Written by Isaac F. Davis

Often when the economy is down, so is the housing market.  Mortgage borrowers, including those with VA loans, can sometimes have difficulty making monthly payments in a recession.  To alleviate the stress, selling a home may be the answer.  And, there are many reasons why a military member might need to put a home on the market for less than what he or she owes on the property.

A VA borrower facing a reduced sale of a home may be able to utilize something known as a VA compromise sale.  A VA compromise sale works much like a short sale in that the sale price of the home is often lower than the VA loan payoff amount.  The difference is that the VA will likely make up the difference that is owed on the loan.  VA compromise sales may be explored in markets where offers are scarce, and where some sellers entertain low offers.  

When a VA borrower receives a low offer, he or she can request that the VA consider a compromise sale.  The VA will evaluate the situation and decide whether to accept the request for a compromise sale. Typically a VA representative will work with the VA-approved mortgage company to negotiate the final price and details of the compromise.

When the VA approves a compromise sale, the difference between the offer and the amount owed on the VA mortgage is covered by the VA.  The borrower’s VA entitlement is restored after he or she pays back the difference to the VA.  In order for the VA to consider a VA-financed property for compromise sale, the following guidelines must apply:

• The borrower must be in financial distress
• The price of the home at the time of sale must be dictated by the current market
• No significant second liens can be present
• No more than standard closing costs can be charged on the transaction
• The compromise sale must not cost the VA more than a foreclosure would
• Fair market value of the home must be determined by a VA appraisal
• A statement from the VA borrower must explain why the home cannot be sold for what is owed

 

Often times, a military member’s war deployment leads to relocation overseas.  This is likely the most common reason for a military member to be forced to sell a home at a loss.  Marriage and divorce are also reasons for a forced home sale. Whatever the reason may be, a VA borrower may experience a reduced sale that is out of his or her control.  The purpose of a VA compromise sale is to help facilitate the sale of a home in certain cases and cover losses to the federal government.

The details of each VA compromise sale are unique.  In certain cases, the seller may be asked to sign a repayment note to compensate the VA for a portion or all of the loss. The payoff amount is usually going to be less that the total loss incurred by the VA.  The amount is tallied after a financial assessment has been done to determine the VA borrower’s ability to pay. 
It’s no doubt that a VA borrower is in financial distress who is forced to sell can buffer the loss with a VA compromise sale.  The advantages of a VA compromise sale, over foreclosure, are that the house never becomes VA-owned property.  And, a borrower’s credit is not affected by a VA compromise sale.  Additionally, a VA compromise sale reduces the number of VA loan foreclosures and the federal government’s real estate inventory.

If a VA borrower thinks he or she may be facing a situation where a VA compromise sale might help, it is a good idea to contact a mortgage counselor at the nearest VA regional office.