Short sales can offer opportunities to buy homes at below-market prices, but they come with unique challenges that many buyers don't anticipate. Yes, you can use a VA loan to purchase a short sale property, but the process is more complex and time-consuming than a traditional sale because it requires approval from both the seller and their lender, and the property must still meet VA's Minimum Property Requirements for safety and soundness.
Understanding how short sales work and what to expect can help you decide if pursuing a short sale property makes sense for your situation. This guide explains everything Veterans need to know about using VA financing for short sale purchases.
What is a Short Sale?
A short sale is when a homeowner sells their property for less than the amount owed on the mortgage, and the lender agrees to accept the proceeds as full payment. Sellers typically do this because they are facing financial hardship and cannot afford to continue making mortgage payments or bring cash to closing to cover the difference.
A short sale differs from a foreclosure, in which the lender takes back ownership of the property, in that short sales involve homeowners who still own the property but need their lender's permission to sell for less than they owe. The Consumer Financial Protection Bureau notes that short sales can help homeowners avoid foreclosure while allowing buyers to potentially purchase at favorable prices.
The term "short" refers to the sale proceeds being short of the full loan payoff amount, not to the transaction timeline. Short sales typically take much longer to close than traditional sales.
Why Sellers Pursue Short Sales
Homeowners typically consider short sales when they're underwater on their mortgage and wanting to avoid foreclosure damage to their credit. For sellers, short sales are less damaging to credit scores than foreclosures and may allow them to purchase another home sooner. However, the process requires extensive documentation and can take months to complete.
How VA Loans Work with Short Sales
The VA doesn't prohibit using VA loans for short sale purchases. According to the VA, the property must meet standard requirements no matter what sort of sale it is.
Your lender will process your VA loan application normally, evaluating your creditworthiness, income, and debt-to-income ratio. The main differences with short sales involve the timeline, seller's lender approval process, and potential property condition issues.
The Short Sale Process Timeline
To give you an idea of general timelines:
Note that these are estimates. Actual timelines vary based on lender processing speed, number of parties involved, property condition and inspection results, financing complexity, title issues, and local market conditions.
Finding and Offering on a Short Sale
Short sale properties are listed on the Multiple Listing Service (MLS), the database that real estate agents use to share property listings, just like any other home for sale. Listings often indicate "short sale" or "subject to lender approval" in the remarks section. Your real estate agent can search the MLS and help you identify short sale opportunities in your target areas.
Many short sales are priced attractively to generate buyer interest, but the list price doesn't guarantee the seller's lender will accept that amount. When you make an offer, you're making an offer to both the seller and their lender. The seller must agree to your terms, then submit your offer to their lender for approval.
Work with an experienced agent familiar with short sales. Your offer should be competitive because the seller's lender wants to minimize their loss. Very low offers are less likely to get approved since lenders would rather foreclose than accept an unreasonably low price.
The Waiting Period
After the seller accepts your offer, they submit a short sale package to their lender including your purchase offer, their financial hardship documentation, and estimates of repairs needed.
The seller's lender then reviews the package to decide whether to approve the short sale. This process takes 60 to 120 days, though it can take longer if the lender is backlogged or requests additional documentation.
During this waiting period, you're in limbo. Your contract typically includes a financing contingency allowing you to back out if you can't obtain financing, but you've invested time and possibly money in inspections and appraisals.
Approval and Closing
The seller's lender may approve your offer as submitted, approve it with modifications (like requesting a higher price), or deny the short sale entirely.
If approved, you proceed toward closing like any other purchase. Your VA loan must still be finalized, the property must appraise appropriately, and the home must pass inspection and meet VA requirements..
VA Property Requirements for Short Sales
Short sale properties must meet the same VA Minimum Property Requirements as any other VA-financed home. The property must be safe, structurally sound, and sanitary.
Common Issues with Short Sale Properties
Many short sale properties have deferred maintenance issues. Homeowners facing financial hardship may not have been able to afford needed repairs, leading to problems that must be addressed before VA loan approval.
The VA appraiser will identify required repairs. These must be completed before closing, either by the seller or through repair escrow arrangements.
Negotiating Repairs
Here's where short sales get tricky. The seller typically has no money to make repairs (that's why they're doing a short sale). The seller's lender often refuses to make repairs since they're already taking a loss on the sale.
This leaves you with limited options. You can pay for repairs yourself before closing (some lenders allow this with proper documentation). You can walk away from the purchase if repairs are too extensive. Or you might negotiate a lower purchase price to account for needed repairs, though the seller's lender must approve any price change.
This repair situation creates a catch-22 that has caused many VA short sale purchases to fall through.
Challenges of Using VA Loans for Short Sales
Several factors make VA short sale purchases more challenging than traditional purchases.
Extended Timeline
The long timeline may create some difficulties. Your rate lock may expire, requiring extension fees or accepting a new rate. Your living situation might change, like a lease ending or PCS orders. Market conditions could shift.
Property Condition Concerns
VA's property requirements exist for good reasons, but they limit your options with distressed properties. If a short sale property needs significant work, it may not qualify for VA financing until repairs are completed.
Seller Lender Approval Uncertainty
Even after the seller accepts your offer, there's no guarantee their lender will approve the short sale. You might wait months only to have the short sale denied, forcing you to start your home search over.
Multiple Lien Holders
Some properties have multiple mortgages or liens. A lien is a legal right that a creditor has to your property until you pay back what you owe them. Each lien holder must agree to the short sale, multiplying the complexity and approval timeline.
Benefits of Buying Short Sales with VA Loans
Despite the challenges, short sales can offer advantages for patient buyers.
Potential Below-Market Prices
Short sales are often listed to attract buyers and may be priced below market, but lender approval determines the final accepted price. If you're willing to navigate the process, you might secure a home for less than you'd otherwise pay.
Your equity position starts stronger when you buy below market value, providing a cushion if property values decline.
Often No Down Payment Required
Using a VA loan for a short sale still means no down payment requirement. You can purchase below market value without needing substantial cash reserves beyond closing costs.
Better Condition Than Foreclosures
Short sale properties are often in better condition than foreclosures. The owner still lives in the home and has some incentive to maintain it. Foreclosed properties often sit vacant for months and may be vandalized or stripped of fixtures.
Tips for Successfully Buying Short Sales with VA Loans
These strategies increase your chances of success with VA short sale purchases.
Work with Experienced Professionals
Choose a real estate agent with short sale experience who understands VA loan requirements. They'll know how to structure offers and navigate the approval process. They can also coordinate with the seller's lender and help resolve issues that arise.
Be Patient and Flexible
Accept that short sales take time. Don't pursue a short sale if you need to move quickly or have inflexible timing requirements.
Stay in communication with your agent and lender throughout the process. Long periods without updates are normal in short sales, but regular check-ins help you stay informed.
Have a Backup Plan
Continue looking at other properties even after making a short sale offer and maintain your financial readiness throughout the process. Don't make major purchases or change jobs while waiting for short sale approval, as these could affect your loan qualification.
Get a Thorough Inspection
Invest in a comprehensive home inspection early in the process. Understanding the property's condition helps you decide whether to proceed and what repair negotiations might be necessary.
If the inspection reveals major issues, consider whether the potential savings justify the hassle and risk.
Consider Properties Already Approved
Some short sale listings indicate the seller's lender has already approved a specific price. These "approved short sales" move faster because you're not waiting for lender review and approval.
Alternatives to Short Sale Purchases
If short sale challenges seem overwhelming, consider these alternatives.
Foreclosures and REO Properties
Bank-owned foreclosures don't require seller lender approval because the bank already owns the property. You can use VA loans to purchase foreclosed properties if they meet property requirements.
Foreclosures often move faster than short sales, though they may have condition issues requiring attention.
Traditional Sales
Traditional sales offer faster closing timelines, more certainty, and often better-maintained properties. While you might pay market price rather than getting a deal, you avoid short sale complications and delays.
Making Your Decision
Short sales can offer opportunities to purchase homes at favorable prices, but they require patience, flexibility, and realistic expectations. The extended timeline, approval uncertainty, and potential property condition issues make them more challenging than traditional purchases.
If you have time to wait and can handle uncertainty, pursuing a short sale might be worthwhile. If you need to move quickly or have inflexible timing, focus on traditional sales or bank-owned foreclosures instead.
Work with experienced professionals who understand both VA loans and short sales. Their expertise can make the difference between a successful purchase and a frustrating experience that wastes months of your time.
Read more about VA loans to find out whether short sale purchases make sense for your situation.
FAQs
How long do VA short sales typically take to close?
VA short sales normally take 90 to 180 days from offer acceptance to closing, compared to 30 to 45 days for regular sales. It takes slightly longer since you have to wait for the seller's lender to approve the short sale.
Can I negotiate repairs on a short sale purchased with a VA loan?
Repair negotiations are challenging in short sales because sellers typically lack funds for repairs, and their lenders often refuse to pay for them. If the VA appraisal identifies required repairs, you may need to pay for them yourself, negotiate a lower price to offset repair costs (subject to lender approval), or walk away from the purchase. This is one of the biggest challenges with VA short sale purchases.
What happens if the seller's lender rejects my offer?
If the seller's lender rejects your short sale offer, the deal falls through, and you'll need to find another property. The property may go to foreclosure, the seller might seek other buyers, or the lender might counter with different terms you could accept. This is why having backup options is important when pursuing short sales.
Can I use VA loans for short sales if I'm a first-time homebuyer?
Yes, first-time homebuyers can use VA loans for short sales. However, the complexity and extended timeline can be especially challenging for first-time buyers who may already feel overwhelmed by the home-buying process. Consider whether you have the patience and flexibility to handle a potentially lengthy and uncertain transaction.
Are short sales worth the wait and hassle?
It depends on your situation. The potential savings need to justify the extra time, stress, and the risk that the deal will fall through.
