There were some areas throughout the United States that didn’t really participate as much in the housing debacle. No state was left completely untouched as unemployment rates and job losses took no prisoners. Home values first topped out then plummeted so hard and so fast that soon the number of foreclosed properties was in the millions. Some areas were affected more than others and there are still foreclosed properties that are priced below market, but how can you position yourself to use a VA loan to purchase a foreclosure?
The Foreclosure Process
Lenders are required to follow a specific procedure when taking back a home due to non-payment. In addition to the lender process individual states also have a role making sure lenders follow the procedures as required by law. States are either judicial or non-judicial as it relates to foreclosures. A judicial foreclosure state is a state that requires a lender to sue the borrower in court and make its case to a judge who then determines that the lender does indeed have a right to foreclose on the subject property. Non-judicial foreclosure states do not require a court setting. In either case, the lender can foreclose when three payments in a row are missed.
When the first payment is missed, the lender doesn’t start to be worried until the latter part of the month. When the borrower misses two payments in a row, the lender is required to file a legal, public notice called a Notice of Default, or NOD. The NOD is sent via certified mail to the property owner with an amount needed to bring the mortgage current. If the third payment in a row is missed, the lender is eligible to file for a foreclosure. Note that a foreclosure filing doesn’t mean the home will ultimately end up in foreclosure but the lender will make the filing as part of the legal process. If nothing can be worked out between the lender and the borrower, the lender will proceed to foreclose and recover the house.
Mortgage lenders and banks have a special department called a Real Estate Owned, or REO department that keeps and manages foreclosed properties and prepares them for sale.
Lenders will typically make arrangements with real estate companies who agree to market the homes for a fee. You, the borrower, can find foreclosures that are listed in the public record, visiting a lender’s website that lists foreclosed homes or contacting a lender directly for a list.
How do you use your VA home loan benefit to buy a foreclosed home? There seems to be a bit of confusion at times about foreclosures but the process is almost identical when buying an existing home that’s not in foreclosure. If a home is listed for sale by a real estate agent you have the opportunity to inspect the home, visit the property inside and out before making an offer. Once you’re satisfied, you can write up a sales contract with your agent, with your preapproval letter in hand, issued by your VA lender.
When you attend a sheriff’s auction and the foreclosed property is listed to be auctioned, the process is a bit different and can also vary a bit due to the location of the property. When you buy at an auction, you need to be prepared to provide a cashier’s check for the amount of the bid should you be the successful bidder. You can’t use a VA home loan in this instance due to the short period of time needed to provide the funds. A VA lender won’t issue funds until after a property is selected. Using this process, you won’t typically have the ability to personally inspect the property nor hire a third party inspector to perform an inspection on your behalf. You can certainly tour the outside but it’s not likely you’ll be able to enter without the lender’s permission.
If the home is listed by a broker or by the lender and is entered into the local multiple listing service, you should be able to take your time and thoroughly inspect the prospective purchase as well as providing your VA lender with the required documentation. In this situation, you have plenty of time to use your VA home loan. If you’re at an auction, your VA loan won’t help if the auction requires that you pay at the auction or within a 24 hour period. Purchasing foreclosures can vary by state in this manner, but if property is listed for sale and open for inspection the process is very similar.