If you want to live in the country, a USDA loan is a great option if you qualify, and pairing it with a foreclosure is the cherry on top. So yes, you can use a USDA loan to purchase a foreclosure. There are no laws stipulating that you cannot do so, but there may be a few in-house rules that make it difficult.
What do we mean by this? Let’s dive in.
Yes, you can buy a foreclosure with a USDA loan as long as you and the home location meet the requirements. There aren’t any laws preventing you from doing so, but timing, auction house rules and in-house lender rules may make things a bit difficult— meaning some foreclosures are easier to buy than others with a USDA loan.
Technically speaking, you could buy any type of foreclosure with a USDA loan, but let’s do a quick review of the foreclosure process so you understand what we mean by this:
Buying pre-foreclosures and foreclosure auctions with USDA loans could cause issues, but, once again, there are no laws preventing you from using a USDA loan on any type of foreclosure.
As for REOs: An REO is easy to purchase with any type of mortgage, provided it’s reasonably well-maintained. The only difficult thing about purchasing an REO is possibly the competition. Other than that, all you may have to do is be the best buyer and offer the best price.
Powered by Foreclosure.comIf a home is in pre-foreclosure, this doesn’t necessarily mean you can just swoop in and get a great deal from the homeowner. Proceed with caution is the name of the game here because:
If you want to try and purchase a home that is in pre-foreclosure, we strongly recommend working with a real estate agent who has successfully closed on pre-foreclosure homes in the past. Trying to buy a home that is not listed for sale from a person who may be going through numerous personal issues is a recipe for disaster.
Another thing to consider is the foreclosure process. Homes that have been put in pre-foreclosure only have a certain amount of time before they are due to sell at a public or private auction. Therefore, the homeowner will need to communicate to their lender that they have an interested buyer (you). It’s important that your offer satisfies the lender’s needs for the sale. If it doesn’t, the home may still go to auction. Plus, the lender may not be willing to back out of the home’s scheduled auction.
As for USDA specifics: USDA loans take around 30 to 60 days to process. Depending on how far into pre-foreclosure a home is, you may not have this much time. This is why having an agent is so crucial. Your agent can communicate with the lender about your qualifications, and can give the lender an accurate timeline for how long he or she thinks it will take to close.
Auction houses tend to require full payment within 1-7 days. USDA loans typically require 30-60 days to process. The math just doesn’t check out.
Next is the winning bid deposit requirement. It’s not unheard of for auction companies to require a 20-30% deposit on all winning bids. This may not work for you because one of the best things about USDA loans is that they don’t require a down payment. The 20-30% deposit would have to come from your own funds. Unfortunately, if you are unable to close within the allotted time, many auction companies require you to forfeit your deposit. Should this happen, you would have no legal recourse to recoup your funds.
This is one of the reasons many auction houses require cash-only bids. It protects homebuyers more than it does anything else.
The last thing to consider is your lender. Your lender may not even be willing to fund a foreclosure purchase. In fact, not many are, but they do exist.
If you understand the risks, you have some homework.
First, call auction houses that list homes in your desired purchase area and ask:
Next, speak to your lender and ask:
If you have trouble finding a lender that is willing to finance a home bought at an auction, one thing you might try is asking if the auction company has any recommendations, because they will likely know of a few local lenders who are willing to do so.
While it’s not impossible to buy a foreclosure at an auction with a USDA loan, the list of people who have accomplished it is probably pretty small.
Can you buy a foreclosure with a USDA loan? Yes. Might it be difficult? Possibly. Your best bet is to focus on either pre-foreclosures or REO foreclosures. Pursue an auction-foreclosure, and your biggest issue is possibly losing your deposit if your lender isn’t able to close in time.
To find the best foreclosure, we recommend using a site like foreclosure.com. Foreclosure.com updates its listings on a regular basis, and you can filter by the type of foreclosure you’re interested in. Here again, we recommend focusing your efforts on REO properties.
Snag our Homebuyer’s Workbook to learn how USDA financing works, plus more about buying foreclosures. In it we discuss every aspect you need to know about buying a home, including how to find down payment assistance programs in your area and how to calculate the true cost of buying your next home.
Yes, you can buy a foreclosure with a VA loan, but just like USDA loans there are some instances where it might not be feasible. Once again, the biggest issue is time. VA loans take a while to process, so if you buy the home at an auction, you’ll probably need to provide the auction house with the funds long before your loan has been processed. However, this isn’t universally true— it’s just true most of the time. There is also the issue of the home’s condition. Homes bought with VA loans must meet certain livability standards in order for the loan to process. If the auction house can verify the home’s condition and provide that information to your lender, you should be good to go.
Yes, you can buy a foreclosure with an FHA loan. USDA, VA, and FHA loans all have two things that make them difficult to use on foreclosures: auction house rules and lender rules. However, as with USDA loans, there isn’t a law anywhere that prevents you from using an FHA loan on a foreclosure. Also, as with USDAs, FHA loans require that the home meet livability standards, too.
Whether you should or shouldn’t isn’t for anyone to say, but buying a foreclosure has a few benefits. The first is access to immediate equity, which you can access via a home equity loan after you’ve closed (six months to a year is the standard amount of time you have to wait). If you get the home at a great price, when you go to sell, you’ll obviously have a bigger financial windfall. One thing to consider, however, is that the home may need a fair amount of work. It’s not a guarantee, but foreclosures have often been neglected for a certain amount of time before they’re sold, so you may have some weekend Lowe’s trips in your future.
