Having to execute a short sale on a VA-backed property can be extremely disappointing and heartbreaking. It may have you wondering if you’ve ruined your chances of purchases another home with a VA loan. That is not the case—there is hope! So, let’s break it down and talk about how and if you can use your VA loan after a short sale.
Short sales, Foreclosures, and deed-in-lieu of foreclosures are not the same thing. The difference in these terms could help determine your eligibility to reuse your VA loan later. For now, let’s highlight the difference in these terms:
A short sale is when a lender (in our case, a VA lender) allows the borrower to sell the home for less than what they owe on the property. That is better than foreclosure for the lender because they can at least recoup some of the loan amounts. Foreclosures can be very costly—in both time and money, so short sales are preferable if one must choose.
Unlike a short sale, during foreclosure, banks are taking the home back from the borrower. Once this has been accomplished--the bank must sell the property to recoup costs.
Deed-In-Lieu is essentially the borrower handing the bank the keys to the house and walking away. That can be less expensive to the bank as far as court/foreclosure proceedings, but there’s also no immediate sale, so there can still be a long-term loss to the bank/mortgage company.
Although the VA has no set requirement on a seasoning period after a short sale, most lenders do. Depending on borrower delinquency, most lenders require two years in-between a short sale and a new VA loan. That will depend on each particular lender, so definitely be sure to ask the question of how long you need to have after the short sale transaction.
If you think that a two-year waiting period after a VA short sale is a considerable amount of time, consider this: both FHA and the USDA require a three-year waiting period before borrowers can qualify for a VA loan after a short sale. If you used a conventional loan (Fannie Mae & Freddie Mac), the stipulation is to wait FOUR years after a short sale before qualifying for a VA loan. Two years doesn’t seem so bad now, right?
Unfortunately, short sales can hurt your credit score and could drop your credit up to 160 points. Be sure to keep an eye on your credit report to see if you’re in a position to purchase a property again. Also, take note that lenders may require no late credit card payments for at least a year before your VA loan application. If your credit score took a big hit, make sure to work toward repairing your credit as fast as possible. That said: not all situations are the same, and you may be able to move forward with another purchase sooner than you think. Talk to your lender (ADPI lending link) to see about your purchase options.
It will depend on how much eligibility you used for the VA property short-sale. When a VA borrower opts for a short sale, it negates the VA eligibility used during purchase. You cannot get that eligibility re-instated unless you pay back that amount. But, if you have eligibility remaining, you can use a 2nd-tier VA loan and use the remaining amount to purchase another property using the VA loan (if you meet all other lender qualifications)
.Keep in mind: even though you may still have VA loan eligibility remaining, if you purchase over that amount, you’ll need to pay a 25% down payment of the difference. (Example: $200,000 eligibility remaining, and you buy a $300,000 home – You’ll have to pay a $25,000 down payment. $300,000-$200,000 = $100,000. $100,000 x .25 = $25,000 down payment.
When you’re considering buying after experiencing a short sale, it can feel a little overwhelming. You must choose a lender that knows and understands the guidelines and stipulations. You need someone who can help lower your stress and make that process as smooth as possible. ADPI’s knowledgeable in-house lending team, AmNet, can help you plan and navigate purchasing a home after a short sale. Don’t hesitate to get assistance and contact them here: (Link)
Active Duty Passive Income is here for you during every step of your home-buying process. If you’re looking for more guidance, join our ADPI Facebook Group and be a part of our fabulous community!