VA Loan Reader Questions: Non-VA Short Sales
A reader asks:
“Is it true that if you have a short sale but you don’t miss any payments on your current mortgage that you can get a VA loan immediately after the sale? Here’s a quick rundown of my situation. I just got a new job so I have to move across the state (PA). I owe 270,000 on my house but it won’t appraise for more than 265,000.”
“After closing costs and Realtor fees I’m looking at it costing 285,000. That’s $20,000 that i would have to come up with that I don’t have. I am currently NOT in a VA loan but would like to use it to purchase my new house. My best option right now is to keep making my payments but try to do a short sale so the bank will cover the difference at settlement. Then but the new house with the VA loan. Any thoughts/ideas would be greatly appreciated. Thanks.”
We get a great many questions similar to this one and regardless of the circumstances the answer is always the same. Borrowers should not enter into a short sale without considering all the implications. Why?
If you have a short sale on your record and want to apply for a VA guaranteed home loan, and a delinquency is involved (where applicable) there is a one year wait from the last delinquent payment that needs to happen before you apply again.
It’s important for potential VA borrowers to understand the rules on this issue as they are generally inflexible. Some mistakenly assume that because the original mortgage loan was not a VA mortgage that they might be exempt from this waiting period. But a one-year record of reliable payments is one of the key qualifying factors for VA mortgage loans–something to remember when considering your options.
Even if the Department of Veterans Affairs did have relaxed standards in such cases, many lender policies could still require a potential borrower to wait. Why? According to the credit reporting agency Experian.com, short sales have a potentially negative impact on your credit rating:
“When you pay less than originally agreed on any loan, the impact on your credit report almost always will be negative. It would be rare for a lender to report the mortgage as “paid” and forgive the remaining amount. In that instance, assuming all your payments had been made on time, there would be no negative impact on your credit scores. In the vast majority of instances, however, a short sale is reported as “settled,” which means that you reached an agreement to repay only a portion of the total amount. The remainder is written off as a loss by the creditor.” That potentially takes the borrower back to the “one year” rule on timely payments.
This reader question likely comes as a result of hearing about a clause in FHA mortgage loan rules (not VA loan rules) which states, “A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all
• mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and
• installment debt payments for the same time period were also made within the month due.”
However, this rule applies to FHA home loans, not VA guaranteed mortgages. It also does not necessarily mean a borrower will find a lender willing to issue credit in such cases–it simply allows the option. Any current home owner considering a short sale should contact his or her lender to ask how that lender would view the short sale in light of a new mortgage loan application–and how long the borrower would be required to wait according to that financial institution’s rules. The answers you get will definitely help when it comes to financial planning and deciding what course of action is best over the long term.