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The VA Compromise Sale Program: How to Do VA Short Sales

Seattle Short Sales - Monday, August 30, 2010
What is the VA Compromise Sale Program?

The VA Compromise Sale Program is often referred to as the VA Short Sales program. Many homeowners who are looking to sell their homes today are finding that, in the current economic climate, the market value of their home is less than the amount owing on their mortgage. However, if their home loan was financed as a VA Loan, they may be eligible for assistance through the VA Short Sales Program.

VA Loan summary

The VA Loan is a program administered through the Department of Veterans Affairs, available to eligible service persons and veterans to help them to negotiate home loans at more favorable terms than most borrowers would have access to.  

VA does not provide the funds; the mortgage is still issued through a private bank, like any other mortgage. But VA provides a loan guaranty to the lender, promising to pay a specific amount to the lender in case they are unable to continue making payments on their loan. They do not guarantee the entire value of the loan, but a percentage. This can range from 50% on loans up to $45,000 (i.e. maximum $22,500), to between 25% and 50% of loans up to $144,000, and up to 25% of the Freddie Mac conforming loan limit on loans over $144,000.

The maximum amount that VA will guarantee a loan for is called the “entitlement.”  It is like an insurance policy for the bank. Active-duty service persons can qualify for entitlement. The amount of entitlement that a service person is eligible to receive can be found on their Certificate of Eligibility, available from VA.

The advantage of getting a home loan through the VA program is that borrowers receive much more favorable mortgage terms. Since the bank receives the loan guaranty from VA, borrowers can negotiate a loan with little or no money down - even a deposit of 0% - and receive lower interest rates.

Why would a homeowner choose to proceed with a VA Short Sale?

Sometimes, circumstances force the sale of a home at a lower sale price than the original purchase price. For members of the military, reasons to sell a home at a loss might be because of a permanent change of station, or a change in marital status.

If the home was purchased with a VA Home Loan, the seller might be eligible for the VA Compromise Sale Program. If an offer to purchase is received that is less than the amount owing on the home loan, the homeowner can send a request to VA to undertake a “compromise sale” (or short sale). If VA approves the sale, they will pay the lender the difference between the purchase price and the amount owing on the VA mortgage, up to the amount that they guaranteed on the original home loan.

In a regular short sale, the homeowner is dependent upon the lender agreeing to take a financial loss - absorbing the difference between the amount owing on the mortgage and the sale price of the house - in order for the homeowner to rid themselves of a mortgage that they no longer can service. If the lender does not approve the short sale, it cannot go ahead. The advantage of a VA Compromise Sale or Short Sale is that VA takes some or all of the loss, through their loan guaranty, making it much more likely that the lender will approve the short sale.

Eligibility requirements:

The VA Compromise Sale program is for homeowners who have already received a purchase offer on their home that falls short of the amount owing on their mortgage, and whose mortgage was negotiated through the VA Home Loan program.

In order to qualify for the program:
- the seller must demonstrate financial hardship
- the home must be sold at fair market value based upon current market conditions
- there must be no second lien or other lien on the home, unless the value of that lien is deemed by VA to be “insignificant” (In situations whereby there are second liens or other liens, the seller can request that the lien-holder consider releasing the lien and converting the loan to a personal loan.)
- closing costs for the sale must be considered “typical” for such a sale
- the compromise sale must be less costly to the government than foreclosure would be
- the borrower must provide a statement explaining why they must sell the property
- a VA appraisal will be required
- on loans that originated on or before December 31, 1989, the seller must be willing to sign a promissory note and enter into a payment plan to compensate VA for a portion of the compromise claim payment.

To protect the seller’s interest, the seller should make the sales contract subject to the approval of a VA compromise sale.

Steps:

The homeowner must first receive a purchase offer, at current fair market value, that is lower than the amount owing on the mortgage. Once this offer has been received:

1. Find out if your lender has a Loss Mitigation Department that has been authorized by VA to process a VA compromise sale. You can find an up-to-date list of authorized lenders here or you can contact your lender to ask them.

2. If your lender does have a VA-authorized Loss Mitigation Department, contact them directly for the forms. If they do not, then contact your regional VA office for forms.

3. Fill out a financial status report form, provided by your lender or the VA. You can download the form here.

4. Complete a letter of request.

5. Complete a Compromise Agreement Sale Application form, provided by your lender or the VA.

VA will then work with your lender and review the application. If they approve the short sale, VA will pay the lender the difference between the mortgage balance and the proceeds of the sale - up to the value that the VA Loan was guaranteed for.

When VA pays the lender the difference between the sales price and the total debt, the portion of the homeowner’s entitlement used to guarantee the loan will remain tied up until VA is reimbursed in full.

Further information:

Updated list of VA-authorized lenders:
http://www.vba.va.gov/ro/roanoke/rlc/slmps.htm
If your lender is not on this list, VA will process the Compromise Sale/Short Sale directly.

Regional loan centers contact information:
http://www.benefits.va.gov/homeloans/rlcweb.asp

More information (pdf document):
www.vba.va.gov/ro/roanoke/rlc/forms/Compromise Sale Program.pdf

VA Compromise Sale Program - Info for Real Estate Professionals:
http://www.vba.va.gov/ro/houston/lgy/compsale.html

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

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