Since the recession, the housing market has been flooded with homes that are offered at a fraction of the cost they were listed at just a few years ago. Following the 2008 subprime mortgage crisis, foreclosure rates jumped to record highs. In 2008, foreclosures increased by 81 percent in comparison to 2007 and 225 percent in comparison to 2006. In addition to the many foreclosed upon homes being sold at a reduced cost are properties being short sold.
Advantageous to veterans is that VA-backed home loans can be used to purchase short sale properties, contingent upon the home meeting VA guidelines. Using a VA loan entitlement to purchase a short sale comes with potential pros and cons. Advantages include the home being sold for “pennies on the dollar” as well as the potential for the property to be discounted with limited or altogether no money down. The disadvantages of this transaction are that offers can take an extended period to process and that properties are sold “as is,” meaning that they may need numerous repairs prior to closing.
Before deciding to purchase a short sale property, it is important to understand the basics of a short sale, the limitations on using a VA Home Loan for this purpose and whether or not this transaction is worth the risk.
The Basics of a Short Sale
Before you begin shopping for a short sale, it’s important to understand from the perspective of a buyer what a short sale is. Essentially, a short sale occurs when the person selling the home owes more on their mortgage than the current market value of the home. Although once required to be behind on payments to short sale, the borrower can be current on their payments and still short sale. However, the seller must have a hardship in order to have a short sale approved. A veteran can qualify for a short sale under the following conditions:
- Reduced earnings
- Permanent Change of Station Orders or alternative situations that call for mandatory relocation
- Medical expenses
- The death of a households primary income earner(s)
Rather than foreclosing on the property, the lender may find it advantageous to sell the asset instead and recoup at least a portion of the losses. The home goes up for sale, and the original lender takes a loss on the loan, by permitting the borrower to sell the home for less than what remains on their mortgage. After a short sale, both the lender and usually the seller are free from the responsibility of the mortgage. If the property up for short sale was purchased with a VA loan, the lender will receive the entirety of the remaining balance after the sale as a result of the loan being federally insured.
* note that if the sale is not negotiated correctly, the seller may have to pay tax liability (1099), or even a promissory note after a short sale is complete. If the loan is a VA loan, a short sale is non-recourse. This means that the borrower will be free from the debt. There are also several laws in place that relieve the borrower from the 1099 debt relief. *
For further information on short sales, click here.
Using a VA Home Loan
If you are a veteran and you’re using a VA-backed home loan, you may find it tempting to purchase a short sale property, and you can do so. Because short sales are distressed property, you’re likely getting the home at a bargain price; however it’s important to also understand the possible ramifications of purchasing a short sale.
The VA has stringent regulations in place when it comes to appraisal requirements. This is because they are guaranteeing a loan on a property, and they want to ensure the value of the property doesn’t end up being significantly lower than the value they’ve guaranteed. This would mean a loss for the VA, which is why they conduct an independent appraisal of properties.
To qualify for a VA loan, the home is required to meet specific standards; otherwise the loan will not be accepted.
The biggest problem is that short sales are frequently sold quickly, and when the seller is in distress—they likely don’t have the time, money or energy towards home repairs, so often short sale properties are in a less than ideal condition. If the repairs needed are cosmetic (like worn carpet), it is usually satisfactory to VA standards. It’s also important for buyers to remember that if the value of that home continues to decline, they will be responsible to the VA for the loan amount versus the difference in the actual value of the property.
Is It Worth the Risk?
Despite the potential downsides of purchasing a short sale with a VA-backed loan, it still should not be ruled out altogether. Many buyers may find well-maintained, quality condition short sale options that represent a great deal. The primary way to avoid possible setbacks during the purchase process is to work with a real estate broker who’s experienced in both VA loans and short sales.
The short sale process is tricky to navigate and is also time-consuming, so working with an experienced broker is the best way to ensure communication is maintained, and the process goes smoothly. In fact, a broker can serve as a mediator between all of the parties involved, including loan officers, title companies and other agents. Buying a short sale generally lasts at least three months, and can last significantly longer, so it’s important for buyers to go into the process prepared to be patient, and they’re more likely to enjoy a successful purchasing process.
If you are interested in purchasing a short sale or applying for a VA loan, use the application form below or call 888-573-4496. Remember, VA Home Loan Centers provides short sale services to underwater veterans free of cost!