Tips & Special Topics
VA Compromise Sale Can Help VA Borrowers in Distress
Added June 30, 2010 | Updated June 30, 2010
A down economy and a distressed housing market often coincide. VA borrowers can feel the effects of a recession just like anyone else. And, there are a number of reasons why a military member might need to sell a home for less than what he or she owes on the property.
For some VA borrowers in this situation, an alternative called VA compromise sale can help. Much like a short sale, a VA compromise sale may be explored when a borrower with a VA home loan receives an offer lower than the payoff amount of the mortgage. In a market where offers are scarce, some sellers may consider low offers. If a VA borrower receives such an offer, he or she can request that the VA consider a compromise sale. The VA will determine whether to accept the request, and typically a VA representative will work with the VA-approved mortgage company to negotiate the compromise.
If a VA compromise sale is accepted, the VA will cover the difference between the offer and the amount owed on the VA mortgage. The borrower’s entitlement that was used to guaranty the loan could remain tied up until the VA is reimbursed. In order for a VA compromise sale to be considered and approved, the following guidelines apply:
• Financial distress must be demonstrated by the borrower.
• Current market conditions must dictate the fair market value of the home price at time of sale.
• The home must be free of any significant second liens. (If a second lien is present, the seller can ask the lien holder to consider releasing the lien and converting it to a personal loan.)
• Closing costs must not exceed what’s standard for such a home sale.
• The VA’s cost for the compromise sale must be less than what it would have cost had the home gone into foreclosure.
• A VA appraisal must be ordered to determine the fair market value of the home.
• A VA borrower’s statement must explain reasons for the necessary sale of the home at a loss.
Relocation overseas and war deployment are probably the most common reasons for a military member to have to sell a home. Marriage and divorce can also force a home sale. Whatever the reason, VA borrowers can sometimes be forced to sell a home at an unexpected loss. A VA compromise sale can help facilitate the sale of a home in certain situations.
However, not all VA compromise home sales are created equal. In some cases, the seller may be required to sign a repayment note to compensate the VA for some or all of the loss. The amount is typically less that the total loss and is based on a financial assessment and the VA borrower’s ability to pay.
When a VA borrower is in financial distress and forced to sell, a VA compromise sale may help buffer the loss. A benefit of VA compromise sales is that the property is not acquired by the VA, and the owner avoids a foreclosure and the resultant damage to his or her credit rating. They also help reduce the overall number of VA loan foreclosures. A borrower who thinks he or she is in a situation where a VA compromise sale might be necessary may find it helpful to contact a mortgage counselor at their nearest VA regional office.
