How are Short Sales on a VA Loan Different?

by on May 15, 2012Shannon O'Brien

Today’s veterans have President Roosevelt to thank for their housing benefits. Signing the GI Bill of Rights into law provided our service members – who fight so hard to maintain the American dream – the chance to actually achieve it themselves: a federally guaranteed home loan with no down payment.

va loan short sale processLike the Federal Housing Administration’s (FHA) guarantee, the U.S. Department of Veteran’s Affairs (VA) doesn’t make loans, but provides a guarantee that protects the lender if the veteran defaults on his or her mortgage. This guarantee allows the lender to do away with down payment requirements and to offer more favorable interest rates and terms.

The short sale process for a home with a mortgage backed by a VA loan is similar to that of a traditional short sale but does contain several important distinctions.

The VA calls its short sale program a “compromise sale.” If a veteran owes more on the home than what it’s worth and sells the home, the VA will pay the remaining balance of the mortgage and closing costs. This is the most significant difference between the traditional short sale and the compromise sale: the lender receives the full balance owed by the veteran.

Additionally, as of January 2011, the veteran is entitled to $1,500 for relocation assistance.

Short Sale Program Requirements

The main requirement to undertake a compromise sale is that the veteran is experiencing severe financial hardship that prohibits her from meeting her mortgage obligation. Suitable hardships include:

  • Major medical expenses
  • A decrease in income
  • Death of one of the principle wage earners in the household
  • Involuntary relocation

If the veteran has any significant assets, the VA may require that they be sold or cashed in to help offset the mortgage deficiency.

The VA will review the veteran’s situation, looking for the following criteria:

  • The home must be sold for current market value.
  • Closing costs must be “reasonable and customary.”
  • The compromise sale will be less costly for the VA than foreclosure.
  • The veteran’s financial situation.
  • The date of mortgage origination – if the loan was taken out on or before December 31, 1989, the lender must agree to write off the portion of the debt above the maximum guarantee.
  • The home has no other liens.

How to Get Started

If you feel you meet the criteria and need to undertake a compromise sale, there are certain steps to take:

  • Contact your lender’s loss mitigation department and let the representative know that you can no longer make your loan payments and will be selling the home via a compromise sale.
  • Secure the services of an experienced short sale real estate agent and list the home for sale. Ensure that the agent includes a contingency that the sale is subject to VA approval and that the home is listed at current market value. Ask the real estate agent to waive his or her commission should the VA not approve the sale and get the agreement in writing.
  • Create a compromise sale package with the assistance of your real estate agent that includes a request for a compromise sale, the offer to purchase, a Good Faith Estimate (GFE) a financial statement with supporting documentation, a hardship letter, a Compromise Sale Agreement (available from the lender) and a payoff statement from the lender. Your real estate agent will take it from here, sending the package to your lender.

The lender will have the property appraised by a VA-approved appraiser, and check the title for additional liens or other clouds. The time it takes until you hear if your compromise sale is accepted varies according to the lender’s current workload.

The VA warns veterans to beware of the various scams perpetrated against distressed homeowners. These include offers by someone other than your lender or the VA to pay your deficiency if you’ll sign certain paperwork. The VA cautions veterans to contact their lender before signing anything presented by a stranger.

A veteran can purchase another home within two years of completing a compromise sale, according to Brian Skaar, a California lender.

{ 95 comments… read them below or add one }

joe martinez September 5, 2014 at 9:39 pm

I had a VA home loan and had to short sale due to financial hardship in 2012. I received paperwork from Wells Fargo stating the loan was paid in full and neither I nor the VA would be pursued for any difference. I looked through all the paperwork we signed and obtained from our attorney and I did not see any documents listing the short sale as a “compromise sale”.

My question is, Is it possible a normal short sale occurred on a VA loan without Wells Fargo making it a compromise sale?

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Mary Ann Daniell September 11, 2014 at 10:53 am

Joe – A short sale on a property with a VA loan is termed to be a VA compromise sale. There is very little difference. I don’t think you have anything to worry about!

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Retired Military September 17, 2014 at 7:01 pm

But the laws clearly state that a “short Sale” on a VA backed loan does not require a “cooling off period of 2 years”. The Veterans Benefit is still intacted as opposed to a forclosure. Look it up.

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Justin Powell July 30, 2014 at 12:06 pm

Hello,

Hoping to get clarification on any options I may have being Active Duty and upside down in a home that we no longer live in (due to PCS’ing). The situation is as follows:

- Bought a home in Virginia in 2008 (utilizing my VA Loan).
- Got orders to Japan in 2009. Attempted to sell the house, but due to the dramatic drop in value, banks would not lend the amount we owed to those ineterested.
- Have been renting the house out since then (as we can find tenants). Issue is the renter prior to the current tenant up and left the house and has since be heard from. This left us with not only repairs, but around 5 months of mortgage to cover (did not have the money, so to prevent my credit from being hurt and financial issues affecting my career, it all went on my credit card)
- We have a tenant now, but the lease is up in a couple months. We would like to get rid of the home to prevent being faced with a mortgage we cannot afford if we can’t get a renter in for months again.

We probably owe around $120,000 now, and the value of the property based on what I have seen online is around $70-75k.

I have seen the compromise sale option, but was wondering if my situation is one that would qualify me for that. I know it will hurt my credit but at this point we do not want the burden anymore, especially with no sign of ever getting stationed back in Virginia. Thanks in advance for any guidance!

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Ron R June 23, 2014 at 4:38 pm

Hello,

I’m seriously considering a short sale. I have a rental house purchased in 2007 which was my primary home but when my job moved me back to the same city months later I decided to get a new home and just rent that one. Well, I have a tenant who’s not paying and I no longer afford to carry this mortgage monthly. I’m so confused as to what I can do or who to talk to. I’m trying to make the BEST decision possible with little repercussion. Can you offer me any suggestions?

Thanks,
Ron

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Will July 9, 2014 at 7:05 pm

Quit paying the mortgage…..kick the renters out and put new renters in……collect rent on it for about 12 months while it goes into the short sale process. Screw these banks. I tried to modify my va loan because of being upside down and then getting bad tenants which set me back 3 months in payments. Paid the $1800 to modify the mortgage and be back on track but the payment was a day late. They kept my money and denied me. They dont care because the government will pay them for the loss. I tried for 3 years keeping the rental home up while I was 10 hours away. GMAC is horrible…..and CITI. Get the rent money for about 10 months before they take your house though.

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Mike B February 22, 2014 at 3:20 pm

Hi everybody. I had a foreclosure on a VA loan last year in the state of Wa. I was extremely underwater. I owed $185,000 on a home that went for $42,000 at foreclosure trustee sale. In addition to this, I was 17 months behind in payments at the date of foreclosure. You bet! I walked away! Anyway, from my standpoint, would there of been much difference between shortsale and foreclosure?

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Tamee B April 22, 2014 at 10:11 am

Mike,

Did the VA ever come after you for the deficiency amount? We’re probably going to be foreclosed on, and that’s what our concern is. If the VA will pursue the deficiency after the foreclosure.

Thanks!

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Mike B July 16, 2014 at 8:43 am

No they did not Tami. Its been 1 year, 6 months since foreclosure. From my research and consulting with the counselor that the VA assigned me while my home was in default, the VA does not pursue deficiencys on thier payout guarentee too lenders after foreclosure or shortsale, unless fraud was commited. That being said, a lender only has 1 year too file a claim. If they do not, then your benefit is fully reestablished. If they do file a claim, then your benefit is reduced, but not entirely eliminated if you did not use the full benefit the first time around. I’m not sure if my lender filed a claim or not. I’m in the process of figuring out if they did or not.

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Todd February 8, 2014 at 6:35 am

If the VA pays off the mortgage loan deficiency amount, will the deficiency amount be considered taxable income? Congress has not extended the Homeowners Debt Relief Act into 2014.

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Loren March 19, 2014 at 11:09 am

According to my Short Sale Realtor Broker you will be 1099′d as income however don’t be too scared. As long as the home is your primary residence you are still entitled to the Capital Gains Relief of $250,000 if you’re single and nearly double that if your married. So even if you receive a 1099 and it’s your primary residence you will not have to pay taxes on the money.

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Sam August 11, 2014 at 9:27 am

Loren,

Capital gain relief is only if you have a capital gain. If you are on a short sale there will usually be no capital gains. You are not being taxed on capital gains, you will be taxed on the loan deficiency which was forgiven. The forgiven debt will be reported on a 1099-C form. You may be able to avoid taxation depending on your financial situation. Best to talk with a tax expert on that matter.

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June Daniels January 24, 2014 at 1:46 am

My sons father recently passed away, and has a home that was bought using his VA benefit. As with va loans we just found out that there was no mortgage insurance on the home. If my son doesn’t want to assume the loan (mainly because his dad has a second lien on the home) What happens with the house. Does it go back to the VA or does the bank (BOA) do a foreclosure? Any info you can give me on how my son should proceed would be greatly appreciated I myself would be interested in the home, however not for what is still owed on it.

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Dena W. December 27, 2013 at 8:37 am

We have just decided to list our home as a VA short sale due to an involuntary PCS and loss of income, as well as not being able to rent out the house for the full amount of the mortgage payment. We used my husband’s VA benefit to purchase this home and I am a co-signer on the mortgage; however, I have my VA benefit that has never been used. Can we still purchase later using my VA benefit or must we pay the residual amount that will be covered by the VA prior to using the VA benefit?

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Denise September 28, 2013 at 8:22 pm

Shannon,

I’m a federal civilian employee and I will be retiring and relocating to another state in the next 8 months. My home that I purchased in 2010 is currently underwater by approx 60k. I have a VA loan and have never missed a payment on the house or any other bill. Will my pending retirement and loss of income which means I will no longer be able to afford the home be a valid situation where the VA will let me do a compromise sale? Also if the bank (Wells Fargo) is made whole with payment from the VA will my credit be affected? Finally, do I have to retire first for the compromise sale is considered or can I start the process a few months before retirement to ensure the process is completed prior to my retirement. Thank you.

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Ron September 24, 2013 at 11:10 am

Shannon,

I am a little confused after reading some of the previous posts. I am in the middle of a short sale that is actually going well. In 2006 I purchase a house for 365,000 with a VA loan. In 2008 I moved due to a PCS (I am a Federal Employee) to Alabama. In 2008 my house in Maryland had dropped in value to around 180,000. I rented the house for less than my monthly payment in hopes that the value would increase. Fast forward to May 2013…the house sat unrented for six months so I was able to negotiate a short sale with the bank. They accepted based on my PCS in 2008 put me in a hardship. Question: The bank said once the sale is complete, they would not come after me for the difference, but nothing was said about the VA. Will the bank seek the difference from the VA and if the VA agrees and pays the difference, will I still recieve a 1099-C from the bank stating the dept forgiveness for with I will owe taxes?

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James September 25, 2013 at 3:30 pm

Ron,
I know you directed this at Shannon, but I can tell you (see my previous posts) that based my VA short sale (aka compromise sale). The bank will (most likely) collect from the VA. The VA will pay (they also would have to approve the short sale) up to the limit of your benefits. I did not get a 1099-C b/c the debt was not forgiven (mine deficiency was within my guaranty amount. I would assume that if your benefit does not cover the full deficiency then you may get a 1099-C for that amount. The bank will (in all likelihood) report it at settled less than amount owed (regardless of the VA paying). If the VA does pay, if you check your eligibility for another VA loan, you’ll get a nice letter saying you owe a debt to the U.S. Govt…they say they won’t collect, but you cannot have your full entitlement restored until you repay them…in full…no installment plans.
Good luck,
James

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Erin August 7, 2013 at 3:05 pm

My husband and I have a home together. We are definitely upside down. We both signed the mortgage, me as the co-signer. I am military and he is not. Will be eligible for the HAP program and will it affect both credit scores if we short sale due to a military PCS.

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Veronica August 7, 2013 at 9:04 am

Shannon,
As I stated in an earlier post, we are in the process of a Short Sale Compromise with the VA for a home we own in Missouri. What advice can you give us regarding taxes to be paid to local municipalities and the state? My husband (on active duty) and I are not residents of Missouri, but Florida. From reading all of your posts, Ive gathered that there is no escaping the deficiency balance owed to the VA. Is that correct? How about with the bank? Could we hold out until the bank agrees to have a written statement in the closing documents stating balance paid in full. At least this can possibly alleviate some of the negative credit reporting. Anything else we should be aware of before we sign on the dotted line?

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Donovan July 11, 2013 at 3:45 pm

So I am going through something similar. I did a short sale on my VA Loan house around June 2011 and it did not hurt my credit score much. I am now back up to 798 as of the end of June. I received a letter stating that the loan was completed and received the 1099C for roughly $99,900, I was able to write this off with the IRS and received not information about the bank going back to the VA for money. I filed the other day for VA certificate and was talk I owe them 68k or no benefits. The 99k was the complete difference in what I owed and the settle cost how the hell do I get have to pay that money twice.
How can I get this fix when I have a letter showing the complete write off?

Thanks everyone
Donovan

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JJ July 19, 2013 at 1:25 pm

I have done a Lot of research on this and from what I can tell you didn’t write off the $99,900 as a loss. The bank wrote it off as a loss and it counted as actual income for you that year. You probably wrote it off in the manner that if the home was your primary residence and you lived in it for at least 2 out of the 5 years you don’t have to pay taxes on the income up to $250,000. The VA then settled with the lender to clear there name from the loan. The VA works much like a co-signer in the manner that they ensure the lender will be paid in full regardless to the fact of the veteran defaulting on the loan or not. It would be the same as if your parents co-signed for a car and you stopped making the payments, now the lender is going to contact your parents and inform them that the loan is in default and if it is not paid a credit hit will be received. If your parents cared about the credit hit they would be forced to pay the loan to good standing leaving them now responsible for the loan. The VA does the same thing in the manner of when you default or “Short sell” the VA pays the difference and then call it a compromise. This all makes sense up to the point were the bank writes off the difference as a loss and then is paid in full by the VA. I feel that these two should not be able to be combined. I also have not been able to figure out how they can say that the loan is not paid in full and hit the veterans credit when in fact the VA did pay the loan in full. It does however make sense to me that it counts as normal received income due to the VA paying the loan on your behalf. This would be the same as them writing you a check for the difference and then you paying off your loan. You will lose your VA benefits until the 68k is paid in full on a one lump sum payment due to the fact that the VA already co-signed for you once and they got “Burned” by your short sell. Until you clear that debt they will not be willing to Co-sign for you again. I hope this helps.

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Donovan July 20, 2013 at 2:42 pm

JJ,
That is exactly what happened and I agree that the bank should not be able to write off the amount that VA did give them. I know that if it were a tax payer they would be going to jail for IRS fraud. I think that they should be held responsible and have to change the amount of money they loss… Anyway all said and done… Thanks to the Bank I got SCREWED… Wish I would have known about all this before hand..

Oh well there goes my VA home loan Benefits…

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Jesse Moore July 25, 2013 at 7:21 am

Hello,

That is not correct. You can still get a VA loan with owing the VA the 68K if you have entitlement left. So if your in a high cost area it works to your advantage somewhat. I want to be clear that if you have left over entitlement you can use it. However, if you want to have full entitlement, then you would need to pay the 68K to have full entitlement restored. Hope this helps.

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Jack June 16, 2013 at 6:24 pm

Three years ago I financed a home for $122,000 which included my VA funding fees. I have made every payment on time with zero issues and can continue to make the payments. I did however receive new orders to Virginia last september. I placed my house on the market a year ago in July with hopes that it would sell. I owe about $116,500 on the home and it appraises for about $130,000. I have the home listed for a little over 127,000 in order to cover closing costs and the 6% realtor fees. My loan is a VA backed loan and my current agent advised me to do a VA compromise due to myself living in VA under my current orders with my wife and 3 children living in south carolina in the house we currently own and are making payments on. I am not sure what to do because I am not getting any offers on my home with the price being at 127k and I can’t go any less than that w/o having to pay out of pocket. I have also noted on here from other people who have done this compromise that it seems you get taken advantage of in the situation due to the fact that the bank still short sells your home and you take the credit hit for a short sell and then the VA pays the bank the full amount and you take a VA benefit hit as well. I am not sure what avenue I should be taking due to the fact that I can and have been making my mortgage payment, but this forces my family to live 2 states away from me and A year apart has been rough. Any advice would be appreciated Again I owe 116.5k , The house appraises at 130k and I am asking 127k and can’t lower the price anymore due to realtor fees and closing costs.
Thank you,
Jack

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James June 28, 2013 at 9:25 am

I strongly recommend against a short sale/VA compromise sale if you can avoid it (see my previous posts below). Hindsight is 20/20…if I could do it all over again (well honestly the first thing I’d change is I wouldn’t have BOUGHT in NoVA)…I’d have rented my house and avoided the short sale (at least initially). Evidently you can claim rental income after a year and attempt to get another home. If you then need to sell the first house…and short sale is the only option…do it. You’ll be in new house and won’t need to worry about the credit hit (for now). It’s frustrating for us…none of this is our doing (except we actually bought in 2009…silly us) but now we are in a situation (credit hit, VA benefits gone, a debt to the USG, and no $$ to put down). Wish I had better advice…but this is FIRST hand experience…not someone trying to “best guess” or “what if”…I did it…and I regret it.

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Sandy L September 16, 2013 at 5:13 pm

Be careful if you decide to rent. Compare carefully the rent amount you can take in against ALL your expenses. You may be spending good money after bad if you don’t expect values to increase much in the next few years. And you can’t deduct the expenses or losses on the home until after you sell it as unrealized gains/losses per my accountant. i poured hundreds into a rental property until my financial advisor told me to take the hit and start anew. My advice for all, go to a good financial advisor and an attorney. Don’t believe anything the bank tells you. These properties are managed by a “team” with big turnover and you won’t get the same advice twice. A good financial advisor can see the forest for the trees and help you make the right decision. Mine did. And it was the best thing I ever did.

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Kirsten P June 3, 2013 at 1:02 pm

Hello Shannon,
We are in the process of figuring out what would be in our best interest regarding our home. We have a VA loan that originated in October 2009 for $255K. Since we financed 103% to cover the VA funding fee, we currently owe approximately $254K after 4 years of on time payments. We have spoken with our lender (Wells Fargo) who advised us that a short sale may default us on our loan and therefore take away our future VA entitlement. I have read many of the posts, and I’m sure that somewhere in there is a combined answer to what we need to do, but I figured I would ask you directly.

The houses in our neighborhood are currently going for $235K-$250K. Our concern is that due to our upcoming PCS we may need to short sale, or compromise sale, to get it off of our hands. Would it be better to short sale it and pay the different, instead of compromise sale it, since we would still owe the VA the difference? If we list it for current market value, we may lose $10 to $15K to cover the closing costs. Do you have an opinion on what would be the best thing to do?

BTW, this is our third mortgage with Wells Fargo, and our first two houses have sold quickly, where we made a little money, and the loans were satisfied with the bank and the VA. Do you think that our mortgage history could count for something?

Thanks!

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phil kramer April 10, 2013 at 8:44 am

Hi
My son is getting out of the service next month and is underwater on his home.

I know that if he was PCS’ed he’d be able to short sale pretty easily…but what if he’s just getting out and is moving elsewhere to get a job?

thanks
phil

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Ron July 12, 2013 at 4:17 pm

You son won’t be able to use PCS orders for the short sale. He would have to go the traditional short sale route and qualify based on lack of equity, lack of reserves and lack of income as a hardship.

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Sandy March 29, 2013 at 1:19 pm

Hi Shannon,

We purchased a home in San Diego July 2008. My husband retired from the Air Force and we relocated to New Mexico. We used my VA loan to purcahse the house in San Diego. When we decided to retire and move to New Mexico, we talked to our realtor and our only options were to rent it, short sale or foreclose. We wrote a hardship letter to Wells Fargo and our short sale was approved. We finally closed on the house Aug 2012. We never missed a payment and kept everything current including HOA fees. We left San Diego in May of 2012 and have been renting a home here in Albuquerque. My husband received his Certificate of Eligibility today for a VA loan. Since my VA loan was used in San Diego and we short saled, can we buy a house using my husband’s VA loan?

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John May 22, 2013 at 11:50 am

@ Sandy,

Yes he can. The main question is can your husband to qualify for the new loan by himself. Since your credit shows a recent short sale (in the last 12 months) you wouldn’t be eligible so it would boil down to whether or not your husband can qualify on his own.

Take a look at my website for more information.

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Nancy and harold Pennington May 29, 2013 at 2:58 pm

Hi:
Read your post. We live here in Belen, N.M. in a retirement community.
We want to sell our house and move to CA:)

Think we have anything to talk about?

Are you 55 or older?

This gated community in Belen, NM is for 55 and older.

Take good care,
Nancy Pennington

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Jeff March 27, 2013 at 2:29 pm

Hi,

I just completed a short-sale of my house that had a conventional loan. I’ve been told that the usual waiting period (2-3 years) to purchase another home does not apply if I use my VA eligibility. My VA was NOT involved in the short-sale. Is what I’ve heard correct? As long as I qualify in all other aspects I can use my VA guarantee to buy a new home immediately?

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John May 22, 2013 at 11:55 am

@ Jeff,

VA technically doesn’t have any published guidelines on eligibility after a short sale so lenders/investors apply the FHA guidelines to VA mortgages as what’s called an overlay. FHA requires 3 yrs from the sale date (basically treated the same as foreclosure) if you were late on the mortgage leading up to the short sale unless you had extenuating circumstances. If you were not late, FHA says you can be eligible to buy again immediately.

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James March 17, 2013 at 4:35 pm

It’s a long post (sorry) but may be of interest.

I completed a short sale w/Bank of America (on a VA loan) in March 2012. The circumstances were that I was being transferred by my employer and the house (purchased in Dec. 2009) was not worth what it was appraised for when we purchased it. I never missed, or was late on, a payment. It was my understanding that because the short sale agreement stated BoA was waiving the deficiency I would not be personally liable (it was also my belief that it meant they would not pursue the VA for the deficiency).
I understood that they would report to the credit bureaus that it was “paid in full (or settled) for less than the amount owed”.

Approximately six months later I attempted to get a “Certificate of Eligibility” (COE) from the VA for a home loan. I was told that my VA “entitlement” was decreased by the amount the VA paid BOA on the “compromise claim” short sale on my behalf. I discovered that BOA requested the VA pay the deficiency
(which is all transmitted electronically making it suspiciously easy). The VA stated that in order to have my VA loan entitlement restored I would have to pay the VA over $77,000 (full payment, no installments) because the government suffered a loss. The VA stated that although the government would not attempt to collect on the loss, my VA benefits were reduced because of it.

My position is simple; BOA was made whole on the loan. Regardless of the short sale, regardless of who paid it, it was directly related to me and my VA entitlements/benefits. The fact that BOA was reimbursed by the VA (on my behalf) has actually created a “debt” in my name to the VA and U.S. Government (regardless of the fact they won’t attempt to “collect”) I have an outstanding debt and it has directly affected/decreased the amount of VA benefits available to me.

I believe that BoA should not be allowed to report to the credit bureaus that the loan was paid in full (or settled) for less than the amount owed (this is credit reporting lingo for “short sale). Although a short sale was completed, BOA suffered no loss as my VA benefits paid the deficiency. I believe that this drastically different than if I had PMI (private mortgage insurance) and BoA received a payment from an “insurance policy”. The effect from that would be that I had paid premiums for a policy and BoA collected on that. No remaining “debt” attributable to me. This is not the case in my situation, the fact that BoA requested the VA pay the deficiency has, in effect, created a debt in my name to the U.S. Government that has actual ramifications:

• the debt itself
• my VA home loan entitlements have been reduced by the amount the VA paid BoA
• I am precluded from using my benefits until I pay back over $77,000 to the VA (in full)

In addition, because BoA reported to the credit bureau that it was “paid in full (or settled) for less than the amount owed” (even though they suffered no loss after the VA paid), my credit scores/history have suffered. I have never missed, or been late on, a payment of any kind … ever. It was very important to me to stay current on the BoA loan even with the short sale. I had hoped that it would help show that it wasn’t a case of me not wanting to pay, or unable to pay, but rather a situation where I was relocating to another state and my wife would lose her job/ income and we couldn’t afford two houses. I could not control the housing market, the housing “bubble” or anything else.
I did not appraise the house … but yet, ultimately, I am paying the price for years of inflated housing prices. Note: Lenders DO NOT CARE the circumstances surrounding the short sale…at least two years (regardless of what the “rules” allow).
I submit that BoA cannot” have its cake and eat it too”. They should be allowed to report as they did or receive the payment from VA (on my behalf) but not both. There is no mention in any document completed during the short sa le about their intention to request the payment of the deficiency from the VA. BoA also intends to issue a 1099 to me on the amount of the deficiency (which I’m sure is required by the tax laws), but I also find this ridiculous that it could (potentially, notwithstanding the homeowner’s relief law) be counted as income … that’s like double jeopardy. I have my credit scores impacted, a 1099 issued and an outstanding debt to the VA/U.S. Government, yet BoA received all their money. Deals are made to help the banks, the auto industry, etc., but the average American is paying the price.

I’ve been trying to the Consumer Financial Protection Board (consumerfinance.gov/) to assist, as well as all three of the major credit reporting bureaus (CRBs). To date, only one has agreed with me and marked it as “Paid in Full” (no “notes”). They say that BoA responds to the complaint that it’s “accurate” that’s all they do…no one looks into these complaints.
BoA Credit (section, department?) has it documented/listed as BoA received all their money, but the Short Sale (section/department) has it coded as a short sale. Both are correct (technically). BoA’s Short Sale department contends that because I did a short sale (compromise claim in VA language) that the proper credit reporting they submitted (Settled – Less than amount owed) is correct. BoA said that although the VA paid the deficiency (from my VA entitlement) and “on my behalf” that I do not get “credit” for the loan being paid in full. BoA also stated that BoA does not pursue/request the deficiency from the VA on short sales. When I asked how the money got to them they said I would have to ask the VA. BoA will not send my anything stating that the loan was paid in full or they received the money from the VA. BoA states that the VA does not allow them to give me any documents related to it. BoA also said that I would have to consult the original loan docs regarding the VA paying. I said that I believed the shorts sale agreement changed all the conditions of the loan/sale. The agreement for BoA clearly states that the agreed (reduced) sale price would satisfy the lien.
VA suffered a loss and I have a debt to them…my benefits were decreased…that is what happens…it’s not for BoA to (inaccurately) report to the CRBs. In this situation, BoA reported “settled less than amount owed” AND my VA benefits were decreased (because the VA paid BoA). Therefore I cannot use my VA benefits (because the remaining amount is not enough). I’m getting penalized twice for this short sale (which I might add was b/c I was being transferred by my employer and the house was not worth what we paid for it 18 months prior…none of which was our fault).
The other question I had was I haven’t received a 1099-C (Cancellation of Debt) for the short sale. When BoA checked they found that they didn’t issue a 1099-c, but a 1098 (for mortgage interest paid) because there was no deficiency after the VA paid. So I do get “credit” for the loan itself being paid in full, but not for credit reporting purposes?!?
If I had to do it over again…no way. I would rent the first house out until the end of time…this has been the most frustrating thing I’ve ever experienced…and no one cares.

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brian March 20, 2013 at 1:28 pm

My exact situation. If someone has an aswer it would be greatly appreciated. I can’t use the VA Loan now, but it looks like my lender was paid in full.

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James March 24, 2013 at 2:44 pm

I’d like to add, in the BoA (and presumably VA) short sale approval letter that there is NO mention of a compromise claim to be made. It clearly states that this will settle the debt. On several VA regional sites it states that the approval letter will state the amount the VA will pay. BoA keeps telling me to refer to the original loan docs, but I say that because a short sale was “agreed to” that the conditions changed and they should have CLEARLY stated that they would request the VA to pay the deficiency. I might add that all the VA docs say “default” and, in my opinion, I was not in “default”. The short sale to avoid potential default, BoA didn’t have to agree. They evaluated the situation and settled for less. BUT then they also got the deficiency from the VA. I believe it’s actually and automated system that kicks in and pays the claim…no review of what the actual paperwork states. No one (BoA or the VA) has yet to produce any documents saying that (as a result of this short sale) BoA would seek, or receive, any money from the VA. BoA still contends that even though they did get the deficiency, and were made “whole”, they cannot give me anything in writing about it because the VA won’t’ allow them too! I can’t even get them to look at the circumstances of my short sale, I’m lumped in with every other short sale. The rep from FICO, who I called disputing their statement about people who did short sales being at risk of defaulting in the future, said that they don’t look at individuals, they look at the “group”. I had great credit for over 20 years, 820 to 840 on all three CRBs, and now I’m a “risk”. How about the banks/lenders be forced to refinance mortgages that are upside down (due to being over-valued)…I surely didn’t decide what my home was worth…it was market value when I bought it. I can understand that even in normal markets houses can lose value, but when the entire market crashes we suffer for their bad decisions? That’s just not right.

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Veronica August 7, 2013 at 8:50 am

James, I’m in the middle of a VA Compromise Short Sale myself. Wondering what can I do at this point to avoid having these issues before all is said and done. Hopeful we will find a resolution in our favor. Thanks for your post, it answered many of my questions and concerns. I need to talk with my attorneys to see what we can do to avoid having some of the issues you have had during the aftermath of your VA Compromise Short Sale.

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James August 10, 2013 at 3:38 pm

No problem…and good luck. I had BoA and filed numerous complaints with the Consumer Financial Protection Board (CFPB). But in the end (as recently as last week) it was no use. CFPB really doesn’t do much (in my opinion) except act as a “middleman”. BoA still says that the original loan agreement that states the VA will pay the deficiency was in effect, even though all the short sale agreement docs said the loan would be settled and I would be released from personal liability. I tried to argue that there was not one mention about pursuing the deficiency from the VA and it was my understanding that the new sale price would satisfy the loan. BoA kept stating I would have to talk to the VA about it. But BoA had to request the payment, it’s not automatic. I also told them that they basically DID cause me to be personally liable for it b/c now I owe the VA. The whole thing is frustrating, especially since I had outstanding credit for my entire adult life…and I didn’t create any of the circumstances that forced the short sale (i.e., job transfer and market crash). Live and learn…I wish you luck.

K April 17, 2013 at 3:29 pm

thank you for sharing your story. I have been researching it and found that it wasn’t clear who would be reimbursing the VA. Its not clear and no one is talking about, except those who have been screwed. Once again the military gets screwed. I know plenty of civilians who have completed short sales and are wrote off the difference–why do they suck every last cent out the soldier!!!

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Ben July 5, 2013 at 3:32 pm

James, Thank you for sharing this. I was about to execute a VA Compromise Sale essentially because I was thinking “if the bank becomes whole, why wouldn’t they report it was paid in full”. We finally got our closing docs this past week and it states they are reporting “settled” just like all other short sales. I have been trying to argue with them the past week over this point, but after reading your post I have come to the conclusion that they will never understand and the bank (in my case Wells Fargo) wants to report a loss and get the funding from the VA, screwing me. Bottom line, after reading your post, unless they give me a written letter stating they will only report “paid in full”, I am not going to go through with the Compromise Sale, I’d rather just keep losing $ on monthly basis by renting it out at a loss. Thank you for writing this, you have really helped me out!

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James July 23, 2013 at 12:46 pm

I’m reposting this from my post on another section. May be something to consider. I wish I had done more research…I had a great agent and even had a short shale attorney which (as it turns out) had little/no experience with VA Compromise Sales…she was just making sure the bank didn’t come after me for the loss on the short sale.

I strongly recommend against a short sale/VA compromise sale if you can avoid it (see my previous posts below). Hindsight is 20/20…if I could do it all over again (well honestly the first thing I’d change is I wouldn’t have BOUGHT in NoVA)…I’d have rented my house and avoided the short sale (at least initially). Evidently you can claim rental income after a year and attempt to get another home. If you then need to sell the first house…and short sale is the only option…do it. You’ll be in new house and won’t need to worry about the credit hit (for now). It’s frustrating for us…none of this is our doing (except we actually bought in 2009…silly us) but now we are in a situation (credit hit, VA benefits gone, a debt to the USG, and no $$ to put down). Wish I had better advice…but this is FIRST hand experience…not someone trying to “best guess” or “what if”…I did it…and I regret it.

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Amy August 4, 2013 at 7:49 pm

Quick question: the hit on the VA benefits I see mentioned – does that also impact disability benefits? We are in the midst of a short sale on a VA loan and my husband is also separating and eligible for VA disability. Anyone know if this will adversely affect that?

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James August 10, 2013 at 3:39 pm

Sorry…I have no idea. I would guess…maybe if the VA was to pursue the claim, but it’s my understanding they (normally) do not. Good luck.

Ed February 2, 2014 at 10:37 am

This will not affect your VA disability benefits.

Stephanie March 13, 2013 at 11:46 am

Hi

My husband and I have a VA home in Florida that we are currently renting out becuase we were unable to sell it due to the market conditions when we moved from Florida to WA. The house in florida is about 60K underwater due to the drop in values in the prices of homes. We pay out of pocket for the house each month becuase the income we received from the rent is not enough to cover the mortage expense. We bought a house in WA last year with my VA eligibility. With the birth of my daughter and pending furlough and 20% cut in pay my husband and i are thinking of applying to short sale the house. My question is, if our mortage lender requires that the VA pay the difference, will the VA require that we repay them back?

Thank you for your help

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John March 14, 2013 at 11:28 am

Stephanie,

I am in the IDENTICAL situation. In Florida and everything. Let me know if you find a suitable answer.

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Shannon O'Brien March 14, 2013 at 3:07 pm

Hi Stephanie and you, too John. I took this right off the VA’s website.

“For loans originated on or before December 31, 1989, the seller may be required to sign a promissory note. A promissory note obligates the seller to pay part of the difference back to VA.”

Then, your entitlement will be held until you reimburse the VA:

“Should VA agree to pay the difference between the sales proceeds
and the total debt to complete the compromise sale process, the portion of the
homeowner’s entitlement used to guaranty this loan will remain tied up until VA is reimbursed in full.”

Hope this helps!

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Karen Nickols March 28, 2013 at 12:37 pm

Hi Stephanie,

I’m pretty much in the same boat as the rest of the folks here. I haven’t started the process yet…and I’m seriously thinking about backing out. I called and spoke with a VA rep just to get some idea on the process and he stated that the VA will not pursue you to pay them back but that it does reduce the amount of your VA entitlement. He did not state that I couldn’t use the remainder (after the two year waiting requirement) of my entitlement but he was adament about why I needed to sell and not just rent. I need to relocate because my new job is in another state. Well…I hope this helps in some way.

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Wendy March 5, 2013 at 9:10 am

Dear Shannon,
We just received orders to move and I can sleep because of our house. We will try to do a short sale (VA Loan)but we need to move in 3 months. No way we can afford to pay for the mortgage and a rental at our new location….
We are meeting with a real a state agent tonight…

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chris March 3, 2013 at 6:26 pm

What they dont’ tell you, is you lose future benifits. I can’t buy a house ever again because the VA covered 84K of the loss. I had a renter that was willing to stay in the house and it was of no cost to me, but was talked into this program. After the dust settled and renter moved out, the VA informed me unless I pay back the 84K, no more loans. Think about it before you do it. Active duty AF officer.

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Shannon O'Brien March 4, 2013 at 11:58 am

That’s true, the VA expects to be paid back. Pity nobody told you this before. So sorry this happened.

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Thomas August 21, 2013 at 12:23 pm

Does this mean that he is not authorized for anymore loans or his benfits are reduced?

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Tina February 20, 2013 at 7:20 pm

I’m in the same boat as Kenny and John. Civilian PCS. Is that covered?

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James February 18, 2013 at 9:40 am

My question is similar to Kenny’s. I have a VA backed loan and am being moved due to a position with the Federal Government, not the military. My home may sell for around what it’s worth but after closing costs, attorney fees, compensation to the real estate agent(s), and unforeseen misc. expenses I will have to come to the closing with money to cover the “under” difference, or sell through a short/compromise sale. Can I use a compromise sale in this case? Thanks.

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Kenny February 11, 2013 at 8:39 am

I noticed where you state that a pcs is pretty much automatic qualification for a VA compromise sale. What if the pcs is for a federal civilian job? Or would that be considered voluntary action?

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Shannon O'Brien February 21, 2013 at 11:02 am

It depends, Kenny. Civilian involuntary employment relocation may allow you to qualify. There are certain stipulations. Also, you may qualify if you’ve been unsuccessful using the Home Affordable Mortgage Program.

The best thing for all three of you to do (Kenny, James and Tina) is to go to the experts: either your lender, or a VA housing specialist: 877-827-3702.

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Paul February 10, 2013 at 9:39 am

Hello,

After 8 years of marriage my wife want to split! We have a home that about 120k under water, our va backed loan is 300k and is worth about 180k neither one of us can afford the mortgage alone, would this qualify for a hardship? If so, where do I start with real estate company of the VA, we live in the Detroit metro area. I’m trying to figure out the best way to preserve my credit I’ve worked very hard to keep it a good rating. Btw we are not behind in payments or have never been late.

Paul

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Shannon O'Brien February 10, 2013 at 5:33 pm

Sorry to hear about the divorce, Paul. If you look at the above article, under the subheading “How to Get Started,” you’ll find the first steps to take.

The VA may consider the loss of your spouse’s income a hardship. If the VA approves the sale they’ll pay off the full amount of what you owe to the lender, so the lender won’t be shorted. You will owe the VA, though.

I’m not sure how the lender will look at the fact that you aren’t delinquent. That may count against you.

Anyway, take the first step. . .call your lender. Good luck, Paul.

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Kris February 6, 2013 at 10:54 am

We live in California, we have a VA loan for 409,000, our house is worth about 269,000. We need to purchase a one story house so we can move my elderly mother in and take care of her, right now we only have one small room downstairs. Our only option will be to try and sell our house but it’s so far under value. If we short sale, will we have to pay the difference back to the VA?

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Shannon O'Brien February 10, 2013 at 5:35 pm

Kris, the VA won’t grant the compromise sale unless you can document a financial hardship. Having to buy a different type of house doesn’t really qualify.

Have you thought about renting it out?

And, yes, you will have to repay the VA and can’t use the housing benefit until you’ve done so.

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Chris February 4, 2013 at 6:40 pm

We bought a house in 2006 for $250k, we were forced to move in 2009 at which point the value of the house was down to $150k. Prior to moving we were able to adjust our mortgage for a slightly lower rate then we turned it over for rent. We take a $400 loss each month on rent and now our renters aren’t paying. Our savings account is almost empty and the house has a value around $100k. We need out. Here’s the rub; I was in the active duty military and separated while I lived in that house to join the full time National Guard in a different state. I didn’t receive PCS orders but do have DD214s that show no break in service plus I’ve been on combat deployments twice since then. We’re out of money and out of options after 4 years of losing money. We were able to buy a house a while back so we have a roof over our heads but I’ve lost way too much money. Our renters aren’t paying their rent so if we boot them out we have no money to fix the house up for another renter. The local rental market is still $400 below what I pay each month and the bank won’t adjust our loan with negative equity for rental property. I feel short sale is my only option since I don’t qualify for HAFA or HAP. What are your thoughts?

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Shannon O'Brien February 5, 2013 at 11:27 am

Hi Chris,

What a mess. I’m so sorry this is happening to you.

My best advice to you is to seek advice from the experts. Call a Regional Loan Center and speak with a VA loan specialist. The service is free for veterans. Call 877-827-3702.

Best of luck and thank you for your service.

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Josh January 31, 2013 at 11:59 pm

I am in the army and had a va load on a house that was $100,000 under water. My lender not only approved the short sale but they also forgave all of the outstanding debt and did not go after the VA for the $100,000. This is huge since it allowes me to get a new va loan with no debt to the government and since i was current on my loan all the way through closeing my credit score only droped 40 points. Be advised that my case is the only i have heard of this happening, may have been oversight on the banks part or them just fealing nice, eather way i came out on top and am out of my home. I have yet to recieve my 1099-c but they sent me a letter stateing that neather the va nor any obligor on the loan would be persued for the indeptedness so i supose this should work to file my taxes.

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Shannon O'Brien February 5, 2013 at 11:31 am

You are truly blessed! Congrats.

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Raquel February 7, 2013 at 8:15 am

My situation is similar to Josh. I am about to file taxes but have yet to receive a 1099C. I called the bank and they stated that I will not get one because it was a VA loan. Is that correct? I thought I would need documentation to file it.

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Shannon O'Brien February 7, 2013 at 11:49 am

The VA paid your loan in full, so the lender will not be sending you a 1099C.

Hope that helps!

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Nicole February 7, 2013 at 3:27 pm

Josh,
Can I ask who your lender was?

Kim February 21, 2013 at 11:36 am

Hi Shannon,

My husband and I have a situation that is very similar to Josh’s. We had a short-sale that we closed on 2 years ago and we received the same letter from the lender after the short sale was complete.

We understand that the minimum requirements to qualify to purchase again are 2 years from the date of the sale, which have met. However, my husband, who is the Vet, applied for the “certificate of eligibility” to make sure we have the full entitlement.

We just received it back and the VA said we do not meet the requirements of the law for restoration because the VA suffered the loss (the indebtedness) from the short sale.

How can this be if the lender stated they WILL NOT pursue the VA or any obligor for any portion of the indebtedness not repaid by the maximum claim payment and the proceeds from the sale?

Any additional information or advice you can share on this situation?
Thank you!

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Shannon O'Brien February 22, 2013 at 12:06 pm

Hi Kim,

The VA paid your lender in full and expects to be reimbursed before they’ll give you the full entitlement again.

Hope everything works out for you.

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Paul David Hiebing January 29, 2013 at 1:15 pm

Shannon,
I have been completing short-sales since 2001.. (with 32 out of 37 closed)
I thought I had seen everything that could come down the line. But, this is a new one fro me. Husband/Wife on a VA Loan (they had done multiple re-finances as the rates dropped– last one in 2011). They were both over 90 years old (he was a WWII vet)… They both died within 6 months of each other… The attorney for the estate has contacted me and wants to know if the estate can do a short sale… It would meet criteria and work if just one spouse had died.. But, what if both of them are deceased?
What do you think?

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Shannon O'Brien February 5, 2013 at 11:30 am

Wow, Paul, that one has me stymied as well. Have you contacted the lender?

By the way, you are the short sale king! That’s quite an impressive record. The folks of Bettendorf, Iowa are lucky to have such an incredibly knowledgeable short sale expert in their town.

Sorry I can’t be of more help to you.

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Ed Kimbley January 21, 2013 at 9:00 am

I have a home in GA that I have a 1st and two 2nds on and I owe about 190K on it.
The value of the home is now at 113K , I had to move in Dec 2010 to Texas for work and I started renting the home in Nov 2011 for half of my monthly payment. I clearly cant keep this up and the renters are moving out in two months, breaking the 2 year lease they signed. This is a VA loan and I also have a VA loan on the house here in TX that I just bought 1 year ago also VA. Any suggestions as to what I can do here as I cant make the full payments on both properties? Thanks

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Judith January 19, 2013 at 12:55 pm

We were pcs’d away from Fort Stewart, GA 18 months ago, at that time we were told that we couldn’t list our home as we were too upside down on it. Since we moved we have rented the home out. This has become a hardship on us due to constant and costly repairs on the home. When we moved it was quick and no one mentioned to us the possibility of a short sale. Is this something that we could still do due to the pcs at that time? (It is a VA loan) Also, will the fact that we used it as a rental work us, beating in mind that we made no profits from this?

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Shannon O'Brien January 19, 2013 at 7:59 pm

Hi Judith,

I’m surprised you were told you couldn’t list your home for being too upside down on it. That’s what a short sale is all about. Plus, the pcs made you immediately eligible for a short sale, even if you were current on your payments. This is for Fannie and Freddie loans…not sure if Ginnie Mae, which a lot of VA loans are, is included in that mandate (I assume they are) but it sure is worth finding out, isn’t it?

I don’t know who you were talking to when your husband got pcs’d but I’d be thoroughly steamed at that person.

At any rate, I’m not sure what your options are what with the home being rented out for the past 18 months. I’d contact the Armed Forces Legal Assistance office near you for more information. Do it soon, ok?

I do hope everything works out for you.

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Josh February 1, 2013 at 12:06 am

In order for you to file for short sale and not have to pay taxes on the forgiven debt the property has to have been your primary residents withing the past 12 months. Also if you want to short sale you can still do that but if the bank forgives you of your debt you will have to pay taxes on the forgiven debt. You were screwed by whom ever told you that you couldnt list your house under the short sale program.

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Jasmine January 17, 2013 at 7:49 am

Hi Shannon. My husband is about to PCS in 4 months. We are trying to sell our house and it’s worth around $150K but we owe around $175K on it. Do you think the VA would consider a compromise offer? We don’t have any liens and are up-to-date on the payments. Also would the compromise offer affect our credit? Thank you.

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Phil January 23, 2013 at 1:07 pm

Yes, you should get approved. The PCS is a qualifying hardship. If you are current on the mortgage, the short sale / compromise sale should not affect your credit nor his security clearance. You may see a small drop in your score but if you are current, this will be minor. If you have defaulted, this may not hurt the security clearance.

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Kelley January 16, 2013 at 10:01 am

Hello Shannon,

My dad has a VA property he has rented to over the last 11 years. He has recently been diagnosed with a terminal illness. We have paid all the expenses over the last 11 years. Is it possible for my dad to conduct a short sale because of his medical condition?

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Shannon O'Brien January 16, 2013 at 11:38 am

His medical condition may qualify for the VA’s “hardship” requirement, but that isn’t the only requirement for the VA Compromise Sale. Does he have any other liens against the property? Does he have any assets that can be liquidated to help pay for the short fall?

Call the Veteran’s Administration for direct answers that fit your dad’s situation. 1-800-933-5499

Best of luck to you both.

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Brandon Barnes January 16, 2013 at 6:12 am

Hi Shannon,

I sold my home in June of 2012, due to a divorce under a short sale. I know under the forgiveness act I cannot be taxed for the difference in sale price (about 43k) or looked at as capital gains. My question is, will I be able to qualify for another VA loan (this will be 3rd time using it) and if so is there a time period? Thank you

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Shannon O'Brien January 16, 2013 at 11:52 am

Under the Mortgage Forgiveness Debt Relief Act that was recently extended through 2013, you are off the hook for federal income taxes owed on the forgiven debt. You may still be on the hook for state or municipality taxes. . .it depends on where you live.

After a VA short sale, the VA states that “the portion of the homeowner’s entitlement used to guaranty [sic] the loan will remain tied up until the VA is reimbursed in full.” In other words, before applying for another VA loan, you’ll need to repay the losses, also known as the “guaranteed amount,” that the VA paid on your behalf during foreclosure.

Other than that, it typically takes two years after the short sale is documented (such as on a credit report) to qualify for another VA loan. During that two year period you will need to clean up your credit and remain current on all your bills.

Hope this helps!

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Kelli January 10, 2013 at 6:56 pm

Hi, we are thinking of doing a short sale. We owe about 174,000 on a house that is only worth about that much. So we would be short on commission of the real estate agent plus closing costs. In your opinion, do you think we would qualify for a short sale? I have talked to 4 agents and they suggest selling my house at 188k to 194k to offset those expenses. Only one of them suggest a short sale. Thank you.

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Shannon O'Brien January 11, 2013 at 2:43 pm

Hi Kelli,

I don’t know what part of the country you are in, but that’s a pretty hot price point in many markets, with investors snatching up houses and multiple offers quite common. Perhaps your market is one of those and that’s why the agents suggested a higher list price?

You also don’t mention if you have a hardship that will qualify you for a short sale. Are you current on your mortgage payments?

If three agents think you can get a higher price, and you’re not behind on your mortgage payments and able to make them while it’s on the market, I’d try listing it before doing the short sale. It will save your credit score and maybe give you a few dollars to move on to the next phase of your life.

Hope this helps.

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Kelli January 11, 2013 at 7:52 pm

We are close to Ft. Benning Georgia, but on the Alabama side. They suggested approximately 188-194 because of adding commission and closing costs. I would have to pay roughly 15k-20k out of pocket which we definitely do not have. We have been current on payments, never missed one, but with this PCS coming up and the prices of other houses coming at anywhere from 165k to 191k, I was just curious if we should even try selling it. There is a house just like ours, but not much of a yard, nor a fence, and we have a shed that is staying. So that adds value. But with their price being 172k brand new construction, it hards to say that someone would pay 188k for ours, 3yrs old. Thanks for your advice.

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Jose January 10, 2013 at 11:58 am

We did a short sale in 2010 and we are trying to purchase again. Our lender stated that we should still have some of the VA loan left to use. Just recieved a requested denied letter from the VA. Old home bought at $215k, but with short sale they got 90k.
Do you know if I would still qualify for a VA loan?
Thxs
Jose

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Phil January 23, 2013 at 1:09 pm

Jose, you should still qualify. I suggest that you find a new lender. You may need to get a higher loan amount but you should still have tier 2 entitlement. Have your lender pull your CAIVRS and COE to see how much eligibility you would have.

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Mary C January 8, 2013 at 9:32 am

Can you provide an update on the tax amnesty program for forgiven debt now that we are in 2013? Thank you for this helpful article.

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Shannon O'Brien January 8, 2013 at 1:00 pm

Hi Mary,

Good news! Congress extended the Mortgage Forgiveness Debt Relief Act through the end of 2013.

Regards,
Shannon

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Lisa December 31, 2012 at 8:21 am

If you short sale a house that is a VA loan. Does the VA mortgage insurance cover the difference on the taxes. Or is this the responsibility of the seller?

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Shannon O'Brien December 31, 2012 at 5:49 pm

The insurance is for the lender, not for the homeowner, so you will be responsible for your tax debt. As of tomorrow, if Congress doesn’t do anything to stop it, the Bush tax cuts expire. One of these is the Mortgage Forgiveness Debt Relief Act. This means you will be taxed on the amount of debt forgiven in the short sale. Not only that, it will be taxed as ordinary income.

Now, if the short sale is a result of a Permanent Change in Station, there may be relief for you from the federal government. It depends on when you bought the home and when you received the PCS. Contact the Armed Forces Legal Assistance office near you for more information.

If you don’t qualify for that, there are two ways around being dinged by the IRS: declaring bankruptcy (your debts are wiped out in bankruptcy, not “forgiven”) or by being declared insolvent. Only your tax adviser can tell you if the IRS will consider you hopelessly in debt and advise you which route to take.

I suggest you speak with either an attorney or a CPA for advice more specific to your situation.

Thanks and Happy New Year!

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judy November 16, 2012 at 1:56 pm

How does VA loans on short sales deal with repairs….namely moisture/ termite damage?

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Shannon O'Brien December 31, 2012 at 5:32 pm

Hi Judy,

VA appraisals are a lot stricter than traditional appraisals so that’s one thing to be aware of. Next, there are restrictions on what repairs a buyer can and can’t pay for.

If the pest report comes back with evidence of wood-destroying organisms, such as rot or termites, the VA won’t lend on the home until this is repaired. Since short sales are “as-is,” you can see the problems you might run into here.

My advice to you is to find a real estate agent who specializes in VA loans and seek his or her advice. It might just be easier and less expensive for you to pursue the purchase of a non-short sale home.

Thanks for the question!

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Anita Gray September 13, 2012 at 8:38 pm

We are being relocated and are doing a short sale. Will we have to pay for the left portion of the loan once the house has been sold? We owe 230,000 on the house but it is only worth 140,000 if that. We currently have it up for a short sale for 159,999. We are not sure what to expect from the VA loan.

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Shannon O'Brien September 15, 2012 at 6:00 pm

Hi Anita,

Have you run these questions by your agent? Since he or she knows your situation better than anyone I suggest asking these questions.

In all likelihood you will not have to pay what you’re short.. .the VA pays the lender in full, including closing costs.

Beware, however, of the tax ramifications. If the house doesn’t close before December 31 of this year, and congress doesn’t extend the tax amnesty program, you may be taxed on whatever the VA forgives. This forgiven debt is treated as ordinary income, too, so get ready for a hefty tax bill.

It looks like you’ve got the house priced over market value. If this is the case you should lower the price to get the home sold quickly to avoid the tax ramifications.

As I said, your agent is your best source for all of these issues.

Best of luck!

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