VA loan short sales are often incorrectly lumped together with foreclosures or deeds-in-lieu of foreclosures. When you’re experiencing severe financial difficulties, it’s crucial to have a clear understanding of your available options and their potential consequences.
If you're considering a VA loan short sale, you need to know how they are distinct in terms of procedure, implications, and subsequent waiting periods. Service members may also qualify for VA loan short sale forgiveness when faced with hardships.
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.
In a foreclosure or deed-lieu-of foreclosure, VA loan lenders frequently make back far less or none of the money they lent you. They only agree to these measures when there are no other foreseeable alternatives. VA loan short sales allow VA loan lenders to recoup at least some cash while avoiding the expense and time involved with foreclosure. In turn, borrowers are relieved of their outstanding debt on their VA loan. While they're not ideal, short sales are typically easier for everyone involved than alternatives.
However, short sales, foreclosures and deeds-in-lieu of foreclosures can still severely damage your credit. They also have waiting periods before you can apply for another VA loan.
While the VA has no set waiting period following a VA loan short sale, VA loan lenders commonly set a mandatory waiting period of two years before they will accept your application for a new VA loan.
Two years may sound like a long time, but borrowers who foreclose on a conventional loan often have to wait up to 7 years.
If you intend to apply for a VA loan after a short sale, you will have other challenges to deal with during the waiting period. A VA loan short sale will likely lower your credit score by over 100 points, depending on what kind of credit you had beforehand.
Your VA loan entitlement likely also took a hit. Veterans and service members who have used their basic entitlement to borrow before can only restore it by paying the difference back in full to their lender. Luckily, many borrowers can still use their remaining second-tier entitlement.
When facing a VA short sale, you may be eligible for a VA compromise sale. In a VA compromise sale, the VA agrees to pay the remaining balance owed after a short sale. This can be a more cost-effective option for the VA compared to a foreclosure.
A key requirement to qualify for a VA compromise sale is demonstrating financial hardship, which could include a significant decrease in income, relocation required due to PCS or other service-related relocation, or the death of a principal wage earner, such as a spouse.
If you’re experiencing trouble making your monthly VA mortgage payment, contact a VA loan technician and/or your VA loan lender as soon as possible. The VA can help avoid foreclosure with assistance programs and communicate with your lender. If you have a VA-backed loan and it’s 61 days past due, they’ll automatically assign a VA loan technician to your loan.