VA Loans Make Many Foreclosed Homes Off-Limits

The Department of Veterans Affairs guarantees home loans for vets that make it possible to buy a house with little or no money down. But some requirements of the loans intended to protect buyers also create hurdles for them.

VA Loans Come With Strict Terms

It's in almost everyone's interest for someone to buy up foreclosed homes. It's good for neighborhoods and banks, the economy benefits, and the buyer gets a home to live in.

But buying a foreclosed home or one in short sale can be difficult for veterans and those who want to use a VA loan. When veteran Eric Warner was looking for a home in Palmer, Alaska, a third of the homes were foreclosures.

"But there was no point in looking at them because they'd tell us up front, 'No, no VA loans,' " Warner says.

The VA and the Federal Housing Administration have long offered loan deals designed to help veterans and middle-class buyers. The VA guarantees up to 25 percent of the loan, which makes it possible for buyers like Warner to put no money down.

But the subprime crisis gave loans without a down payment a bad name. Now, vets are drawn to the VA because it offers the best deal in the market. But many sellers are reluctant to entertain offers from buyers with the loans because the VA requires certain conditions, including that the house be in great condition.

In today's market, with so many foreclosures for sale, this caveat often turns out to be a deal breaker. That was the case for most of the homes Warner looked at.

"There's very few times I've felt embarrassed for being a veteran," he says. "But finding that, in many ways, it was becoming a stumbling block to securing a good home for my family was sort of shocking and embarrassing."

VA: Terms Are In Vet's Best Interest

Even in areas where foreclosures make up the bulk of what's on the market — like in southern Florida — real estate agents say clients have trouble trying to buy distressed homes with VA or FHA loans. They can't compete with investors offering all cash, or the process drags out so long that buyers just give up.

After five months, Warner finally did buy a house. But he says the drama didn't help his post-traumatic stress disorder, and he frequently considered giving up on the loan in the middle of the night: "Usually at about 1 o'clock in the morning after one or two hours of my wife crying and saying, 'Why is it this hard?' " he says.

The VA says it created the requirements to help vets and protect them from sinking money into a rundown house they later might not be able to afford. Bill White, assistant director of loan policy for the VA's Veterans Benefits Administration, says he has considered what it means to potential home buyers.

"We have talked among ourselves about, 'Well, are we protecting somebody out of a home?,' " White says.

White acknowledges that the VA has gotten some complaints about the unintended consequences of its rules. But, he says, the VA has no intention of changing its requirements.

Homes Need Families, Families Need Homes

Emily Winslow isn't sure what to blame for having to endure half a year of bank approvals, inspections and paperwork. During those six months, Winslow moved her family five times — from a hotel to a friend's house, back to another hotel. Then, at nine months pregnant and still waiting, she frantically searched for a rental.

"No one could accommodate us, because our stipulations were so challenging," Winslow says. "Here we were, just waiting on the deal. And we have a month, maybe, until this goes through. 'I'm having a baby in two weeks, we've got to receive our household goods, we don't have a pet — can you please help us out?' And they said 'No, I'm sorry I can't.' "

The rental finally came through, but meanwhile their offer was still in limbo. The house they wanted didn't pass the VA's inspection because of a termite problem.

"We were just so, so brokenhearted so many times because it appeared that the whole deal was going to fall through," she says.

In January, Winslow's family bought a house in Augusta, Ga. She says she still feels embittered.

"If common sense were used, we wouldn't have had to go through this," she says. "And it breaks my heart for other people that have to go through this, too, that you know, maybe there's a wife out there whose husband is deployed. And she's going through this by herself and she doesn't know what to do. It's just — my heart breaks for people like that."

Winslow says she understands the good intent behind the VA's rules, but she doesn't understand how there could be so many homes needing families, while so many families need homes.

Copyright 2022 NPR. To see more, visit https://www.npr.org.