VA Vendee Loan

What happens when borrowers stop paying their VA loans? Like any mortgage default, this begins the foreclosure process. And, the VA then sells these foreclosed homes via its VA Vendee loan program, an outstanding option for any homebuyer – veteran or not. As such, we’ll use this article to explain how VA Vendee loans work.

Specifically, we’ll discuss the following:

• The Foreclosure Process and REO Properties
• The VA Vendee Loan Program
• VA Vendee Loans for Owner-Occupiers
• VA Vendee Loans for Investors
• Finding a Property and Applying for a VA Vendee Loan
• Final Thoughts

The Foreclosure Process and RE Properties

To explain how VA Vendee loans work, we need to first provide an overview of the foreclosure process, in general.

When a bank or other lender issues a mortgage loan, the associated house serves as collateral for that loan. If the borrower defaults – or stops paying – on the loan, the bank can seize the house. Then, the bank can sell that house to pay off the outstanding loan balance.

The foreclosure process begins with a series of late notices. When a borrower misses a loan payment, the lender will send a series of these notices. Eventually – usually after 90 days of missed payments – the lender files a notice of default. This is a public record filed at a local courthouse alerting all parties that the borrower is now in default on the loan.

Following the notice of default, borrowers typically have another 90 days to pay off the late loan balance. If they do not, the bank can foreclose on the property. Procedures differ on exactly how this happens, but, in essence, foreclosure means that a lender seizes the property from the borrower. And, once the lender has seized the property, it can sell it – either directly or via auction – to recoup the outstanding loan balance.

When a property has been seized in foreclosure by a lender, it becomes known as a real estate owned, or REO, property.

The VA Vendee Loan Program

The VA Vendee loan program revolves around VA-owned REO properties. When a VA loan borrower defaults on the loan, the VA-approved lender may eventually foreclose on the property (NOTE: other options to foreclosure exist for VA borrowers, but this outcome can occur).

However, due to the VA’s guarantee of these loans, the Department of Veterans Affairs provides recourse to these lenders. More precisely, the VA itself will acquire these properties from the lenders and resell them directly. Once the VA has acquired these foreclosed properties, they become known as VA REO properties.

After acquiring these properties, the VA then needs to sell them. And, they will sell to veterans, non-veterans, or investors. Buyers can buy these properties with cash. But, this isn’t an option for most people. As a result, the VA offers financing specifically for purchasing its REO properties. These loans are called VA Vendee loans, and they are underwritten with the same guidelines as all VA loans, with two major differences. First, the VA will issue its Vendee loans to any qualified borrower – not just veterans and military members. Second, investors can use the VA Vendee loan to purchase rental properties, whereas the VA loan prohibits this. And, as with its standard home loans, the VA guarantees its Vendee loans.

Due to the scale of the VA REO portfolio, the Department of Veterans Affairs outsources the management and sale of these properties. While several different companies have held the contract in the past, Vendor Resource Management (VRM) currently holds the contract. And, VRM’s lending arm – VRM Lending – issues all loans through its VA Vendee Loan program. This means that, to use a VA Vendee loan to purchase a home, people will actually receive their mortgage financing from VRM Lending.

Similar to VA loans, VA Vendee loans offer borrowers some outstanding benefits:

• Financing with little to no money down
• Origination and funding fees may be rolled into the loan for qualified borrowers

NOTE: The VA charges a 2.25% funding fee for all VA Vendee loans.

• 15- or 30-year loan term options
• Competitive interest rates
• Seller may contribute a portion of closing costs
• No appraisal necessary
• No pre-payment penalties
• No PMI requirements

VA Vendee Loans for Owner-Occupiers

For people looking to purchase a primary residence, the VA Vendee loan can be a great option. Most importantly, it provides owner-occupiers a zero-down mortgage option, even if they don’t qualify for a traditional VA loan. But, potential buyers also need to consider the below challenges to the VA Vendee loan program.

Limited Supply

There simply aren’t that many VA REO properties available. Yes, areas with large military concentrations tend to have more, but the supply remains limited. This means that, as an owner-occupier, you’ll likely need to prioritize location or financing.

If you prioritize location of your new home, you may not find an available Vendee program home in that area. Alternatively, if you prioritize using the VA Vendee program, you may need to move to a new area to purchase a home.

Property Condition

Additionally, VA Vendee homes are sold “as is.” Unlike a normal VA loan process, no minimum property requirements (MPRs) exist for Vendee homes. This typically doesn’t concern investors, as they factor repairs into investment budgets. But, owner-occupiers need to be careful that they don’t purchase a home in need of significant repairs that turns into a money pit.

Fortunately, the VA Vendee program allows for an inspection period. Therefore, before closing on a home with a VA Vendee loan, homebuyers can complete a full home inspection. If this inspection uncovers major issues, buyers can leave the deal.

VA Vendee Loans for Investors

With most conventional mortgages, investors need to put at least 20% down on a rental property. With a VA Vendee loan, they can close with as little as 5% down. This makes this loan product a potentially outstanding option for building an investment property portfolio.

Low Down Payment Requirement

With most conventional mortgages, investors need to put at least 20% down on a rental property. With a VA Vendee loan, they can close with as little as 5% down. This makes this loan product a potentially outstanding option for building an investment property portfolio.

Potential Inclusion of Future Rent in DTI Calculation

While not guaranteed, investors can potentially apply up to 75% of a property’s future rent payments – as confirmed by an appraiser – towards their debt-to-income (DTI) ratio. To qualify, they’ll need to show a demonstrated track record as a landlord, typically via two years of tax returns.

The decision whether or not to include future income will ultimately be made by the lender.

No Limit to the Number of Vendee Loan Investment Properties

Many lenders set a limit to the number of outstanding investment property loans they will allow for a borrower. This means that, if you hit a lender’s ceiling of outstanding mortgages, they won’t approve your next one. The VA Vendee loan program doesn’t impose any limits, making it a potentially great option for investors.

I’m Interested In the VA Vendee Loan Program – What Next?

Step 1: Pre-qualify with VRM Lending

Before searching for properties, borrowers should pre-qualify for a Vendee loan. This ensures that, before spending a ton of time and effort looking for a new home, you know that you’ll likely qualify for the loan. To pre-qualify, borrowers will talk to a VRM loan officer about their overall financial picture. Then, underwriters will review each case individually to confirm whether or not you meet pre-qualification criteria.

Step 2: Find an Eligible VA REO Property

Once you pre-qualify for a VA Vendee loan, you next need to actually find a home. All of the VA REO properties for sale are listed by local agents through the Multiple Listing Service (MLS). But, people can also search for homes directly with VRM.

Step 3: Apply for Your VA Vendee Loan

After finding a home, you’ll officially apply with VRM for a VA Vendee loan. This application will include:

• Income verification
• Social Security number verification
• Credit check authorization
• Property information (address & desired loan amount)

Once you’ve submitted this info, the loan officer will run a credit check and send you an initial disclosure. At this point, you’ll decide whether or not to proceed with the VA Vendee loan.

Step 4: Loan Processing and Underwriting

If you decide to proceed, your loan officer will forward your credit information and full mortgage package to an underwriter. The underwriter will then review the entire package to determine if it meets lending requirements.

Step 5: Sign Your Closing Disclosure and Close the Loan

Once the underwriter conditionally approves your application, VRM will send you a closing disclosure (CD). This includes all of the loan details, and it must be received and reviewed at least three days prior to closing. After acknowledging receipt of the CD, you’ll sign all the closing documents, and the lender will organize the release of funds to purchase the home.

Final Thoughts

For owner-occupiers who do not qualify for the VA loan, the VA Vendee loan serves as a great path to homeownership. For investors, the Vendee loan offers an outstanding opportunity for buying rental properties with as little as 5% down. While supply of available homes remains limited, homebuyers – primary and investor alike – should consider the VA Vendee loan program.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.