Can You Get a VA Loan After a Short Sale? Here’s What You Need to Know

If you’re a veteran or active military looking to buy a home but had a short sale in your past, you may be wondering if you can still qualify for a VA loan. The short answer is yes, you can get a VA loan after a short sale, but there are some requirements and waiting periods you’ll need to be aware of.

As a VA homebuyer who has gone through a short sale, here are some key things to understand about getting approved for a new VA mortgage:

What is a VA Loan Short Sale?

First let’s quickly recap what a short sale is. A short sale occurs when a homeowner can’t keep up with their mortgage payments and gets the lender’s permission to sell their home for less than what is still owed on the loan.

For VA loans, this allows the veteran borrower a dignified exit from the home without having to go through foreclosure Lenders may agree to a short sale because it allows them to recoup some of the unpaid loan balance

So in short, a VA short sale is when a lender approves a veteran homeowner to sell their home for less than the remaining mortgage debt.

VA Short Sale Seasoning Period and Waiting Time

If you want to get a new VA mortgage after a short sale, most lenders will make you wait a certain period of time. This is known as the VA short sale seasoning period or waiting period.

The minimum time you’ll need to wait is 2 years from the date your previous short sale closed. Some lenders may impose longer waiting times, but the VA does not specify an exact mandatory waiting period beyond 2 years.

So at a minimum, expect to not qualify for another VA loan for 2 years following the short sale completion. This gives you adequate time to reestablish your credit and financial standing.

How a VA Short Sale Affects Your VA Entitlement

When you get a VA home loan, you are granted a certain amount of VA entitlement which determines your ability to buy with no money down.

If you go through a short sale, you will lose whatever portion of your entitlement was used on that loan. For example:

• If you had $36,000 in entitlement and used $20,000 of it on the home you did a short sale on, you would have $16,000 remaining.

• If you used your full entitlement, you will have $0 remaining for a future purchase unless you restore it.

Having less entitlement doesn’t necessarily prevent you from using the VA loan again, but it could impact your financing options if you want to buy a more expensive home.

How to Restore Your VA Entitlement After a Short Sale

The good news is veterans can restore VA entitlement that was used in a short sale, but it takes time and effort. Here are your options for restoring entitlement after a VA short sale:

Repay the VA entitlement loss from the short sale in cash. You can send the VA a cash payment for the portion of entitlement you lost from the short sale. This immediately restores your full entitlement. However, this can be an expensive option.

Wait out the 2 year seasoning period. After 2 years from your short sale closing date, you can apply to have your entitlement restored. You’ll still need to formally notify the VA.

Refinance any current VA loan into a non-VA loan. If you have an existing VA mortgage on another property, you can refinance into a conventional or FHA loan. This allows a one-time restoration of your full entitlement.

Use your one-time restoration of entitlement. If you meet requirements, the VA allows veterans a one-time restoration of full entitlement while keeping a current VA loan in place. You can only use this once.

Bottom line, there are paths available to restore your VA home loan benefits in full after a short sale. I’d recommend talking to a VA lender to discuss the options.

How a VA Short Sale Impacts Your Credit

Like any financial hardship that leads to defaulting on a mortgage, a VA short sale will hurt your credit. The short sale will show up on your credit reports for up to 7 years.

The specific credit impacts include:

• Drop in credit scores – Expect your credit scores to drop significantly after a short sale, possibly over 100 points or more. The higher your scores were before, the bigger the drop.

• Late payments – Your mortgage history will show you were delinquent and missed payments leading up to the short sale. Late payments hurt scores.

• Foreclosure proceedings – Even if you avoided an actual foreclosure, the lender’s foreclosure process will appear in your records.

• Settled debt for less – Creditors don’t like seeing settled accounts for less than the full balance. The short sale will show the lender’s loss.

While a short sale credit hit is severe, it’s not as damaging as a foreclosure. But you will need to take action to recover and rebuild your credit over time. I’d suggest getting a copy of your credit reports to understand how the short sale impacted your scores.

Tips for Rebuilding Your Credit After a VA Short Sale

Here are some smart tips for repairing your credit after a VA short sale so you can qualify for a new VA loan in the future:

• Get current on all other bills and avoid new late payments. You need positive payment history.

• Pay down credit card balances to reduce your utilization. High balances hurt scores.

• Limit new credit applications to reduce hard inquiries. Too many inquiries looks risky.

• Watch out for credit repair scams and quick fixes. Reputable ways to improve credit take time.

• Wait to apply for new major credit like an auto loan or mortgage. Give your reports time to heal.

• Leverage secured credit cards and credit builder loans to add positive accounts.

• Dispute any false information on your reports with the credit bureaus.

• Sign up for credit monitoring to track your progress over time.

Rebuilding credit is a slow process after a short sale, but diligently following these tips will help set you up for approval in the future. Expect it to take at least a year or two to significantly improve your credit standing.

VA Loan Options After a Short Sale

As you now know, you can get approved for another VA loan even after a short sale thanks to the 2 year seasoning period and restoration of entitlement. Here are some things to keep in mind about your specific VA mortgage options:

Purchase loan – You can apply for a new VA purchase loan once the lender’s waiting period is satisfied. How much you can borrow may depend on your remaining entitlement.

Streamline refinance – If you have an existing VA loan in good standing, a streamline refi into a lower rate is typically an option right away.

Cash-out refinance – After the waiting time, a VA cash-out refi to tap home equity may be possible. Your credit scores will be scrutinized.

VA IRRRL refinance – This Interest Rate Reduction Refinance Loan from the VA has easier credit and appraisal requirements than a typical refi.

While your VA home loan options will be more limited initially after a short sale, your benefits do fully restore in time if you take the proper steps. Be patient, focus on rebuilding your credit stronger than before, and you can purchase again with a VA loan when the time is right.

Tips for Buying a Home After a VA Short Sale

If homebuying is in your future after going through a VA short sale, keep these tips in mind:

• Wait the required time period before applying for financing.

• Get pre-approved so you know what you can realistically afford.

• Be prepared to make a larger down payment if your entitlement is reduced.

• Focus on improving your credit any way possible before applying.

• Expect to pay a higher interest rate due to your credit scores.

• Be ready to explain the short sale situation to underwriters.

• Have significant reserves saved up in your bank accounts.

• Consider an FHA or conventional loan if you need more flexibility.

• Work with a trusted VA lender who can guide you through the process.

With the right preparation and expectations, buying a home is absolutely possible even after facing financial hardship. If homeownership is your goal, be patient and keep moving forward.

Overcoming a VA Short Sale

Going through a short sale is certainly difficult both financially and emotionally. But take comfort knowing it is not the end of the road when it comes to achieving your homeownership dreams.

Thanks to VA loan policies designed to help veterans bounce back, you can restore your benefits and purchase again when the time is right. Stay focused on rebuilding your credit stronger than ever before. And educate yourself on the latest VA lending guidelines.

Before you know it, you can have the keys to your new home in hand thanks to the power of a VA mortgage. Don’t get discouraged by a short sale. Use it as motivation to achieve what you want with your next VA loan.