Short sales can be a good option for buyers looking to purchase a home at a lower price. Sellers of these homes are highly motivated and are often willing to cut a deal to sell the property quickly. While it is possible to buy a short-sale home with a VA loan, certain requirements must be met. Below, we’ve discussed the matter in detail.
A short sale VA loan can be a helpful option for servicemembers and veterans facing financial hardship. If you’re struggling to make your VA mortgage payments a short sale may allow you to avoid foreclosure and preserve your credit.
In this comprehensive guide, we’ll cover everything you need to know about short sales for VA loans, including:
- What is a VA short sale?
- VA short sale guidelines
- VA short sale waiting period
- VA short sale vs. foreclosure
- Does a VA short sale affect my credit?
- And more…
Let’s get started!
What is a VA Short Sale?
A short sale occurs when a VA lender allows a borrower to sell their home for less than the remaining mortgage balance owed. This usually happens when the home’s value has decreased, leaving the homeowner “underwater” on their mortgage.
For example, if you owe $200,000 on your VA mortgage but your home is now only worth $150000 the lender may approve a short sale for $150,000 or slightly above. This allows them to recoup most of the loan amount and avoids the costly foreclosure process.
Short sales require lender approval and aren’t guaranteed, but can be a win-win solution when homeowners truly can’t afford their payments. VA lenders often prefer short sales over foreclosures since they lose less money.
VA Short Sale Guidelines
The VA doesn’t have specific short sale rules, but lenders can set their own policies. Here are some common VA lender guidelines for short sales:
-
Short Sale Seasoning Period: Most lenders require waiting 2 years after a short sale to apply for a new VA loan.
-
Impact on VA Entitlement: Your VA entitlement will decrease after a short sale, reducing the VA guaranty you can receive on future loans.
-
Credit Impact: Short sales hurt your credit, but not as severely as foreclosure. More below.
-
Proving Hardship: You must show financial hardship to qualify for a short sale. Documentation of income loss, medical bills, etc. helps.
Overall, short sales are preferable to foreclosure for VA loans when you simply can’t afford the payments. But they do have consequences.
VA Short Sale Waiting Period
The VA itself does not mandate any waiting period to get a new VA loan after a short sale. However, most lenders will make you wait around 2 years before they’ll approve your VA loan application.
This “short sale seasoning period” gives you time to rebuild your finances and credit before taking on new mortgage debt. While 2 years can seem long, it’s much shorter than the 5-7 year wait often required after a foreclosure.
During this period, focus on saving money, paying bills on time, and keeping credit card balances low. This will help improve your credit score and financial profile for your next VA loan approval.
VA Short Sale vs. Foreclosure
While neither is ideal, there are some key differences between a VA short sale and foreclosure:
-
Control: Short sales are voluntary. Foreclosures are initiated by the lender when you default on payments.
-
Credit impact: Short sales hurt your credit score less than foreclosures.
-
Timing: Short sales can take several months to happen. Foreclosures tend to happen more quickly.
-
Deficiency judgment: Lenders can pursue you for the deficiency balance after a foreclosure but usually release it after a short sale.
-
Money recovered: Lenders recoup more money from a short sale compared to a foreclosure.
Overall, short sales allow you to handle the situation on your own terms while salvaging your credit score. Just be sure to consult a housing counselor or attorney during the process.
Does a VA Short Sale Affect My Credit?
Yes, a VA short sale will negatively impact your credit score. However, the damage is typically less severe than a foreclosure.
Here’s how a VA loan short sale can impact your credit:
-
Payment history: Your mortgage payment history will show you were delinquent or in default. This heavily impacts your score.
-
Credit scores: Expect your scores to drop 100 points or more. The exact impact depends on your starting score.
-
Public records: The short sale will appear on your credit report’s public record section for 7 years.
-
Remaining balances: Outstanding balances on the mortgage may be forgiven, improving your debt-to-income ratios.
A short sale isn’t ideal for your credit. But taken voluntarily, it can help you avoid worse damage from foreclosure. Be sure to monitor your credit and take steps to rebuild it over time.
Other Key VA Short Sale Facts
Here are a few other important things to know about VA short sales:
-
You’ll need to prove financial hardship to qualify, such as job loss, medical bills, divorce, etc. This helps justify the short sale.
-
Your lender will order a broker price opinion or appraisal to establish current home value for short sale purposes.
-
VA short sales require documentation, time and patience. A real estate attorney can help negotiate the process.
-
Outstanding second mortgages or liens on the home must be settled before closing a VA short sale.
-
Loan deficiency balances are sometimes forgiven after short sales, but not always. Check with your lender.
-
You can still qualify for a VA Interest Rate Reduction Refinance Loan (IRRRL) during the short sale waiting period if you meet all other requirements.
Alternatives to VA Short Sales
If you’re struggling to pay your VA mortgage, consider all options and alternatives, including:
-
Loan modification: Your lender may modify the loan terms to reduce payments.
-
Forbearance: Temporarily pause or reduce mortgage payments for a set time.
-
Repayment plan: Set up affordable monthly payments to catch up on late payments.
-
Deed-in-lieu of foreclosure: Voluntarily deed the property to the lender instead of going through foreclosure.
-
Bankruptcy: Chapter 7 or Chapter 13 bankruptcy stops foreclosure and discharges some debts.
Be sure to seek out certified housing counseling to fully understand all alternatives to foreclosure when facing financial hardship. VA loan technicians can also help you avoid foreclosure.
The Bottom Line
Short sales can be a beneficial option for VA borrowers facing temporary financial struggles. While certainly not ideal, they allow you to minimize damage to your finances and credit before you get back on your feet. If you think a short sale may be in your future, act quickly and seek legal and financial guidance right away. This will help ensure the best possible outcome during a difficult situation.
What Is a Short Sale?
A short sale is a home that is sold at a lower price than the current owner’s mortgage balance. Usually, a short sale occurs when a homeowner is one or more payments behind on their mortgage.
To avoid foreclosure, the owner needs to sell the property quickly. While a short sale can impact a homeowner’s credit, the financial consequences are not as severe as a foreclosure.
A short sale can only occur if the current owner’s lender approves of the transaction. For this reason, there is usually extra paperwork involved. It may also take longer to process the transaction.
VA Loan Requirements for Short Sale Purchases
If you’re okay with putting in a little extra effort and waiting longer, buying a short-sale home with your VA benefits could be a great option that helps you save money. That being said, you’ll need to meet certain requirements including:
- Be eligible for a VA loan.
- Able to obtain a COE (certificate of eligibility)
- Meet your lender’s credit score and income requirements.
- Have a reasonable debt-to-income ratio (usually lower than 41%)
- Be able to pay for closing costs and other fees.
Additionally, the property you’re buying must meet the VA’s Minimum Property Requirements and be in a stable, livable condition. This is where things tend to get complicated since short sales are often sold “as is” and in need of repairs.
VA Mortgage Loophole Allows Veterans to Buy One Day After Short Sale?
Does a short sale home need repairs before a VA appraisal?
Sometimes a short sale home will need repairs before it passes the VA appraisal/inspection. Because most sellers of short sale real estate offer the home “AS IS”, the buyer could end up paying for repairs to the home before he or she actually owns the property. This can incur some risk should the sale fall through.
What is a VA loan short sale?
A VA loan short sale occurs when the VA loan lender or servicer grants a homeowner permission to sell their home for less than they owe on their loan. This is usually the case when the home’s value has depreciated, resulting in the borrower owing more on their mortgage than the current market value of their home.
Can I get a new VA loan after a short sale?
There is also typically a two-year waiting period before lenders will approve you for a new VA loan. Unfortunately, the only way to regain your entitlement after a short sale or foreclosure is to repay that lost entitlement to the VA in full.
What is a VA short sale waiting period?
This is called the seasoning period or the VA short sale waiting period. While the VA itself doesn’t have a set waiting period, lenders are free to make their own rules about when they’re willing to consider you for future loans. If you opt for a short sale on a VA loan, you will lose part of your VA entitlement.
Do short sales affect VA loan eligibility?
While short sales do complicate the home buying or selling process, there are times when they are necessary and potentially beneficial. Always ask your mortgage specialist about how short sales could affect your VA loan eligibility, so that you can make the best-informed decision for your situation.
Can a VA borrowers buy a short sale home?
VA borrowers planning to purchase short sale real estate should prepare for the wait. The VA will not guarantee a property unless it is in safe livable condition and its sale price justifies the insured value. Sometimes a short sale home will need repairs before it passes the VA appraisal/inspection.