Following World War II, President Roosevelt signed the GI Bill of Rights into law. The original GI Bill offered returning veterans who otherwise would not be able to secure a mortgage, a sustainable way to become homeowners. Instead of handing out cash, The U.S. Department of Veterans Affairs offered these veterans federally insured loans with no down payment requirements. Under this loan program, the VA isn’t actually making a loan to a veteran, but is instead providing a guarantee that protects the mortgage lender in the event that the borrower defaults on their payments. By providing this type of guarantee, lenders can eliminate down payment requirements, and offer lower interest rates and more advantageous mortgage terms to veterans. During the 70 years that the loan program has been in existence, The VA has issued 20 million loan guarantees.
Despite the advantages of obtaining a VA home loan; there are circumstances in which a short sale may be required. A short sale is essentially what happens when a home is sold for less than the amount of money that remains on the mortgage because the owner owes more on the mortgage then what the property is worth. Although going through a short sale is a difficult and unfortunate situation to experience, it is a far more appealing result than a foreclosure. A short sale will appear on a credit report as a settlement, and will be looked upon more favorably in the future than a foreclosure which will remain on your report for seven years and could potentially destroy your credit.
For military borrowers, a grant may be possible. For the purposes of this article, we will limit the discussion to the non-grant short sale only.
Although a standard short sale and a short sale involving a VA loan are similar in process there are numerous crucial distinctions between the two. The VA refers to this scenario as a compromise sale. The primary point of difference lies in the fact that because the loan is insured, the lender can receive the full amount the mortgage’s remaining (deficiency) balance when a home financed with a VA loan is short sold.
There are a number of reasons a veteran may be allowed to initiate a short sale. The VA defines what scenarios qualify a veteran for a short payoff, and these include:
- Medical expenses
- The death of one of the primary income earners in a household
- Mandatory relocation
- A decrease in earnings
It’s important for veterans to remember that if they do own assets of a significant value, they may be required to contribute to the sale in order to make up for some of the money owed on the mortgage.
During the process, the VA evaluates the individual situation of the veteran attempting to initiate a short sale. A few of the requirements that must be met include:
- Closing costs have to be reasonable
- The veteran’s financial situation is significant to the process
- The home can have no other liens placed against it
- Homes sold in a short sale must be sold at the current market value
- The cost for the VA claim must be less than what it would be to complete a foreclosure
As with any short sale, there are steps in the process that must be taken by the veteran. The first step in this process is to call VA Home Loan Centers at 888-573-4496. VA Home Loan Centers will connect you with a real estate agent who specializes in short sales, and who will officially list the home as being for sale. There is no out of pocket charge whatsoever for this service, VAHLC provides short sale assistance to underwater veterans gratis. The real estate agent should make it known that the sale of the home is contingent on both VA approval, and the house being sold at its current, fair market value.
Once there is an offer, VA Home Loan Centers 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—which results in pricing 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 Realtor® to complete. This package contains the request for the sale, the offer to purchase, 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, a 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 this point, the home is transferred to a new owner, and a veteran is no longer financially responsible for the mortgage.
The entire time required to complete the process can vary significantly and 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 and even immediately if they are current on the mortgage at the time of sale.
If you choose to have VA Home Loan Centers represent you in selling your home as a short sale, you can stop using our services at any time. VA Home Loan Centers charges no up-front fees to assist you with your short sale. Our partner real estate brokerages will charge a real estate commission but if the bank agrees to a short sale, this is paid for by your lender. VA Home Loan Centers is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change the terms of your mortgage including approving your short sale. It is recommended that you continue to make payments on your mortgage throughout the process. Should you default on your payments, you can see a negative impact to your credit report and your home could be foreclosed upon.