Buying a Home After a Short Sale using a VA Mortgage

untitled-1024x849I have had a lot of people ask me about how to buy a home after a short sale using FHA financing but it’s becoming more and more common that people are considering buying a home after a short sale using financing insured by the Veteran’s Administration.  These guidelines use to be murky but the issues concerning waiting periods after a short sale and underwriting guidelines are coalescing around an interesting blend FHA guidelines and Fannie Mae guidelines.

There are six unique stipulations and they are as follows:

  • The borrower must have made all mortgage and installment payments within the month due for the 12 months prior to the short sale – This is the same as the FHA rule
  • The short sale must serve as payment in full on the existing lien(s) and the existing mortgage servicer may not require repayment of the difference between the mortgage balance and the short payoff – This is the same as the FHA rule
  • Borrowers may not execute a short sale to take advantage of declining market conditions and purchase, at a reduced price, a similar or superior property within a reasonable commuting distanceThis is the same as the FHA rule
  • If a borrower was delinquent on the mortgage at the time of short sale, iLoan will not approve the borrower for VA financing for at least two years after the date of the short sale unless the borrower experienced significant extenuating circumstances and the loan receives and automated underwriting “approve” or “accept” response – This rule is borrowed from the Fannie Mae guidelines for buying after a short sale except Fannie Mae requires 10% down after 2 years where VA financing will allow for 0% down
  • Borrowers having short sales will not be approved if they also have a previous bankruptcy or foreclosure at iLoan
  • Borrowers having a short sale within the most recent three years and credit scores at or under 639 are ineligible at iLoan

Outside of these stipulations, only the basic requirements for a VA loan must be met.  While these 6 provisions are inflexible, outside of them, we approach these would-be veteran home purchasers with an open mind as we see them as an excellent credit risk.

Equally important to finding a good loan officer for this type of transaction is finding a good and enlightened Realtor.  Their role will be key in in executing the sale of the current home (if it’s not already sold short) and the selection of the new property if the new property cannot be similar or superior within a reasonable commuting distance from the previous property.  Particularly, they should know that you don’t need to be late on your mortgage to do a short sale in most instances and be willing to guide you through that process without a technical default.  That will be necessary for a would-be buyer if they don’t want to suffer a long waiting period.

Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI

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Comments 14

  1. Heather

    My husband and I did a short sale on a VA loan in 2005, and filed for bankruptcy in 2006. We are now considered first time home buyers and have been told we would probably qualify for bond money. Our credit isn’t great, but not horrible. My husband’s score is above 620, mine is 618. I do not work. He was recently laid off, but found new work in a similar field making less money. We do not have much money at all for a down payment or closing costs. What is the best route for us to pursue moving forward. We are renting, but rent is too high, so we want to buy at the end of our lease.

    1. Post
      Author
      Charles Dailey

      If you did a prior short sale on a VA loan and wanted to use VA financing for your new purchase, you’d have to restore your VA eligibility. This would likely involve paying the VA back for the deficiency they had to cover on the short sale. Because you’re short on down payment funds, I assume that’s not an option. I’m not licensed in OK so I can’t be of help but my suggestion would be to look into buying using FHA financing with gift funds for the 3.5% down payment and use seller paid closing costs. Also, for most lenders you’ll need a 640 credit score.

  2. Trish

    Charles,
    We have lived in our home since 2006, all mortgage payments have been made on time, we have a credit rating in the 800’s. My husband’s employer closed their company in July 2012 and my husband thankfully transitioned to another company right away. Unfortunately, his job is located about 50 miles away (100 miles round trip). We just had a realtor do a CMA on our home and the price she came back with is below what we owe on the house. It is a VA loan through Wells Fargo. We want to be able to buy a house in the area where he works. Do we have to miss a payment to do a short sale? If we keep paying on time and are allowed the short sale due to job relocation will other banks see the circumstances and allow us a loan again right away even though we did a short sale?

    1. Post
      Author
      Charles Dailey

      You shouldn’t need to be late in order to qualify for a short sale: /do-i-need-to-be-late-my-mortgage-to-qualify-for-a-short-sale-dont-take-yes-for-an-answer/.

      If you short sale a VA loan, you can’t purchase using a VA loan until you’ve restored the full VA eligibility (paid the VA back for its losses). Therefore, you’d want to use FHA. Here are the rules on that: /buying-a-home-after-a-short-sale-dont-believe-the-naysayers/. Buying 50 miles away would be considered inside of “a reasonable commuting distance.” Consequently, your FHA purchase after the short sale would be subject to the “similar or superior” constraint outlined in the article and video below it. In short, you’d need to buy down.

  3. Ember

    Hi Charles,
    My husband and I had a short sale in January of 2010. We actually moved in 2008 for a job, couldn’t pay a mortgage and rent and ended up trying to do a short sale in 2009. We had several offers on the home but the bank drafted the wrong offer, the buyer backed out, and the house sat longer until it finally sold in January of 2010 and that’s what reflects on our credit. Since then we’ve rented and we are moving again for a job promotion to Minnesota in March or April of 2013. We would like to buy if we can. Our credit is around 690-700. We have paid everything on time since the short sale and our credit to debt ratio is good. Can we get approved for a loan, whether conventional or VA? If so, do we go through an bank or a specific bank that does a VA loan? We may have some to put down but likely not 10%/.

    Thanks in advance for your help!

    1. Post
      Author
      Charles Dailey

      Ember,

      You are past the waiting period and ready to go. I can help you with your VA loan for your MN purchase. We run a permanent promotion for VA loans you might like: /iloan-puts-its-money-where-its-mouth-is-for-veterans-using-va-loans/. I’ll e-mail you my Welcome Letter that explains how to get the pre-approval process going.

  4. Ray Brown

    We had a VA Loan for our home. We contacted Wells Fargo on multiple occasions to proceed with a short sale due me separating from the military. After 8 months of non-corporation with Wells Fargo our relator insisted to quite paying the mortgage payments because if you continue they will not entertain because they are receiving their monthly installment. We stopped. 9 months later we moved out and into a rental. 6 months later we completed a short sell on the home. We did NOT make payments on the home for 15 months. My question is; Is my VA Eligibility Revoked?

    Thanks,

    1. Post
      Author
      Charles Dailey

      If you wanted to use a VA loan again vs. using FHA, you’d have to restore your edibility using form 26-1880. There may be a problem with this if there is any indebtedness to the federal government as a consequence of a claim on the VA fund from the short sale. Here’s the text from the VA manual:

      “…although the veteran’s debt was waived by VA, the Government still suffered a loss on the loan. The law does not permit the used portion of the veteran’s eligibility to be restored until the loss has been repaid in full.”

      The place to start here is by submitting form 26-1880 and starting the restoration process.

  5. Hillary

    My husband(Jason) and I are currently trying to get approved for a VA loan after our short sale of our last home (that we have owned since April 2006) in March 2012. Here’s the story, Ill try not to make it too long and confusing. In the Spring of 2011 we put our home on the market for a year and didn’t get many showings so we took it off. My husband’s aunt and uncle wanted us to buy their home which has been in my husband’s family for over 40 years but since we were upside down on our home we couldn’t. His aunt and uncle then offered for us to do a contract-for-deed with them so we looked into doing a short sale on our home. We called the VA and they said that by doing a short sale Jason might lose a little bit of his entitlement but as soon as we can get a bank to give us another loan, they would back it. There was no “penalty time” so us to wait. I wrote a letter to Wells Fargo saying why we needed to short sale our home and that it had nothing to do with being able to afford our home, we just had a growing family, an offer to buy a home that has been in the family for many years and this new home with located across the street from the school that I teach at. Wells Fargo approved the short sale and we closed on the house in April 2012. After we closed on our home, we were living with my in-laws from 2 months until Jason’s aunt and uncle could close on our next home. In those two months, Jason’s aunt and uncle’s cabin was infested with black mold hitting them pretty hard with a financial burden and are no longer able to carry a contract for deed with us. So, this past October (2012) we tried to process a new VA mortgage loan through a small bank in our area and they said that the VA would support the loan, our credit was great, our finances are great but our loan was “referred” and not approved because it hasn’t been 2 years since our short sale so the underwriters wouldn’t over-ride it since it hadn’t been the 2 years. They told us to wait until January 2013 to try and re-process and our chances would be much better. Last week we tried to re-process a loan but again, the under-writers said they couldn’t over-ride the loan. The bank suggested that we try and get a loan through a bigger bank that would be wiling to over-ride the “referred” and approve it. I just don’t know where to go from here. Jason’s aunt and uncle are still waiting for us to buy the house and we are still living with my in-laws…..Im getting pretty desperate from some help!! ANY advice would be amazing! THANK YOU!

    1. Post
      Author
      Charles Dailey

      Hillary,

      This is a total mess. You may just want to call me at 651-248-6968 to sift through this as it appears you’re in MN and I’m licensed here. With respect to getting a VA loan, there may be more than one obstacle. Of course the first one is getting an accept vs. a refer on the underwriting findings. The other problem will be making sure that your COE or Certificate of Eligibility is fully restored. Often times, after doing a short sale on a VA loan, your VA eligibility isn’t fully restored until you repay the deficiency to the VA from the previous short sale.

      Even if your COE isn’t fully restored, you aren’t without options. As long as you meet the guidelines outlined in this article you might be eligible for FHA financing.

      Does this help?

  6. Chet

    We closed on our short sale 30 days ago and are trying to re-enter the market with a VA loan. So far each “big bank” is indicating that new guidelines (Sept 2012) specify that VA borrowers must wait at least 2 years from the closing of the short sale property. Do you happen to know whether this requirement is bank specific or a govt regulation which impacts all banks? Thanks.

  7. Ann

    My husband and i would like to purchase a house we have found. We had a shortsale on our convetional home mortgage the was final in Feb of 2011. The house shortsaled as a result of job loss. We also used a realtor who gave us the really bad advice to stop paying our mortgage as we went through the process. The realtor did a terrible job for us and the whole process was a nightmare. We would like to use a VA loan to purchase this new house and our credit rating is around 678. Would we be eligble for a mortgage in March of 2013?

    1. Post
      Author
      Charles Dailey

      Ann,

      Sounds like you got bad advice indeed and I hate to be the bearer of bad news but unless guidelines change, you’d have to wait 3 years and not 2. Here’s a comprehensive list of waiting periods: /waiting-periods. The only way to buy after 2 years from a short sale where there were late payments on the mortgage and/or other installment debt would be to use Fannie Mae financing and put 20 percent down or use Fannie Mae financing, put 10 percent down and document Extenuating Circumstances (/what-are-extenuating-circumstances).

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