What do you need to know about VA loans and short sales? That depends. Are you an eligible service member or veteran planning to use your entitlement to purchase a home with a VA loan? Or, are you a homeowner who used a VA loan to purchase a home and is wondering about the consequences of a short sale? Whether you’re buying, selling, or interested in buying again after a prior short sale, it’s smart to explore the possibilities.
VA Loans and Short Sales
VA loans are extended by private lenders and guaranteed in part by the U.S. Department of Veterans Affairs (VA). That guarantee allows lenders to offer favorable terms and provides eligible borrowers with certain built-in consumer protections, but it also means that these loans sometimes operate under slightly different rules. What happens when you mix VA loans and short sales?
Understanding Short Sales
As Investopedia explains, short sales have a mixed reputation. Some insist that they’re a great chance for savvy buyers to snag a real deal. Others warn that buying a short sale property can be complicated and time-consuming.
What is a short sale? Basically, it’s when a home is being sold for less than the remaining balance owed on its mortgage. Sometimes referred to as compromise sales, short sales are a way of avoiding foreclosure when the homeowner has fallen behind on their mortgage payments and the property’s value has fallen, often due to a cooling housing market. The home’s sale price is normally less than its market value, but any offers must be approved by both the seller and their lender, a requirement that can significantly extend the time needed to complete the sale. Whether a short sale makes sense depends on the property and your circumstances.
If You Are a Buyer
If you’re a buyer who hopes to use a VA loan to purchase a home, taking advantage of a short sale is a possibility. The VA doesn’t have a rule that prevents you from doing so. However, Military.com suggests that VA borrowers evaluate the property’s condition with care. Why is this necessary? Most short sale homes are sold as is, and the VA requires that any home being purchased with a VA loan meet its Minimum Property Requirements (MPRs), which are designed to ensure that the home is in a safe, livable condition.
What happens if repairs are necessary to bring the home in line with the VA’s MPRs? You’ll likely have two options: You can walk away from the home, or you can pay for the necessary repairs out of your own pocket before the sale. The latter choice will get results, but it can be a risky path. After all, what happens to your investment if the sale falls through?
If You Are a Seller
What does opting for a short sale mean if you’re the seller? As Benefits.gov reports, you’ll sell your home for less than what you currently owe, and the VA will pay the difference up to the maximum guaranty on the loan. You’ll lose your home, but avoid the sting of foreclosure and the seven-year waiting period that’s normally required of homeowners who’ve gone through a foreclosure before they can secure another mortgage (source). Instead, you’ll only have to wait two years before pursuing another home loan. However, you might have to choose another form of financing for your next home purchase. According to Circular 26-18-25, a veteran’s full home loan entitlement will only be restored if the veteran fully repays the VA for any losses resulting from the short sale. If the veteran doesn’t repay the loss, he or she is limited to using any remaining entitlement or seeking other forms of financing.
Are you a service member or veteran interested in exploring the ins and outs of VA loans? Are you wondering if a short sale could be a stepping stone that carries your along the path to homeownership? Reach out to PrimeLending: Manhattan, Kansas. Our experienced team doesn’t offer cookie-cutter solutions. We talk with you to learn about your specific housing goals and offer the insight, information, and expert service that you need to help you reach those goals. Contact us today to get started.