both the buyer and seller can finance repairs to meet VA appraisal guidelines, but oftentimes, you, the buyer, will need to finance those out of pocket. Of course, it would be worth your while to ask the seller to fund these first, but that is not especially likely to work out for a foreclosure.  

Still, financing repairs would allow you an opportunity to move forward with your desired home purchase despite MPR issues. Given that the cost of a foreclosure is already relatively depressed, this could still keep the home in your price range. Here are some of the options available to finance repairs on a foreclosed home.

Buyer Financing

If you are able to pay for the VA appraisal repairs, your lender may ask you to sign a “hold harmless” agreement. This protects the lender and seller if, for example, you back out of the process, as you would be initiating these repairs before closing the loan.  

Borrowers who already own a home may be able to use their home equity to open some funds for repairs. A Home Equity Line of Credit (HELOC) or VA Cash-Out Refinance could help you here, but before taking that step, ensure it makes sense for your financial situation.  

Sometimes, you can put off repairs until after the loan closes through a VA Escrow Holdback. In this scenario, the buyer would need to set aside the funds for repairs—usually around 1.5 times the estimated cost of repairs—in an escrow account. However, this option would not likely be available for major issues like electrical work.

FHA 203(k) Loan or VA Renovation Loan?

If these options don’t seem likely to pan out for you, you can also consider financing outside of your VA benefits. The Federal Housing Administration (FHA) offers a 203(k) loan that can be used to finance both your mortgage and major or minor repairs in one loan. However, this would require a down payment, mortgage insurance, and the use of FHA-approved contractors.  

Alternatively, you might find luck getting a VA Renovation Loan. Much like the FHA 203(k) loan, this option finances both the purchase and renovations of the home. Unlike the FHA 203(k) loan, the VA Renovation Loan allows eligible veterans to avoid a down payment and private mortgage insurance (PMI). The downsides to this option are that it is still rare among lenders, requires the use of VA-approved contractors, and only covers non-structural repairs.

Pros and Cons of Buying a Foreclosed Home with a VA Loan

As you can see, buying a foreclosed home with a VA loan can be complicated, but under the right circumstances, it can also be a great opportunity. Here are a few pros and cons to consider:

Pros

• No down payment 

• No private mortgage insurance (PMI) 

• You may find competitive interest rates on your VA loan. 

• Potential for lower home prices due to the foreclosure, which can allow you to build equity more quickly 

• VA appraisals can steer you away from buying a deeply flawed home. 

Cons

• It can be hard to find foreclosures that meet VA MPRs, as many are sold “as-is.” 

• Sellers (often banks) may not agree to pay for repairs, which can either tank the deal or force you to fund renovations.  

• Closing times can extend longer than typical home buying processes. 

• You may face competition from cash buyers and investors.  

• This cannot be an investment property. VA loans require the buyer to use the property as their primary residence. 

Is Buying a Foreclosed Home with a VA Loan Worth It?

Veterans have the option to buy a foreclosed home with a VA loan if the property meets the VA’s MPRs, but that doesn’t necessarily mean they should. As we’ve explained in this article, it can be difficult for the VA to approve distressed properties, often due to the agency’s MPRs. Additionally, banks can be more challenging to work with than individual sellers for buyers using VA loans.  

These factors can complicate and drag out your home search. However, pairing your VA loan with the generally lower cost of a foreclosure has the potential to save you a fair amount of money. Depending on your situation, you may even be able to finance repairs to your preferred foreclosed property.  

If you pursue this homebuying strategy, consider working with a lender and real estate agent experienced in the VA loan process. Buying a foreclosed home with your VA loan can be difficult but worthwhile, and the right lender can help you make your hard-earned VA benefits work for you.