Buying a Foreclosed Home with a USDA Loan

Foreclosed properties, often sold at reduced prices, are like hidden gems for many prospective homebuyers.

A foreclosure occurs when a homeowner fails to make their monthly mortgage payments on time, leading the lender to repossess the home. Once in the lender's possession, they usually aim to resell the property at a lower price to quickly recover their investment. For potential buyers, this can offer a compelling opportunity to get more value for their money.

But if you're a rural homebuyer, you might be wondering, "Is it possible to buy a foreclosed property using a USDA loan?"

How to Buy a USDA-Backed Foreclosure

If you're considering purchasing a foreclosed property with a USDA loan, here are some factors you should consider:

Home search: The first step in securing a foreclosed property with a USDA loan is the home search. Bank websites, local newspapers or experienced real estate agents are great starting points.

Property eligibility: The foreclosed home must still satisfy the USDA minimum property requirements and be located in a designated rural area. Property listings will also often designate their acceptable methods of purchase, so keep an eye out for those deemed eligible for USDA financing.

Type of foreclosure: There are various types of foreclosures to consider when deciding which property is best for your unique circumstances.

Types of Foreclosure Sales

There are four distinct types of foreclosure sales to be aware of when searching for a foreclosed property for USDA financing:

Pre-Foreclosures

In the pre-foreclosure phase, the original homeowner still legally possesses the property but has received a notice of default from their mortgage lender. This situation presents an opportunity for USDA borrowers who may consider purchasing the home directly from the original owner. To navigate these types of foreclosure sales successfully, it’s helpful to have the guidance of an experienced realtor who’s familiar with the local housing inventory.

Short Sales

When a property is listed for short sale, the lender has agreed to sell the home for less than the original borrower’s remaining loan amount.

If you’re considering purchasing a short sale property, you may run into obstacles during the home inspection or appraisal processes. Lenders or banks are often unwilling to complete necessary repairs themselves, resulting in less flexibility for the new buyer. Additionally, sellers may be unwilling to renegotiate the purchase price of the property to consider necessary repairs.

Sheriff’s Sale Auction

Also known as a trustee sale, a sheriff's sale auction is a public event where foreclosed properties are auctioned off to help lenders quickly recover earnings from defaulted mortgages. These auctions typically take place on the steps of the city's courthouse and are overseen by local law enforcement.

You can easily find information about these auctions by searching online or in local newspapers. However, in most cases, USDA borrowers won’t be able to purchase foreclosed properties during a sheriff’s sale auction. These properties are often sold “as-is” and do not allow for the mandatory USDA appraisal, limiting their availability for USDA financing.

Bank-Owned Properties

When a home doesn't sell during its public auction, the bank assumes ownership of the property. Bank-owned properties are generally listed through local realtors, making them more accessible to potential buyers.

Similar to properties in sheriff’s sale auctions, bank-owned foreclosures are often sold as-is. However, they are generally a more suitable choice for USDA borrowers because they do allow for home appraisals, allowing buyers to meet the USDA loan requirements.

Pros and Cons of Buying a Foreclosure With a USDA Loan

Buying a foreclosure can be an overwhelming process. To make an informed decision when purchasing a foreclosure with a USDA loan, consider the pros and cons of these properties:

The Pros

1. Home repair opportunities: USDA loans can be a great option when purchasing a foreclosure since they don’t require an upfront down payment. Borrowers may use funds originally reserved for a down payment to complete any necessary repairs to the home.
   
2. Quick home equity: Purchasing a foreclosure offers the opportunity for a cheaper and faster real estate investment, allowing borrowers to build quick equity in their homes.
   
3. Opportunity for savings: One of the most attractive features of purchasing a foreclosure is the chance to buy a home for significantly below its market value. You may also be able to use the condition and rural location of the property as leverage if you’re negotiating with an individual seller.

The Cons

1. Poor home conditions: Foreclosures often come with poor home conditions and the need for repairs. While this aspect can be negotiated if you're purchasing from an individual seller, bank-owned properties are most commonly sold as-is.
   
2. Difficulty finding eligible properties: Due to the poor condition of many foreclosed properties, USDA borrowers may have difficulty finding a property that satisfies minimum property requirements. Additionally, some types of foreclosure sales, such as sheriff’s sale auctions, do not allow buyers to complete a home inspection or appraisal, which is a mandatory step in the USDA loan process.
   
3. Extended purchase timelines: When purchasing a foreclosure, it will typically take longer to close on your home. These purchases generally involve additional documents to complete before closing and your purchase offer may also have a delayed response time. For example, banks that are backed up on foreclosure offers often take up to 90 days to respond to an individual offer. These factors may contribute to a longer timeline for your home purchase.

The Bottom Line

Buying a foreclosure with a USDA loan can be a great option for rural homebuyers but it comes with its own set of challenges and considerations. If you have questions or need assistance with purchasing a foreclosure with a USDA loan, reach out to a specialist at Neighbors Bank today!