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 treat short sales as a form of foreclosure and impose that same two-year seasoning period.
Veterans United doesn’t in most cases.
We have no seasoning period after a short sale, as long as it’s clear you weren’t trying to take advantage of the market. That can obviously make a big difference for homeowners who’ve dealt with a distressed property.
It’s also important to note that FHA homeowners who experience a short sale may not be able to move forward right away. Defaulting on federal debt can force would-be buyers to wait three years before being eligible for a VA-backed home loan. Check out this article to learn more about how delinquency and default on federal debts can affect your home loan chances.
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. The difference with a short sale is that you won’t automatically have to wait a full two years before being in a position to land one.
In fact, if your credit score is still above the lender’s benchmark, you may be able to get prequalified for a VA home loan right after experiencing a short sale.
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 855-524-7279 to get a clear sense of your purchasing power.