Table of contents
- What Is A VA Loan Short Sale, aka VA Compromise Sale
- How Does a VA Loan Short Sale Work?
- Who Qualifies for a VA Compromise Sale?
- VA Compromise Sale Process
- How much will the VA accept as the Payoff in a Compromised Sale?
- Permanent Change of Station (PCS) Short Sale
- How do I get my VA loan entitlement restored after a Short Sale?
- What Are the Benefits of a VA Loan Short Sale
- VA Loan Short Sale Negotiator
What Is A VA Loan Short Sale, aka VA Compromise Sale
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.
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.
Who Qualifies for a VA Compromise Sale?
How do you qualify for a short sale the VA way?
As a seller, you must demonstrate financial hardship and must qualify for a short sale. It could be that your current financial situation requires you to move out of the home or relocate. receiving Permanent Change of Station orders would qualify as an acceptable reason for a short sale. Other acceptable reasons are decreased income; death in the family, e.g. principal wage earner; or a major medical expense.
A compromise sale can be considered when one of the following financial hardships exist:
- Medical expenses
- The death of one of the primary income earners in a household
- Mandatory relocation
- A decrease in earnings
VA Compromise Sale Process
As with any short sale, there are steps in the VA Loan Short Sale process that must be taken by the veteran.
The first step in this process is to contact a real estate agent who specializes in short sales, and who will officially list the home for sale. We can assist you with this entire process. There is no out of pocket charge whatsoever for this service. We are paid by the lender when the short sale closes.
Once there is an offer, the real estate agent will contact the loss mitigation department and register the sale.
The mortgage lender will then arrange to have the property appraised by an individual who’s approved by the VA, and at this point the title will also need to be assessed for any other liens that may be in place. This appraisal will determine whether or not a short sale is accepted and can proceed. This is referred to as a liquidation appraisal, and it will help determine the fair market value of the property and that it is in compliance with VA standards.
After an appraisal, the lender will then order a broker price opinion—or BPO. The BPO is a second valuation that is based on a professional’s opinion of fair market value.
At this point, a compromise sale package can be created, which typically requires the assistance of your real estate agent to complete. This package contains the request for the sale, the offer to purchase, a financial statement, Good Faith Estimate, and the Compromise Sale Agreement. Additionally, this package should also include your lender’s statement of payoff. At this point, the short sale is in the hands of your realtor, who will ensure the package is received by your lender.
Finally, the investor must approve the sale, and then closing takes place. At closing, the home is transferred to a new owner, and the veteran is no longer financially responsible for the mortgage.
The entire time required to complete the process can vary significantly. It is primarily dependent on the processing time on the part of the VA and the lender. For veterans who do undergo a short sale, it is typically possible to purchase another home using a VA-backed loan within two years. In some cases, even immediately if they are current on the mortgage at the time of sale.
VA Compromise Sale Requirements:
- The property must be sold for fair market value
- The closing costs must be reasonable and customary
- The compromise sale must be less costly for the Government than a foreclosure
- There must be a financial hardship of the part of the seller
- On loans that originated on or before 12/31/1989, the lender must be willing to write off any debt above the max guaranty.
- There must be no second liens (unless the amount is insignificant). In situations where there are second liens or other liens, the seller can request that the lien holder consider releasing the lien and converting the loan to a personal loan.
- The seller must obtain a sales contract in order to be considered
- To protect the seller, the seller should make the sales contract contingent and subject to the approval of a VA compromise sale.
What The Seller Will Need To Get Started:
- Once it is determined that the seller needs to consider the compromise sale program, the seller should contact his/her servicer.
- A financial statement should be provided and signed by all parties.
- The seller should complete a letter of request for a compromise sale to include hardship information.
- A Compromise Sale Agreement Application should be completed and can be obtained from the servicer.
- On loans that originated on or before 12/31/89, the servicer is required to write off any amount over the max guaranty of the loan.
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
Obstacles That Could Cause A Delay In A Compromise Sale
- Illegible copies of the required documents
- One of the parties on the title refuses to sign the contract
- Inability of the veteran to meet hardship requirements
- Other significant liens are recorded against the property
- The other lien holder is unwilling to convert the loan to a personal loan
- Loan is not guaranteed by VA
- The value of the property will satisfy the total indebtedness (equity).
- The shortage exceeds the VA’s maximum guaranty amount.
- The Veteran is deceased and the administrator or executor of the estate is unknown.
- The offer is substantially lower than VA’s appraised value.
- Veteran/Seller filed for bankruptcy
- A breakdown of the buyer’s closing costs were not provided.
Approval of Compromise Sale
Once the loan servicer has completed their review and the VA has approved the compromised sale, the loan servicer will submit a letter of approval to the real estate agent and escrow company.
At the closing, the loan servicer will receive the net proceeds of the sale and file a claim to the VA for the shortfall between the sales price and the mortgage amount owed.
How much will the VA accept as the Payoff in a Compromised Sale?
The amount that the VA (Department of Veterans Affairs) will accept as a payoff in a compromised sale will depend on several factors, including the borrower’s financial situation, the property’s value, and the specific terms negotiated with the lender.
The VA can technically accept as low as 84.05% of the appraised value as minimum net proceeds. But, some banks have overlays that will require a higher net payoff amount.
Permanent Change of Station (PCS) Short Sale
Many military families are no strangers to PCSing – receiving Permanent Change of Station orders is part of military life. Fortunately, Freddie Mac and Fannie Mae have relaxed their short sale requirements to offer more protection for service members and their families.
Under the terms of the new guidelines, military homeowners who have orders to move do not have to be delinquent on their mortgage in order to qualify for a short sale.
In order to meet the delinquency or hardship requirements, most military homeowners would skip mortgage payments (while ruining their credit and jeopardizing security clearances) – even if they could afford it – in order to sell their underwater homes. The worst part is that once the homeowner has defaulted on their payments, the lender is not required to agree to a short sale. They may choose instead to foreclose on the home. But under the new terms set by the Federal Housing Finance Agency, military members with PCS orders who are current on their loans do not have to show they are having financial difficulties to receive short sale consideration.
This will make it considerably easier for families who are required to move as part of their obligation to the armed forces.
How do I get my VA loan entitlement restored after a Short Sale?
If your short sale involved a VA-backed mortgage, the portion of your VA entitlement utilized on that loan will be inaccessible moving forward. The only way to get it back would be to repay the entitlement you lost, which is rarely – if ever – a good financial move. This means that it may be difficult to buy again after a short sale if you want to use a VA Loan.
However, you may have enough remaining entitlement – also known as a second-tier entitlement – to purchase again without the need of a down payment.
What Are the Benefits of a VA Loan Short Sale
A VA loan short sale is a great option for veterans who are struggling to keep up with their mortgage payments. A short sale allows you to sell your home for less than what you owe on your mortgage, and the proceeds from the sale go towards paying off your debt. This can be a great way to avoid foreclosure and get out from under a burdensome mortgage.
VA Loan Short Sale Negotiator
If you have a VA loan and are considering a short sale or loan modification, make sure you are working with a real estate agent and short sale negotiator who is a short sale specialist.
Many companies and agents claim to be proficient in these types of sales, but few possess the knowledge and experience. Our team has negotiated over 3,500 short sales and we have an extensive knowledge of VA Comprised Sales.
Contact us today at 619-777-6716 or submit your information on our contact form and we will be in touch to discuss how we can help you.