Buying Short Sale Properties with VA Loans Guide
Investopedia describes a short sale home as a situation where a home owner “…sells their property for less than the amount due on the mortgage”. For these sales, the money goes to the lender and not the borrower. VA loans can be used to purchase short sale properties as long as VA guidelines are met. Short sales are the result of a delinquent loan, and the borrower and mortgage servicer have agreed to sell the home at a discount to avoid foreclosure proceedings. Using your VA home loan entitlement for the purchase of short sale real estate can have its advantages and disadvantages.
Most short sale homes are offered for pennies on the dollar
Buyer can buy the discounted home with little or no money down
Offers can take a long time to process
Properties are sold “AS IS” and often need repair before closing
VA Home Loan Basics You Should Know
We don’t need to cover the entire VA home loan program. What you need to know about buying a short sale property with a VA mortgage is basically:
- You must qualify for the VA mortgage loan program through military service or by being a qualifying spouse of someone who is eligible for VA mortgage loan benefits
- You must purchase a primary residence with your VA home loan and certify the home will be used as your home address in a legally binding document
- VA home loans typically feature a zero-money-down option but depending on your credit and other variables a down payment might be required in certain cases
- No mortgage insurance is required by the VA loan program but you will need to discuss your lender’s individual requirements
After Making an Offer on a Short Sale
The potential buyer may often wait 60 days or longer before the seller replies with an acceptance or counter offer. During this time, interest rates can go up or down. VA borrowers planning to purchase short sale real estate should prepare for the wait.
The VA will not guarantee a property unless it is in safe livable condition and its sale price justifies the insured value. Sometimes a short sale home will need repairs before it passes the VA appraisal/inspection. Because most sellers of short sale real estate offer the home “AS IS”, the buyer could end up paying for repairs to the home before he or she actually owns the property. This can incur some risk should the sale fall through.
Buying a short sale home with a VA loan can save the buyer money if he or she is willing to work a little harder and wait a little longer.
The advantages of VA loans include:
- As little as zero cash down
- No monthly mortgage insurance premiums
- No penalty for early or pre-payment
- Competitive interest rates
- Up to 6% of closing costs and concessions may be paid by seller
- No additional credit underwriting required by VA for a Streamline refinance
VA Loan Short Sale Waiting Period
While the VA doesn’t set a required waiting period, or seasoning period, for VA loan short sales, lenders typically do. The short sale waiting period on a VA loan is often two years.
Should I Use An Agent Or Broker?
There is no requirement for a VA loan borrower to use an agent or broker, but a local realtor may be able to help you avoid properties that are considered blighted or problematic.
If you have little overall house hunting experience it may be wise to consider using an agent or broker if for no other reason than to avoid getting potentially burned twice–once because you aren’t familiar with the housing market in general and once because you aren’t familiar with the more specialized aspect of the real estate world pertaining to buying a short sale.
How can you tell if you need an agent or broker as a first-time home buyer? See if any of the following terms are things you feel you have a clear understanding of or familiarity with:
- Chain of title/”clean title” procedures
- Foundation problems
- Operational capacity of mechanical systems in the home
- Local flood zone issues or other natural disaster hazards in the area
- Lead paint hazards
- Local pest control issues
- Local ordinances pertaining to wells, septic fields/septic tanks
If most or all of the list above is unclear to you, you might need to talk to a broker about buying short sale properties in general and get some advice on how to proceed.
Some people choose to purchase short sale properties because they enjoy the challenge of the fixer-upper. Others buy them because they assume they will save money compared to the purchase of a typical suburban home, mobile home, or condo unit. But repairs and corrections can inflate the final cost of your purchase higher than you might think. This is especially true if there are roof issues, foundation problems, issues with excessive moisture or water seepage, etc.
In any case, making the most informed decision about buying or not buying a short sale property with a VA mortgage is the most important thing.
VA Loan Short Sales and Credit
A VA short sale, like foreclosure, will negatively affect your credit.
Your score will take a hit, and how hard depends in part on what kind of credit you had beforehand.
Studies from the credit score firm FICO indicate consumers with good credit prior to short sale would likely notice a larger hit – up to 160 points – following a short sale than someone with poor credit.
If You Are a Buyer
If you’re a buyer who hopes to use a VA loan to purchase a home, taking advantage of a short sale is a possibility. The VA doesn’t have a rule that prevents you from doing so. However, Military.com suggests that VA borrowers evaluate the property’s condition with care. Why is this necessary? Most short sale homes are sold as is, and the VA requires that any home being purchased with a VA loan meet its Minimum Property Requirements (MPRs), which are designed to ensure that the home is in a safe, livable condition.
What happens if repairs are necessary to bring the home in line with the VA’s MPRs? You’ll likely have two options: You can walk away from the home, or you can pay for the necessary repairs out of your own pocket before the sale. The latter choice will get results, but it can be a risky path. After all, what happens to your investment if the sale falls through?
If You Are a Seller
What does opting for a short sale mean if you’re the seller? As Benefits.gov reports, you’ll sell your home for less than what you currently owe, and the VA will pay the difference up to the maximum guaranty on the loan. You’ll lose your home, but avoid the sting of foreclosure and the seven-year waiting period that’s normally required of homeowners who’ve gone through a foreclosure before they can secure another mortgage (source). Instead, you’ll only have to wait two years before pursuing another home loan. However, you might have to choose another form of financing for your next home purchase. According to Circular 26-18-25, a veteran’s full home loan entitlement will only be restored if the veteran fully repays the VA for any losses resulting from the short sale. If the veteran doesn’t repay the loss, he or she is limited to using any remaining entitlement or seeking other forms of financing.
Common Mistakes When Buying a Short Sale Home
Be sure that you don’t make these common mistakes when going into a VA loan short sale. It is crucial to pay attention to the inspection to see what kinds of problems might exist with the short sale home. Remember, the VA will not back a loan on a short sale if the property does not meet “livable” standards. Paying attention to the inspection report will give you an accurate picture of the integrity of your new home so that you know what to expect if it comes into your possession, what kinds of repairs and remodeling projects you might have to take on. Are there any rodent or pest infestations? Are there health hazards like mold, lead, or asbestos? What is the condition of the home’s basic structure, like the state of the roof?
We suggest looking at this article of common mistakes first-time homebuyers make, a list of considerations you will want to have in mind when purchasing a house.
Is Buying a Short Sale Worth It?
For now, the days of easy pickings from short sales are over. Homes in pre-foreclosure and foreclosed bargains are getting harder to find, too.
True, you can still find very profitable deals with a short sale. But you have to work harder and smarter to hunt them down.
And it’s strongly recommended that you work with a professional agent who has plenty of short sale experience.
If you’re interested in buying a short sale home, you still need to get pre-approved for financing. That step, at least, you can start right here.