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VA Loan Short Sale Guidelines

By Malcolm Means Updated on 11/26/2019

Military and short saleVA Loan Short Sale

To counter the difficulties of owning a mortgage while being subject to relocation, the Department of Veteran Affairs (VA) offers guaranteed VA loans.  

When VA borrowers undergo a short sale, the transaction is referred to as an “offer in compromise,” a “compromise claim,” or a “compromise sale.” 

Regardless of the name, the process is the same as a standard short sale, in which a homeowner receives an offer to purchase his/her home for an amount less than the amount needed to pay off a mortgage loan balance. 

When a borrower requests an offer in compromise, the VA, and the mortgage company meet to review the situation.  If approved, the VA takes responsibility for paying the difference between the home sale proceeds and the veteran's mortgage balance.

For information regarding the acquisition of a VA mortgage after a short sale, visit our Lender411 VA Loan after Short Sale page.

VA Short Sale Eligibility Criteria

To qualify for a VA short sale, borrowers must satisfy the following eligibility requirements:

  • The borrower must prove that he/she is experiencing a financial hardship.
  • Property must be sold at fair market value based on conditions in the current market.
  • Property must be free of secondary or other liens.
  • Closing costs cannot exceed what's considered reasonable and customary.
  • The cost of the compromise sale must cost the VA less than the cost to foreclose on the property.
  • Seller must provide a written statement explaining why the sale is necessary.

VA Short Sale to Avoid Foreclosure

One of the most common reasons for performing a VA short sale is to avoid foreclosure. With a significantly greater expense and much more hassle to both borrower and lender, foreclosures provide no benefits and should be avoided at all costs.

For more options and information regarding how to avoid undergoing a foreclosure with a VA mortgage loan, visit our Lender411 VA Foreclosure page.

VA Loan Foreclosure vs. Short Sale Pros & Cons

VA Foreclosure Pro

  • No benefits

VA Short Sale Pro

  • Can still live at home while waiting for sale to close (can be anywhere from 2 8 months)
  • Gives borrowers time to plan their next step
  • Can be overcome more easily than foreclosure
  • Not reported on a credit history
  • You’re in control of the sale

VA Foreclosure Con

  • Lose home
  • Lender can get a judgment against borrower for what is owed on the loan
  • Additional foreclosure costs 
  • Credit score will tremendously suffer, usually by 250 300 points 
  • Remains as a public record on a borrower’s credit history for 10 or more years

VA Short Sale Con

  • Credit score will suffer by 50 200 points (less detrimental than foreclosure, however)
  • Difference between mortgage balance and amount gained from the short sale is deemed as taxable income

Steps for a VA Short Sale

1. Contact your lender. The first step in completing a VA short sale is to contact your VA-approved lender to mitigate the losses on the transaction. You can verify whether or not your lender is VA-approved by visiting the Veteran Affairs website. 

If your lender has not been approved, contact the VA. Let your lender know that you cannot keep up with monthly mortgage payments and will be initiating a short sale.

2. Hire a real estate agent. To make the most of a short sale, hire a real estate agent with previous experience with short sale transactions. Discuss the situation with your lender and ask for a recommendation for a reliable agent. 

An alternative way to find a real estate agent would be to contact a local real estate broker and inquire who on the staff has experience with short sales. Ideally, he or she will have previous experience specifically with VA compromise sales.

3. Assess the market value. Once you have hired an agent, ask him or her to assess the house’s fair market value by composing a market analysis. This should give sellers a reasonable sale price range.

4. Sign the listing agreement. With your agent, sign the listing agreement to put the home on the market. The home seller should ensure that the agreement contains a clause to protect him or her from being held responsible for the agent’s commission in the event of the VA refusing the VA compromise sale transaction.

5. Evaluate offers. When undergoing a short sale, VA sellers should only accept purchase offers at the fair market value of the home, as the Department of Veteran Affairs will not accept offers for less than this amount. Request that your real estate agent counter the offer to make it dependent on VA approval.

6. Fill out a financial statement. Once an acceptable offer has been received, homeowners must fill out and sign a financial statement form; this can be acquired from your lender or may be downloaded directly from the VA website.

7. Send a compromise sale request. Finalize a compromise sale request letter and the Compromise Agreement Sale Application. Once these documents have been completed, the agent will assemble these documents as well as the purchase agreement to be sent to either the seller’s VA approved lender or directly to Veteran Affairs.

8. Wait for approval. After the documents have been sent, sellers only need to wait for VA approval. Depending on the area and several other factors, the processing time will vary.

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About The Author:
Malcolm Means
I hope you choose me as your loan professional. I have been in the mortgage finance industry since 2003 and have spent my career structuring financing options for my clients and guiding them through the loan process... more

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