Today’s veterans have President Roosevelt to thank for their housing benefits. Signing the GI Bill of Rights into law provided our service members – who fight so hard to maintain the American dream – the chance to actually achieve it themselves: a federally guaranteed home loan with no down payment.
Like the Federal Housing Administration’s (FHA) guarantee, the U.S. Department of Veteran’s Affairs (VA) doesn’t make loans, but provides a guarantee that protects the lender if the veteran defaults on his or her mortgage. This guarantee allows the lender to do away with down payment requirements and to offer more favorable interest rates and terms.
The short sale process for a home with a mortgage backed by a VA loan is similar to that of a traditional short sale but does contain several important distinctions.
The VA calls its short sale program a “compromise sale.” If a veteran owes more on the home than what it’s worth and sells the home, the VA will pay the remaining balance of the mortgage and closing costs. This is the most significant difference between the traditional short sale and the compromise sale: the lender receives the full balance owed by the veteran.
Additionally, as of January 2011, the veteran is entitled to $1,500 for relocation assistance.
Short Sale Program Requirements
The main requirement to undertake a compromise sale is that the veteran is experiencing severe financial hardship that prohibits her from meeting her mortgage obligation. Suitable hardships include:
- Major medical expenses
- A decrease in income
- Death of one of the principle wage earners in the household
- Involuntary relocation
If the veteran has any significant assets, the VA may require that they be sold or cashed in to help offset the mortgage deficiency.
The VA will review the veteran’s situation, looking for the following criteria:
- The home must be sold for current market value.
- Closing costs must be “reasonable and customary.”
- The compromise sale will be less costly for the VA than foreclosure.
- The veteran’s financial situation.
- The date of mortgage origination – if the loan was taken out on or before December 31, 1989, the lender must agree to write off the portion of the debt above the maximum guarantee.
- The home has no other liens.
How to Get Started
If you feel you meet the criteria and need to undertake a compromise sale, there are certain steps to take:
- Contact your lender’s loss mitigation department and let the representative know that you can no longer make your loan payments and will be selling the home via a compromise sale.
- Secure the services of an experienced short sale real estate agent and list the home for sale. Ensure that the agent includes a contingency that the sale is subject to VA approval and that the home is listed at current market value. Ask the real estate agent to waive his or her commission should the VA not approve the sale and get the agreement in writing.
- Create a compromise sale package with the assistance of your real estate agent that includes a request for a compromise sale, the offer to purchase, a Good Faith Estimate (GFE) a financial statement with supporting documentation, a hardship letter, a Compromise Sale Agreement (available from the lender) and a payoff statement from the lender. Your real estate agent will take it from here, sending the package to your lender.
The lender will have the property appraised by a VA-approved appraiser, and check the title for additional liens or other clouds. The time it takes until you hear if your compromise sale is accepted varies according to the lender’s current workload.
The VA warns veterans to beware of the various scams perpetrated against distressed homeowners. These include offers by someone other than your lender or the VA to pay your deficiency if you’ll sign certain paperwork. The VA cautions veterans to contact their lender before signing anything presented by a stranger.
A veteran can purchase another home within two years of completing a compromise sale, according to Brian Skaar, a California lender.