VA loans offer the possibility of homeownership to eligible service members. Unfortunately, it is possible for events beyond your control to result in a decline in your property's value, which can land you owing more on the home than it's worth. When this happens, your home is considered "underwater" because you cannot sell your home for enough money to pay off what you still owe on the mortgage.
In this kind of situation, a short sale can help you avoid more intense financial problems, but there can still be risks. This guide will cover the process of applying for a VA loan after a short sale, and the broader financial impact of a short sale on your finances and VA entitlement.
A VA short sale is when a homeowner sells their home for less money than what they owe on their mortgage. This is a tool for a homeowner who can't make their mortgage payments and becomes delinquent on the loan. Through a short sale:
Avoiding foreclosure is better for both the homeowner and the lender.
Yes, you can use your VA loan benefit after a short sale, but will likely be required to wait a certain amount of time after the short sale before you are eligible to use your VA loan benefit again.
The VA has specific guidelines for determining your eligibility for a loan. These basic guidelines still apply if you've had a VA short sale, but some additional requirements are worth noting.
If you’ve experienced a previous foreclosure or bankruptcy along with your short sale, you may have to wait up to two years to purchase your next home. This seasoning period can vary depending on the lender.
If your lender requires a seasoning period, you won't be able to apply for a new VA loan until it's complete.
It's important to note that a VA loan short sale will impact your VA loan entitlement — the amount you have available for the VA to guarantee on your next loan. After the short sale, you'll lose any entitlement used to secure the previous loan. If you don't have enough entitlement left after this, you may not be able to purchase a new home with a VA loan without making a down payment.
You can restore your VA entitlement after a short sale by paying back the full amount of your compromise claim, but this is usually not a wise financial move. It typically makes more sense to put those same funds toward a down payment and build equity on a future home.
A VA short sale is not the same as a foreclosure or a compromise sale.
Foreclosures happen when homeowners can no longer make the mortgage payments on their home, and the bank takes steps to repossess it. Foreclosures are typically quicker than a VA short sale but cause more substantial financial damage to the homeowner. Once the foreclosure is final, the bank can sell the home at auction to recoup some lost funds.
Through a VA compromise sale, you may be able to have the VA pay the difference between your mortgage amount and your home's value. However, additional requirements for the seller, such as getting a sales contract, demonstrating financial hardship, and selling the home at fair market value, must be met.
Note that a VA compromise sale works directly with the Department of Veterans Affairs while a short sale does not.
A VA short sale will negatively impact your credit in much the same way as a foreclosure. A short sale can sit on your credit profile for up to seven years. It can also prevent you from getting another mortgage for two to four years. Many borrowers find it's better to wait to sell and work on improving their credit first since a short sale can worsen already poor credit.
But, it isn't all bad news—you can take steps to lessen the impact of a short sale and rebuild your credit.
While it might take up to seven years to fully repair your credit following a short sale, you don't need to wait that long before getting a new mortgage. Many borrowers can get a new VA home loan in two years—or less (compared to three years for FHA-insured loans or four years for conventional mortgages.)
Once your VA short sale is finalized, it's time to focus on repairing your credit. Start by requesting a free copy of your credit report, and checking it carefully for any errors or inaccuracies. If you notice anything wrong, contact the reporting agency and request a correction. Next, concentrate on paying all of your bills in full and on time. Doing this for 12 months can result in a boost to your credit score.
Some lenders have no waiting period for borrowers who didn't default on a federal loan or who don't want to take advantage of the market for personal gain. Lenders will examine your credit score, and if it's within their VA loan threshold, it's possible you could move forward with a home purchase immediately after a short sale.
Homeowners and loan officers have additional options when it comes to processing a VA short sale or deed-in-lieu of foreclosure.
The VA has authorized servicers to give an advance of $1,500 in relocation assistance to borrower occupants who complete a short sale with a VA compromise claim or who execute a deed-in-lieu. Regulations prohibit the owner from receiving cash proceeds from a short sale, but the VA does not consider relocation assistance as proceeds.
Relocation assistance can be very helpful and not just to the homeowner. Deed-in-lieu and short sale agreements require the home to be presented in good condition. Under these arrangements, the home doesn’t sit vacant for extended periods of time, lowering the chance of vandalism or other issues that can lower property values.
VA loans help remove the obstacles—like hefty down payments—to homeownership for eligible service members. So if you're considering or coming out of a short sale, are looking for a quote, or have questions about how to apply for a VA loan after a short sale, get in touch with a home loan specialist today.