Nobody applies for a home loan expecting to miss payments, go into loan default, and face foreclosure. But tough economic times happen to the best of us, and sometimes there is no choice but to cut your losses, pick up the pieces, and work on rebuilding your credit.
Some people will interpret the paragraph above to mean that it’s OK to let your home slide into foreclosure. But VA home loan foreclosure should be the absolute last resort for many reasons, the least of which being the damage that a fully realized home loan foreclosure will do to your credit.
But what options does a VA borrower have? Some cases involve only a couple of missed payments and can be cured (the mortgage loan industry term for solving the missed payments problem and getting back on schedule) through a loan modification program, loan forbearance, or other measures.
But some financial problems can be severe enough that these steps aren’t appropriate. Another alternative is needed that can prevent a full-blown foreclosure action from ruining a borrower’s credit score.
Enter the VA Compromise Sale, which is an option offered to VA borrowers who meet specific criteria.
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What Is The VA Compromise Sale?
To understand how a VA Compromise Sale works, you have to understand what it means to put your house up for sale as a foreclosure avoidance measure. There are some basic options for selling a home that is in danger of being foreclosed upon. They include:
- A private sale of the home to pay off the mortgage, done with the lender’s cooperation. This usually involves the lender agreeing not to foreclose on the home to give the borrower time to arrange a private sale.
- Deed-in-Lieu of Foreclosure, which is where the home owner signs the title of the home to the lender, the bank becomes the new owner of the home, and the borrower moves out and gives up the property.
- Short sale, which is where the borrower sells the home for less than the amount needed to pay off the mortgage.
The VA Compromise Sale is a program a bit like a short sale, except the Department of Veterans Affairs agrees to step in and make up the difference between the amount the property was sold for and the full amount due on the mortgage.
This compromise sale option is not open to all applicants. Specific need must be demonstrated, as we’ll explore below.
How A VA Compromise Sale Works
In cases where the VA borrower is unable to sell the home “for an amount that is greater than or equal to what he/she owes on the loan, including closing costs” the VA may be willing to pay the compromise claim to facilitate the private sale.
The transfer of the home may come via ordinary mortgage financing, or it may be accomplished via a loan assumption (with the lender’s participation).
A VA Compromise sale is possible only under certain circumstances, which include:
- The home must be sold at fair market value
- Closing costs must be “reasonable and customary”
- The compromise sale is required to be the lesser cost to the VA than if a foreclosure were to occur
- The seller must demonstrate financial hardship
- The home must have no substantial second lien
VA loan rules add that the home’s seller “must first obtain a sales contract in order to be considered for the program” and the VA advises the home should be sold on the contingency that the sale is approved.
VA Loan Compromise Sales And VA Loan Entitlement
Every VA purchase loan uses the borrower’s VA loan entitlement. Those who wish to use their VA loan benefits again must have this entitlement restored to make a new purchase (the rules operate differently for certain VA refinance options) and while a VA loan transaction may not use the borrower’s full entitlement, that 100% entitlement is not available again until the loan is paid in full.
In cases where there is a VA Compromise Sale, the Department of Veterans Affairs warns consumers that in cases where the VA agrees to pay the difference between the sale price of the home and the total remaining mortgage debt, “the portion of the homeowner’s entitlement used to guaranty this loan will remain tied up until VA is reimbursed in full”.
What Demonstrates Financial Need?
VA Compromise Sales are need-based. In order to be approved for a Compromise Sale, the following conditions must exist for the VA borrower:
- The home owner’s job requires a relocation
- The home owner’s financial situation requires a relocation
- Loss of income
- Decrease of income
- Major medical bills
- Death of the “principal wage earner”
- Death of a spouse or family member
Some situations are NOT permitted to be considered for a VA Compromise Sale:
- Desire for a bigger home
- Desire for a different home or neighborhood
- The homeowner has assets which can be liquidated instead of selling the home
- Property values have dropped
How To Explore Your VA Compromise Sale Options
The key to being approved for a VA compromise is much like other foreclosure avoidance measures. The moment the home owner realizes they are experiencing financial hardship or other circumstances that may require relief, they should contact the lender.
A financial statement is required and must be signed by both the lender and the borrower, and this must be submitted with a formal letter requesting the compromise sale. This letter must contain the same financial hardship information in the financial statement.
You will be required to ask your participating VA lender for a Compromise Sale Agreement Application and for any VA loans originated on or before Dec. 31, 1989, the participating lender/loan servicer is “required to write off any amount over the maximum guaranty of the loan” according to VA.gov.
Other Considerations
VA Compromise Sales require a current VA appraisal and home owners should anticipate this expense. VA.gov states that in cases where the buyer is purchasing a home through a compromise sale and uses a VA mortgage, “the buyer’s VA appraisal can be used provided the buyer will agree to the same.” In all other cases, “the seller’s servicer will have to complete a VA appraisal.”
A title review is also necessary to insure no second liens are present. In cases where there are second liens, a request to convert those liens to personal loans may be required. The VA advises, “A compromise assumption will not be processed without first receiving a statement from the servicer that they are willing to have their guaranty amount reduced by the amount of the claim payment.”
When a VA Compromise Sale makes it to closing day, the proceeds of the sale are paid directly to the lender, who then contacts the VA to file a claim for the difference between the money paid at closing time, and the amount remaining that is still due. The VA will not pay a compromise claim for more than the original loan amount.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
