Short Sale Blog

What is the VA Compromise Sale Program?

The VA Compromise Sale Program is often referred to as the VA Short Sales program. Many homeowners who are looking to sell their homes today are finding that, in the current economic climate, the market value of their home is less than the amount owing on their mortgage. However, if their home loan was financed as a VA Loan, they may be eligible for assistance through the VA Short Sales Program.

VA Loan summary

The VA Loan is a program administered through the Department of Veterans Affairs, available to eligible service persons and veterans to help them to negotiate home loans at more favorable terms than most borrowers would have access to.  

VA does not provide the funds; the mortgage is still issued through a private bank, like any other mortgage. But VA provides a loan guaranty to the lender, promising to pay a specific amount to the lender in case they are unable to continue making payments on their loan. They do not guarantee the entire value of the loan, but a percentage. This can range from 50% on loans up to $45,000 (i.e. maximum $22,500), to between 25% and 50% of loans up to $144,000, and up to 25% of the Freddie Mac conforming loan limit on loans over $144,000.

The maximum amount that VA will guarantee a loan for is called the “entitlement.”  It is like an insurance policy for the bank. Active-duty service persons can qualify for entitlement. The amount of entitlement that a service person is eligible to receive can be found on their Certificate of Eligibility, available from VA.

The advantage of getting a home loan through the VA program is that borrowers receive much more favorable mortgage terms. Since the bank receives the loan guaranty from VA, borrowers can negotiate a loan with little or no money down - even a deposit of 0% - and receive lower interest rates.

Why would a homeowner choose to proceed with a VA Short Sale?

Sometimes, circumstances force the sale of a home at a lower sale price than the original purchase price. For members of the military, reasons to sell a home at a loss might be because of a permanent change of station, or a change in marital status.

If the home was purchased with a VA Home Loan, the seller might be eligible for the VA Compromise Sale Program. If an offer to purchase is received that is less than the amount owing on the home loan, the homeowner can send a request to VA to undertake a “compromise sale” (or short sale). If VA approves the sale, they will pay the lender the difference between the purchase price and the amount owing on the VA mortgage, up to the amount that they guaranteed on the original home loan.

In a regular short sale, the homeowner is dependent upon the lender agreeing to take a financial loss - absorbing the difference between the amount owing on the mortgage and the sale price of the house - in order for the homeowner to rid themselves of a mortgage that they no longer can service. If the lender does not approve the short sale, it cannot go ahead. The advantage of a VA Compromise Sale or Short Sale is that VA takes some or all of the loss, through their loan guaranty, making it much more likely that the lender will approve the short sale.

Eligibility requirements:

The VA Compromise Sale program is for homeowners who have already received a purchase offer on their home that falls short of the amount owing on their mortgage, and whose mortgage was negotiated through the VA Home Loan program.

In order to qualify for the program:
- the seller must demonstrate financial hardship
- the home must be sold at fair market value based upon current market conditions
- there must be no second lien or other lien on the home, unless the value of that lien is deemed by VA to be “insignificant” (In situations whereby there are second liens or other liens, the seller can request that the lien-holder consider releasing the lien and converting the loan to a personal loan.)
- closing costs for the sale must be considered “typical” for such a sale
- the compromise sale must be less costly to the government than foreclosure would be
- the borrower must provide a statement explaining why they must sell the property
- a VA appraisal will be required
- on loans that originated on or before December 31, 1989, the seller must be willing to sign a promissory note and enter into a payment plan to compensate VA for a portion of the compromise claim payment.

To protect the seller’s interest, the seller should make the sales contract subject to the approval of a VA compromise sale.

Steps:

The homeowner must first receive a purchase offer, at current fair market value, that is lower than the amount owing on the mortgage. Once this offer has been received:

1. Find out if your lender has a Loss Mitigation Department that has been authorized by VA to process a VA compromise sale. You can find an up-to-date list of authorized lenders here or you can contact your lender to ask them.

2. If your lender does have a VA-authorized Loss Mitigation Department, contact them directly for the forms. If they do not, then contact your regional VA office for forms.

3. Fill out a financial status report form, provided by your lender or the VA. You can download the form here.

4. Complete a letter of request.

5. Complete a Compromise Agreement Sale Application form, provided by your lender or the VA.

VA will then work with your lender and review the application. If they approve the short sale, VA will pay the lender the difference between the mortgage balance and the proceeds of the sale - up to the value that the VA Loan was guaranteed for.

When VA pays the lender the difference between the sales price and the total debt, the portion of the homeowner’s entitlement used to guarantee the loan will remain tied up until VA is reimbursed in full.

Further information:

Updated list of VA-authorized lenders:
http://www.vba.va.gov/ro/roanoke/rlc/slmps.htm
If your lender is not on this list, VA will process the Compromise Sale/Short Sale directly.

Regional loan centers contact information:
http://www.benefits.va.gov/homeloans/rlcweb.asp

More information (pdf document):
www.vba.va.gov/ro/roanoke/rlc/forms/Compromise Sale Program.pdf

VA Compromise Sale Program - Info for Real Estate Professionals:
http://www.vba.va.gov/ro/houston/lgy/compsale.html

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

July 2010 saw more cancellations of government-sponsored loan modifications than new loan modifications.

HAMP, the Housing Affordable Modifications Program, was initiated by President Obama in April 2009 to help homeowners who are struggling to meet their mortgage payments. The program can provide assistance for mortgage holders who want to refinance their mortgage or negotiate a loan modification with their lenders. It also includes opportunities for those who wish to mitigate their losses through short sales.

HAMP helps homeowners looking to modify their loan by giving lenders incentives to negotiate more favorable terms: for example by increasing the time period of the loan and by lowering interest rates. Homeowners start with at least three payments on “trial” before the loan modification becomes permanent.

However, nearly half of the 1.3 million loan modifications that have been negotiated under the HAMP program have been cancelled. This July, the number of new government-sponsored loan modifications grew by its slowest rate since the program started, and there were five times more cancellations than new modifications.

The Treasury indicated last week that there will be more cancellations than new trials for the coming months. This is to clear a backlog of “aged trials” from the program’s early days, when banks were encouraged to approve new trial loan modifications without supporting documents to ensure borrowers’ eligibility.

A total of 422,000 borrowers have received permanent loan modifications through HAMP. Other alternatives HAMP offers to homeowners include negotiating a short sale or a deed-in-lieu of foreclosure.

Seattle Short Sales, Inc. is a specialist in the marketing and short selling of properties in the Seattle area. Please contact us with any of your questions about short sales.

Freddie Mac CEO, Ed Haldeman released a statement today on "Why Foreclosure Prevention is a National Priority." He states that while the overwhelming majority of borrowers are current on their mortgages, that since the start of the recession that over three million homeowners have lost their homes to foreclosure, and that over five million are still currently at risk.

While Freddie Mac would like to find ways to help homeowners stay in their homes, they recognize that in many cases it is not financially feasible to make that happen. The typical reasons why a homeowner doesn't qualify for a workout plan is when they are struggling with a job loss, curtailment of income, a health issue, or simply bought more house than they can afford.

In those situations, Freddie Mac has found that the best scenario for the homeowner is to find a graceful exit from homeownership. Solutions such as short sales are recommended by Freddie Mac as they help homeowners avoid the stigma of foreclosure, shorten the waiting period before they can buy another home, and may inflict less damage on the individual's credit report. Freddie Mac reports that short sales are up by 600% from 2008.

Fannie Mae, in an effort to reduce the amount of 'strategic defaults' has issued new underwriting guidelines meant to punish those homeowners who walk away from a mortgage, even when they have the ability to pay it.

Researchers have stated that the main motivation to walk away from a mortgage is when there is negative equity. According to real estate research firm CoreLogic, about 11.3 million homeowners are underwater on their mortgages. Around 2.3 million additional homeowners are very close to being underwater. All told, almost one-third of all U.S. homeowners are either underwater or are close to it. CoreLogic projects that the typical underwater homeowner will not return to a position of positive equity until 2015 or 2016 at the earliest.

Fannie Mae is targeting homeowners who let their house go to foreclosure without evidence of a hardship or a good-faith attempt at a workout alternative. The penalty that Fannie Mae is implementing is two-fold. First, they have declared that strategic defaulters will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Secondly, they are vowing to aggressively pursue deficiencies in states that allow them to do so.

In order to encourage workouts, Fannie Mae, in April 2010, issued a revised underwriting bulletin, found here, that encourages homeowners to seek foreclosure alternatives such as short sales, by making the homeowner eligible for a new Fannie Mae backed loan in as little as two years. Compared to the waiting period of seven years post-foreclosure, it is clearly an advantage to pursue alternatives to foreclosure.

Let's take an example of a borrower who is underwater. Here at Seattle Short Sales, Inc. we work with hundreds of local homeowners, and can draw on a mountain of recent statistics. You can see all of the short sale approval letters here. On average, when the home is sold, the debt discounted is over $100,000 on an average property.

In our example, the homeowner previously purchased the property for $350,000 four years ago. The homeowner has a mortgage payment that is over $1,000 more than a rental payment would be for a suitable, alternative dwelling. If it takes until 2016 to regain their lost equity, that would mean they are making 84 housing payments for a $1,000 more than necessary, with nothing to show for it in the end. $84,000 put into the pocket of a homeowner in only six years is the reason why people voluntarily default.

Now, in Washington State, if the house goes to a Trustee Sale, the foreclosing senior lien holder, in most cases will not have a right to pursue the borrower for a deficiency. The junior non-foreclosing lien holder does retain the right. So, if the homeowner only has one mortgage, then there is a good chance that they could completely walk away unscathed, except for the restriction in using Fannie Mae money for the next seven years. If they have a junior lien, then the situation is more complicated.

In all cases, the homeowner will want to consult with a real estate and bankruptcy attorney to assess their options and compare the pros and cons of the situation.

If you want to sell your house, you won't have enough money from the buyer's proceeds to pay all the closing costs and your mortgage balance. You will either have to bring in money to closing, or ask your lender to take less than owed. That is called a short sale.

The challenge facing millions of homeowners right now is that their mortgage payments are too high, relative to their income.


At some point, the homeowner has to wonder, would it be better to walk away from this house and find a lower housing payment? Some people are forced to do this involuntarily, when they simply don't have enough money to pay all of their bills due to job loss, illness or other economic hardships.

Millions of homeowners though, are facing a voluntary decision. Should they default on their mortgage? Would it be best for them financially? And, what are the consequences?

The Top 4 Reasons for a Homeowner to do a Short Sale

In my role as general manager of Washington Foreclosure Assistance, I’ve worked with hundreds of local homeowners in the Seattle area over the past six years. The one thing in common was that they were all facing imminent foreclosure and wanted to make the best of a difficult situation. They all had the option of burying their head in the sand, and ignoring the problem, but instead, they chose to take action. Here are the top four reasons why Seattle Short Sales clients decide to sell their property and do a short sale with their lenders.

1.    Dramatically Improve Future Borrowing Capability

In the Fannie Mae Announcement titled 08-16, published June 25, 2008 Fannie Mae announced a new category of borrower for their underwriting guidelines. They established a borrower category called preforeclosure. They also altered some lending guidelines for the pre-existing categories of foreclosure and bankruptcy.

Fannie Mae and their cousin Freddie Mac control the bulk of lending in the United States. They finance over 80% of all loans. Therefore, their guidelines are very important.

Here is what they changed:

If you let your house go to foreclosure, you used to have to wait 4 years to be eligible to borrow again. The time period has been increased to 5 years. In addition, in years 5-7 after the foreclosure, you will have to put 10% down and have a minimum credit score of 680.

In stark contrast, a new category called preforeclosure was created, and is much more favorable to borrowers. Fannie Mae established a short 2-year time period for reestablishing credit following completion of a preforeclosure short sale, with no additional requirements or conditions. If you are a distressed Seattle homeowner, and want to purchase another home in Seattle in the near future, a pre-foreclosure short sale is clearly the way to go.

2.    Pre-Negotiate or Eliminate Deficiency Judgments

In Washington State, foreclosing lien holders typically choose the non-judicial foreclosure process. Here is the reason why: If they took their borrower to court to get a judgment, they would typically be awarded the entire amount of the loan – but they would have to go through the time and expense of the court action, plus face a long redemption period where the borrower could make good on the loan. The lien holder would have to wait the entire period before getting the property back and being able to sell it.

In contrast, the trustee sale process is relatively quick and affordable to the foreclosing lien holder. In exchange they forgo the right to a deficiency judgment against their borrower.

What we just covered above relates to just the foreclosing lien holder. If you have a junior lien holder, for example a second mortgage or a HELOC on the property, you will have to address the deficiency judgment issue.

If the homeowner lets the property go to a trustee sale, the non-foreclosing junior lien holder can come back later and take the borrower to court and get a judgment for the difference between what the lien holder was owed at auction, and what they received.

In contrast, in a preforeclosure short sale situation, the homeowner will invariably have a better outcome. At a minimum, the junior lien holder will be paid between $1,000 and up to 10% of the loan balance in exchange for the release of lien. In addition, in the majority of cases the junior lien holder agrees to report to the credit agencies that the account is settled, meaning they won’t come after the borrower for a deficiency judgment later.

3.     Get a $1,500 MHA Relocation Payment

On February 18, 2009 the Obama Administration created the Making Home Affordable (MHA) Program, to address the housing crisis. The initial elements of the plan centered on loan modifications. Between the servicers who have signed on to the program, and loans owned or securitized by Fannie Mae and Freddie Mac, the MHA program covers over 75 percent of all loans in the country.

On May 15, 2009 a new initiative within MHA called Foreclosure Alternative was created to provide incentives to lenders to help borrowers complete short sales. The main reason why a borrower would be interested in this is that there is now a $1,500 relocation credit available to the borrower at the closing of the short sale. The requirement is that the borrower by ‘eligible’ for the Foreclosure Alternative Program, but not qualify for a loan modification, or were unable to make their modified payments.

4.    Getting One’s Affairs in Order and Taking Positive Action

This last reason falls more into the psychological category. I find this to be the most effective though, in helping people get their lives in order.

It is very tempting for homeowners in distress to want to bury their heads and hope the problems go away. I liken it to a heavy burden on the shoulder’s of the homeowner, weighing them down. Or like a dark rain cloud following them around, keeping them in the darkness.

The opportunity, with a foreclosure proceeding at hand, is to use it as a lever to make changes in one’s lifestyle. By completing a Borrower Financial Statement, the homeowner has a chance to assess where their money goes every month. They can make a decision to sell the property, reduce their housing expenses dramatically, and get rid of the burdens.

If the homeowner needs to find more employment, it is easier to do that when he or she is not also trying to save their house. It is better to close the door on a troubled housing situation, and free the mental space up to focus on income producing activities. Everyone has a gift to give, and it is easier to give it if one’s hands are open and available, rather than clutching the past.

The Mortgage Bankers Association reported on May 28, 2009 that a record 12% of U.S. homeowners are behind on their payments or facing foreclosure.

The striking change is that previously strong borrowers are being caught up in the downturn. The rate of foreclosures on prime fixed-rate loans has doubled in the past year, and now represents the largest portion of all new foreclosures. At this time, almost 6% of borrowers with fixed-rate mortgages are in the foreclosure process. At the same time, nearly 50% of all borrowers with shaky credit, with adjustable-rate loans, are in foreclosure.

It is now predicted that the wave of foreclosures will last into late 2010.

Loan modifications have been promoted as the 'answer' to our nation's housing crisis. The idea was that by either reducing the principal balance of the loan, or lowering the interest rate on the loan, troubled borrowers would be able to keep their home.

The first statistics that came from the FDIC were not promising. 65% of borrowers who had their loan modified via the government run IndyMac bank were in default within 6 months. Since then, the government has encouraged even more loan modifications, with the argument that the loan servicers need to lower the monthly payment for the borrowers even further to make the policy work.

Well, Fitch Ratings has come out with a report looking at a bundle of securities from 2005 to 2007 that are managed by around 30 mortgage companies. Fitch found that a conservative project was that between 65% and 75% of modified subprime loans with go into default within the first year after the modification. Even loans where the principal was reduced by 20% were still redefaulting at rates of 30-40% in the first year.

If you are a homeowner, and are not able to make your payments, the best thing to do is take matters into your own hands and get your property sold and your accounts settled with your lender. All too often, the hope for a loan modification makes homeowners wait until it is too late to sell the house and then they lose it to the auction.

The Ford Foundation has announced a plan to invest $50 million in a trust that will buy foreclosed properties directly from national lenders and then redevelop the properties.