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Using a VA Loan with a Short Sale

By: Grant Moon 03/19/14 10:58 am

Using a VA Loan with a Short Sale

You’ve certainly heard the term “short sale” used more often recently. As property values have declined and have just now stabilized. Short sales have been around forever and have been known under different names but all apply under the same set of circumstances.

When a buyer makes an offer on a home and it’s accepted, one of the items the VA lender asks for is the payoff on the existing mortgage. The payoff is the outstanding loan balance plus any unpaid interest still owed. If an offer is made for $200,000 and the loan balance is $100,000, the lender gets paid off and the borrower receives the rest, less closing costs. But if those numbers are reversed, there’s a problem.

The lender won’t release their lien until their loan is paid in full. In this example, the outstanding loan balance is $200,000 and the sales price $100,000. To get the lien released, the seller would have to come up with the $100,000 difference or the sale can’t go through. A short sale however is a request made by the property owner to the lender to accept what is owed on the property as “paid in full.” Why would a lender accept less than what is owed? A lender will consider a short sale offer if the lender fears a foreclosure is imminent and the bank would own a home worth much less than what is owed. A short sale allows the bank to take the hit on the loan but releases the home from its inventory.

A short sale must be approved by the bank and review the request based upon the owner’s current financial condition. If the owner is indeed in a distressed situation and it can be shown that similar properties in the area are selling for much less than the outstanding loan balance, the bank may accept the short sale offer.

There are no special requirements when using a VA loan to finance a short sale and is treated like any other purchase. Yet be prepared for an extended closing, up to two months, as the short sale request process will take more time compared to a standard transaction.

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