A frequent question about VA home loans is how long must a borrower wait after a short sale before the person is eligible to apply for a new VA mortgage loan. The VA does not have a strict guideline for a waiting period, or seasoning period, after a short sale. However, after foreclosure, the VA encourages a two-year seasoning period.
For military homebuyers, applying for a VA loan after a short sale has no VA-recommended seasoning period. Many lenders will follow the VA’s foreclosure common practice and enforce two-year seasoning periods after short sales. But not all lenders will have seasoning periods for repeat homebuyers coming off a short sale.
Short Sale Circumstances
Not all lenders set the same policies and there are VA-approved lenders who have no waiting period, in some cases, even after a short sale. As long as the lender does not find that the homeowner took advantage of the market or defaulted on a federal loan, then the seasoning period can be null.
But homeowners who defaulted on federal debt, such as an FHA or USDA loan, may have to wait three years until they’re eligible to apply for a VA loan. Talk with a lender about your specific short sale situation.
The Basics of Short Sales
Put plainly, a short sale indicates that a homeowner was allowed to sell their property for less than they owe the lender. Unfortunately, during economic downturns in the U.S., home values can dip and put homeowners “underwater,” meaning their property value is less than what the homeowner owes the mortgage lender.
When lenders allow homeowners to execute short sales, both parties avoid foreclosure expenses and lengthy proceedings. Simultaneously, the lender redeems some value from the short sale. A deed-in-lieu of foreclosure allows homeowners to return the home to the lenders. Instead of a sale, the home belongs to the lender again.
Even though the lender does not collect any money in a deed-in-lieu of foreclosure, both parties again steer clear of foreclosure costs. Not everywhere, but in some states, foreclosure can take three years or longer to complete.
Credit History and Short Sales
Short sales, foreclosures and deeds-in-lieu of foreclosures can hurt credit reports and scores. So even before hunting for lenders with lenient short sale seasoning periods, it’s critical to examine and repair credit damage from defaulting or short selling. Since you may not need to wait two years after a short sale, it’s best to fix credit as soon as possible if you want to apply for a VA loan.
Credit scores can lose as much as 160 points after a short sale, foreclosure or deed-in-lieu. But if your credit score is within a lender’s threshold for a VA loan, it’s possible you could move forward with a home purchase right after a short sale. Every buyer’s situation is different.