A VA loan short sale, also known as a VA Compromise Sale, happens when a veteran cannot sell the home for more than or equal to the outstanding mortgage amount owed plus closing costs.
VA compromise sale is offered by the Department of Veterans Affairs, and it is the VA’s version of a short sale. It’s an option for Veterans and their families who have trouble keeping their homes and don’t want to lose it ultimately to foreclosure. It allows the VA to pay a “compromise claim” to cover the difference versus facing foreclosure and possible damage to your credit score. The process also allows lenders to recoup at least some cash and avoid the expense and time involved with foreclosure.
If you are a Veteran looking in that direction, here’s a short guide to VA compromise sale. Find out how to qualify for the transaction, including guidelines and requirements.
A VA loan short sale can be a difficult process, but there are paths to VA homeownership again. Understanding VA loan short sale forgiveness rules is key.
When financial hardship hits and you can no longer afford your mortgage payment, working with your lender on a short sale can help you avoid foreclosure. With a short sale the lender agrees to let you sell the home for less than what you owe on the mortgage. This avoids a lengthy foreclosure process and damage to your credit.
However if you had a VA-backed loan, a short sale will impact your ability to get another VA home loan in the future. Here’s what you need to know about VA loan short sale forgiveness and restoring your VA home loan eligibility after a short sale.
How a Short Sale Affects Your VA Loan Eligibility
With a VA-guaranteed mortgage, the Department of Veterans Affairs provides the lender with a guarantee that a portion of the loan will be repaid if the borrower defaults. When a VA borrower does a short sale, the lender files a claim with the VA to recoup the loss.
Under VA guidelines, borrowers who complete a short sale are barred from getting another VA-backed loan for a certain waiting period. Here are the current rules on VA short sale seasoning requirements:
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If the short sale was on your primary residence, you must wait 2 years from the date of the short sale until you can qualify for another VA home loan.
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If the short sale was on a property that was not your primary residence at the time, the waiting period is only 1 year.
These mandatory waiting periods give the VA time to restore the available guaranty after paying a claim to the prior lender. The waiting periods cannot be waived or reduced. You must wait the full term before the VA will back another loan for you.
Seeking VA Short Sale Forgiveness
Some borrowers hope to receive VA short sale forgiveness to remove the waiting period and instantly reinstate VA loan eligibility. However, the VA does not have a formal loan forgiveness program for short sales.
The only cases where the VA provides any leeway is for certain exceptions:
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If you can prove the short sale was due to a work transfer to a new area, divorce, or family death, the VA may exempt you from the waiting period. You’ll need to provide documentation to support the circumstances.
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If you can show the short sale was completed under a federal government relocation program, the VA may grant an exemption. Again, documentation will be required.
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If the short sale happened at least 7 years ago, the waiting period has expired and you can qualify for a new VA loan right away. The VA keeps short sale records on file for 7 years.
Outside of these scenarios, there is no short sale forgiveness from the VA. The 1 or 2 year waiting period will apply.
Alternatives for Buying Again with a Prior VA Short Sale
If you aren’t eligible yet for a new VA loan, you may still be able to buy a home sooner through other options:
Conventional Loan – Most conventional loans only require a 2-4 year wait after a short sale. If it’s been over 2 years, you may qualify for a conventional mortgage right away.
FHA Loan – FHA has a 3 year waiting period before you can get a new FHA loan after a short sale.
USDA Loan – No set waiting period, but will depend on your specific circumstances.
Cash Purchase – You can buy a home with cash at any time without needing new mortgage financing.
Non-Occupant Co-Borrower – If you apply for a mortgage with another borrower who will occupy the home, you may be on the loan as a non-occupant co-borrower before your VA waiting period is up.
Tips for Restoring Your VA Loan Eligibility
If you want to qualify again for a VA loan after a short sale, focus on rebuilding your credit and financial standing during the 1-2 year waiting period:
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Stay on top of other payments – Keep up with credit cards, auto, and any other loans. No late payments!
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Lower your debt-to-income ratio – Pay down balances and limit new debt.
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Check credit reports – Make sure no errors or old short sale info is dragging your scores down.
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Save up reserves – Show you can pay the mortgage with cash leftover each month.
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Keep income stable – Lenders may view job changes right before applying as higher risk.
Meeting VA credit standards and debt-to-income limits will be critical to approval of a new VA mortgage after the waiting period. Take advantage of that time to demonstrate you’re back on solid financial ground.
Who Can Help with VA Short Sale Questions
Navigating the guidelines around VA short sale forgiveness and restoration of your home loan eligibility can be confusing. For help, reach out to these VA resources:
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VA Loan Technicians – Speak to a VA representative by calling 877-827-3702 or emailing [email protected]
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VA Regional Loan Centers – Local VA offices can explain the process. Locate one near you at https://www.va.gov/find-locations
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VA Website – Info on short sale limits and requirements at https://www.va.gov/housing-assistance/home-loans/loan-types/purchase-cash-out-refinance-loan/
With careful financial planning, a prior VA short sale does not have to permanently take away your chance at homeownership. Be patient during the waiting period and take steps to improve your borrowing position. You can recover and qualify for a new VA purchase loan again.
How Does a VA Loan Short Sale Work?
VA compromise sales are the short sale of VA borrowers. In a regular short sale, the borrower is allowed to sell the home for less than the amount he/she owed on the mortgage. A compromise sale works the same only that the Department of Veterans Affairs pays the difference between the outstanding amount owed on the mortgage and the home’s current market value up to the amount it guaranteed the loan for.
This compromise claim effectively allows the private sale to go through as noted in a VA document. There must be prior agreement on the part of the lender/loan servicer to have its loan guaranty reduced by the claim paid.
On the part of the Veteran involved in the compromise sale, the portion of his/her entitlement used in the home will be “tied up” — meaning this entitlement will only be restored once he/she has repaid the VA loan.
This compromise sale must be more cost-effective for the VA than a foreclosure.
What The Seller and Realtor Will Need To Get Started:
- A sales contract signed by all parties with a contingency which reads: “This offer is contingent upon approval of a VA compromise sale.”
- Good faith estimate projecting closing costs. This document is usually prepared by the real estate agent to facilitate the processing
- Letter to the servicer requesting consideration of a compromise sale
- Financial data and supporting documentation
- Compromise Sale Agreement Application
VA Loan Entitlement – Using More Than Once and Using After a Foreclosure or Short Sale in 2021
FAQ
Can VA entitlement be restored after a short sale?
Can I use a VA loan on a short sale?
Does the VA forgive a foreclosure?
How long after a short sale must a consumer wait to apply for a new VA loan?
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.
Is a VA short sale a better option than a foreclosure?
A VA short sale can be a more attractive option than a foreclosure. Learn about the regulations and effects of VA short sales. If you’re having trouble making your VA mortgage payments on time due to financial hardship, you’re not alone. VA lenders are often willing to work with borrowers to avoid the added time, stress and cost of a foreclosure.
What is a VA loan foreclosure?
A VA loan foreclosure is what takes place when the underlying mortgage is backed by the VA. VA foreclosure works similarly to any mortgage foreclosure process. There are limited cases in which you could be foreclosed upon much more quickly (for example, triggering due-on sale provisions).