Short Sales and Seasoning Periods for VA Home Loans

When is a foreclosure not a foreclosure?

Short sales often get lumped together with foreclosure and its offshoot, the deed-in-lieu of foreclosure. But these aren't the same thing, and that can make a huge difference for homebuyers.

Borrowers will almost always need to wait two years after a foreclosure before applying for a VA home loan, but VA guidelines do not set a required wait, or seasoning period, after a short sale. Despite that, many lenders, including Veterans United, treat short sales as a form of foreclosure and impose that same two-year seasoning period.

Short Sale Seasoning

Homeowners can wind up underwater on their mortgage -- meaning they owe more than the home is worth -- for a variety of reasons. Home values have rebounded in recent years after nosediving in the wake of the Great Recession. That lost value pushed millions of homeowners into underwater territory.

A short sale occurs when your mortgage lender or servicer allows you to sell the home for less than you owe. Short sales let lenders recoup at least some cash and avoid the expense and time involved with foreclosure. It can take more than three years in some states for the foreclosure process to play out.

A deed-in-lieu of foreclosure involves the borrower basically giving the house back to the lender. There's no sale, so there's no immediate financial recovery for the lender, but there's also no expensive foreclosure process.

To be sure, not one of these events -- short sale, foreclosure or deed-in-lieu -- is good for your credit. Your score will take a hit, and how hard depends in part on what kind of credit you had beforehand. Studies from the credit score firm FICO indicate consumers with great credit could lose up to 160 points following a foreclosure, a deed-in-lieu or a short sale.

So, when it comes to getting another home loan, you might need to spend some time working to improve your credit score.

Sustainable Homeownership

In the wake of a short sale, it's important to make sure you're financially and emotionally prepared for another home loan. Sustainable, responsible homeownership is the goal.

If your short sale involved a VA-backed mortgage, the portion of your VA entitlement utilized on that loan will be inaccessible moving forward. But you may have enough remaining entitlement -- also known as second-tier entitlement -- to purchase again without the need of a down payment.

Talk with a Veterans United loan specialist at 855-870-8845 to get a clear sense of your purchasing power.