The VA compromise sale is actually a really cool benefit of the VA loan program, but it doesn’t get a whole lot of publicity, partially because those who have utilized it aren’t usually proud of it and want everyone to know about it. To understand what the compromise sale is and why it’s such a great benefit of the VA loan program, you first have to understand what short sale is and how it might come about.
What’s a short sale?
A short sale is when a house is sold for less than the current owner owes the mortgage company. Short sales are not a happy experience. They are, however, usually a better alternative to foreclosure, at least for the current owner of the home. A short sale situation usually happens when home prices have dropped and the income of the owners has also dropped. This drop in home prices takes away the equity the owners have in the home and the drop in income takes away the ability of the owners to make their current mortgage payment. Needless to say, this is a horrible situation to be in and it makes selling the home very urgent at the same time as making the sale price much lower than it should be. The biggest problem with short sales is that the mortgage company has to agree to release their lien on the home even though they have not been completely paid back. If the mortgage company does not agree to this, the short sale cannot proceed and the home will be foreclosed on.
Enter the VA Compromise Sale
The VA compromise sale is designed to mediate these situations. Since mortgage companies will often refuse to agree to a short sale, the VA steps in and uses the veteran’s entitlement to make up the difference between the sale price of the home and the amount the borrower still owes to the lender. The borrower’s equity is not restored, and no cash ends up in the borrower’s pocket, but the lender gets paid back the full amount owed to them, which makes much more amenable to the idea of a short sale. This service also goes a long way in helping the borrower’s credit after the short sale, since the debt has been paid in full. The VA compromise sale is one of those things you hope you never have to use but if you are in a situation where you need it it’s invaluable. Those who have access to the VA compromise sale find that it makes the difference in their lives for the next 10 to 15 years.
When Can I Use the VA Compromise Sale?
The VA compromise sale is only available to VA-eligible borrowers whose home is currently financed with a VA loan. A VA-eligible borrower who has financed their home with a conventional or FHA loan will not have access to the compromise sale. If you are in need of a VA compromise sale, you’ll want to communicate that to your mortgage company and together work with the local VA office to get everything taken care of. Now, you should know that if your VA entitlement is used to pay a lender in a compromise sale, you no longer have access it (because it’s been used). If you want to use your VA loan benefits again, you’ll either be limited to however much entitlement you have remaining, or you will need to pay back the entitlement to the VA. Paying the entitlement back is probably not worth it, but it’s something you can consider as an option.
So, a short sale is when the home is sold for less than the owner currently owes on the home. The mortgage company has to agree to allow a short sale to take place, and may just decide to foreclose on the property instead. The mortgage company can also put very damning things on the owner’s credit report. A VA compromise sale is where the VA steps in on a short sale situation and pays the lender the difference between the amount that the home is selling for and what is still owed to the lender. The borrower does not get any cash from the proceeds of the short sale, but the borrower also has significantly better odds of being let out of the loan and being able to move on with their life without a significant blemish on their credit report.