Buying Short Sale Properties With VA Loans

Buying a home can already feel complicated, and the process can become even more confusing when terms like “short sale” come into play. Some buyers are attracted to short sale properties because they may be listed below market value, but these transactions often involve extra approvals and added uncertainty. For veterans and active-duty service members, that raises an important question: can you use a VA loan to buy a short sale home?

The answer is yes, but there are important conditions and potential challenges to understand first. Before we break down the VA-specific requirements, it helps to start with the basics of what a short sale home is and how the process works.

What Is a Short Sale Home?

A short sale occurs when a homeowner sells their property for less than the remaining balance on their mortgage, and the lender agrees to accept the reduced payoff.

Why? Because the lender has agreed to accept the proceeds of the sale and either forgive the remainder of the loan (with negative credit consequences) or makes an agreement with the buyer for payoff of some or all of the remaining loan balance not covered by the short sale.

It’s important to clarify that what we are discussing here is the act of purchasing a short sale property using a VA mortgage loan. We are not discussing the act of putting a house purchased with a VA mortgage up for sale as part of a short sale agreement, VA compromise sale, etc. Those are important topics, but this discussion concentrates on an eligible VA borrower purchasing a short sale home.

Can You Buy a Short Sale With a VA Loan?

Yes, eligible borrowers can buy a short sale home using a VA loan. VA guidelines do not prohibit short sale purchases, as long as the borrower qualifies for the benefit and the property meets VA requirements.

However, short sales can be more complicated than traditional home purchases. The seller’s lender must approve the transaction, and the property must meet VA minimum property requirements. In some cases, individual lenders may also have additional rules or restrictions.

While it’s possible, buyers should be prepared for a potentially longer timeline and additional steps before closing.

What to Do if You Want to Buy a Short Sale Using a VA Loan

All who want to purchase a short sale using a VA home loan should make sure they have or obtain a VA Certificate of Eligibility. Your participating lender can help you obtain this or you can do it via the VA official site.

You must have sufficient remaining VA loan entitlement for the purchase, or have previously restored your entitlement after paying off a prior VA loan. Entitlement is typically restored once the previous VA mortgage has been satisfied.

You cannot use a VA loan to purchase short sale properties you intend to flip. You must be purchasing a primary residence you intend to live in. You cannot purchase commercial or non-residential properties offered up as short sales.

It’s also important to understand that not all lenders finance short sale purchases. Even if VA guidelines allow the transaction, individual lenders may apply additional requirements or choose not to participate in short sales at all. Working with a lender experienced in VA loans and distressed property transactions can help avoid delays or unexpected issues.

Things to Remember When Buying a Short Sale with a VA Loan

What else can affect your ability to buy a short sale property with a VA mortgage? The condition of the property is one–the home must be in livable condition and meet minimum VA requirements or be brought into compliance as a condition of loan approval.

A VA appraisal is required, but a home inspection is not. However, a home inspection is strongly recommended, especially when purchasing a short sale property.

It’s important to understand that a VA appraisal is not as detailed as a home inspection. An inspection can help identify potential structural, mechanical, or safety concerns before closing. Buyers who waive an inspection assume responsibility for any issues discovered after purchase.

After the appraisal (not the inspection) you may get a list of “corrections” that must be accomplished as a condition of loan approval. These corrections may be due to issues that violate VA loan appraisal rules, but they may also be associated with issues covered by state law, local building code, or other factors. Both may play a role in the corrections you may be required to make for loan approval.

Many lenders warn about potential risks associated with short sales, including higher-than-anticipated repair expenses.

Short sale homes may or may not be occupied, they may stand vacant for extended periods of time, and there may be other problems. You will need to evaluate the pros and cons of purchasing a short sale property including the amount of repairs that might be needed. And it’s best to assume the buyer must pay for these corrections/repairs.

Should You 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.

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