Buying Short Sale Properties with VA Loans

Many wonder if it’s possible to buy a short sale property using a VA loan. The simple answer is yes, but with caveats. And at least some of those caveats have to do with whether the participating lender is willing to offer a VA mortgage (to qualified applicants who are eligible to use VA home loan benefits) for a short sale property.

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What Is A Short Sale Home?

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.

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.

Not To Be Confused With…

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.

VA Home Loan Basics You Should Know

We don’t need to cover the entire VA home loan program here, we’ve done that in other articles. 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

If You Want To Buy A Short Sale Using A VA Mortgage

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 remaining entitlement for your VA mortgage or have previously used entitlement restored for the new purchase. You can have your VA loan entitlement restored after your current or previous VA mortgage is paid in full either by selling the home, completing the loan term, paying off the mortgage early, or otherwise fulfilling the original VA mortgage obligation.

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.

Participating Lenders Can Choose

VA loan rules may technically permit you to purchase a short sale home if it meets VA standards (and that’s key in many cases as we’ll explore below) but the most important factor (mentioned above but crucial enough to mention twice) is whether your participating lender chooses to offer a VA home loan for the short sale property. Not all lenders will, so shopping around for the right participating lender is a big priority.

Things To Remember About Buying A Short Sale With A VA Mortgage

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.

You will need an appraisal–which is mandatory–and also a home inspection, which is NOT mandatory but may as well be. If you purchase a home without a home inspection, you have done the real estate equivalent of purchasing a used car without ever test-driving it.

This issue is major and borrowers should know that if you purchase ANY property using a VA loan that you do not get inspected (as opposed to having it appraised, which is vastly different and nowhere near as complete as an inspection) you will NOT have any recourse or options for refunds or other resolution from the Department of Veterans Affairs.

Skip the inspection at your own risk, and be aware that the risk is MASSIVE.

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 will play a part in the corrections you may be required to make for loan approval.

And that’s one thing to keep in mind–many lenders have official sites that warn about some of the potential hazards of short sales that include higher-than anticipated repair expenses on the home you wish to purchase.

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 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.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News