VA Loans: The Seasoning Period Following A Short Sale
In recent blog posts, we’ve covered topics related to foreclosure, and how to avoid foreclosure on a VA home loan. One way to avoid foreclosure proceedings on a home purchased with a VA mortgage is to put the property up for sale. But in a troubled housing market, the sale of the home may not happen quickly enough in time to avoid foreclosure. In cases like this the owner can make the sale more attractive by lowering the price.
But at some point the borrower may need to lower the price below the amount still owed on the home. This is known as a short sale. According to the Department of Veterans Affairs, “If the property cannot be sold for an amount which is greater than or equal to what the mortgagor owes on the loan, VA may pay a “compromise claim” for the difference to help complete the sale.”
That means the Department of Veterans Affairs steps in to pay the amount still owed on the loan that wasn’t paid off by the sale of the home. According to the VA official site, “…some servicers are authorized by VA to approve a sale with a compromise claim. If the servicer is not authorized by VA to approve a compromise claim, they must contact VA to discuss the situation and get prior approval for a sale with a compromise claim payment.”
Borrowers who “sell short” or participate in a short sale to avoid foreclosure need to understand that such a transaction does have a negative effect on a credit rating, and there may be a waiting period in cases of loan delinquency required before the borrower can apply for a new VA mortgage. Once the waiting period is over the buyer is free to approach conventional lenders or apply for another VA home loan.
One important thing to understand about this process is that a VA borrower doesn’t get their eligibility automatically restored for a VA mortgage–even under the most ideal circumstances and with spotless credit, VA loan eligibility restoration must be applied for in writing before the VA will act to review your paperwork and restore the eligibility.
According to the VA, the veteran must send a completed VA Form 26-1880 to the Winston-Salem Eligibility Center. “To prevent delays in processing, it is also advisable to include evidence that the prior loan has been paid in full and, if applicable, the property disposed of. This evidence can be in the form of a paid-in-full statement from the former lender, or a copy of the HUD-1 settlement statement completed in connection with a sale of the property or refinance of the prior loan.”