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Strategic default on VA loan - no deficiency?
Last Post Feb 25, 2013 11:05 AM by Illcomm. 21 Replies.
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Henbob6
Posts:831


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Dec 14, 2009 05:34 PM

    Civilian friends of mine are planning to default on their VA loan so they can move out of state (no financial hardship - they just want to be closer to family). They took out a $300k mortgage to buy a new house 18 months ago, and are listing it for $170K - about the going rate now. Their realtor is taking care of all aspects of the short sale, including dealing with the bank and VA, and tells them that they will not have to bring any money to closing, nor will they have to pay back the VA. 

    Is it true that they will be able to walk away from their house with no financial repercussions other than loss of their entitlement?

    Joe and Deb - VR SAMUser is Offline
    VR SAM
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    Dec 15, 2009 11:59 AM
    • Correct Answer?

    I would be extremely skeptical that they will walk away w/o being required to sign a note for part or all of the deficiency.  Regardless of what you hear about government programs to the contrary, banks are making short sales a less desirable option and in many cases are requiring people to sign notes for at least part of the deficiency.

    Almost certainly, they can expect a major credit hit for at least two years.

    Also, just because they list their house for a certain amount, doesn't mean the bank will sign off on an offer for that amount.   We frequently see banks coming back and demanding considerably more than the contract price. 

    Either they aren't understanding everything their Realtor is telling them, or they aren't getting the straight info.  No Realtor can "guarantee" a client an outcome on such a deal.   Joe Gladden, VR SAM

     

    Veteran Realty Serving America’s Military, Inc., VR SAM®,  is a partnership of retired Military Officers and Spouses, all Military Realtors, serving Military Families purchasing or selling homes in the Northern Virginia region including Fairfax County, Prince William County, Loudoun County, Fauquier County, Stafford County, Arlington, and Alexandria,  Many of our purchaser clients are PCSing to the Pentagon, NRO, Fort Belvoir, Fort Meyer, Anacostia, Bolling AFB, Andrews AFB, Navy Yard, Quantico, Coast Guard Headquarters, and other NOVA military installations.   VR SAM also serves a large number of defense contractor employees and Federal Employees from the FBI, NCIS, CIA and other agencies.  Call VR SAM today to learn about our industry leading purchaser client credit and competitive listing programs and rates. 

    VR SAM is affiliated with Jobin Realty Manassas, 9327 Main Street, Manassas, VA 20110.   703 365-9090

    Joe and Deb Gladden
    703 754-3036
    Fax: 703 848-3690
    homesformilitary@vrsam.com
    http://www.vrsam.com
    Specializing in Military, Defense Contractors, Fed Employees Relocation.
    Ask us About Fawn Lake - Virginia's Best Kept Secret!
    henbob6
    Posts:831


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    Dec 18, 2009 12:25 PM
    • Correct Answer?

    Thank you for your reply. One other question - will they have to pay back the First Time Homebuyers tax credit they got last year? 

    (I'm a bit leery of what their realtor is telling them also. Their combined income is around 130K, so I'm a bit incredulous that the bank/VA would accept their claim of "financial hardship." )

    Joe and Deb - VR SAMUser is Offline
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    Dec 18, 2009 01:53 PM
    • Correct Answer?

    I haven't heard of this specific situation, but my guess is that they would have to pay it back if they haven't met the minimum time living in the home.  If they are considering this, they should certainly check with a CPA.   Also, if a foreclosure is a possibility, they should not get confused between a foreclosure and a bankruptcy.  Two different things.   In many states, absent a chapter 7 bankruptcy, they may find that the lender can still come after them several years down the road if they foreclose.   Again, not an attorney but they most certainly should check with one before they dive head first into what appears to be very shallow water! 

     

    Joe

     

     

     

    Veteran Realty Serving America’s Military, Inc., VR SAM®,  is a partnership of retired Military Officers and Spouses, all Military Realtors, serving Military Families purchasing or selling homes in the Northern Virginia region including Fairfax County, Prince William County, Loudoun County, Fauquier County, Stafford County, Arlington, and Alexandria,  Many of our purchaser clients are PCSing to the Pentagon, NRO, Fort Belvoir, Fort Meyer, Anacostia, Bolling AFB, Andrews AFB, Navy Yard, Quantico, Coast Guard Headquarters, and other NOVA military installations.   VR SAM also serves a large number of defense contractor employees and Federal Employees from the FBI, NCIS, CIA and other agencies.  Call VR SAM today to learn about our industry leading purchaser client credit and competitive listing programs and rates. 

    VR SAM is affiliated with Jobin Realty Manassas, 9327 Main Street, Manassas, VA 20110.   703 365-9090

    Joe and Deb Gladden
    703 754-3036
    Fax: 703 848-3690
    homesformilitary@vrsam.com
    http://www.vrsam.com
    Specializing in Military, Defense Contractors, Fed Employees Relocation.
    Ask us About Fawn Lake - Virginia's Best Kept Secret!
    anon1
    Posts:831


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    Dec 18, 2009 05:02 PM
    • Correct Answer?
    Just my .02 here, and its not worth much, but I was told by my realtor that with short sales the bank can come after you for YEARS for the delinquincy. I also was under the impression that being a VA loan, one's wages can be garnished if in fact they do make enough to pay back some of the short sale. I may be incorrect in that, as a lot of what circulates nowadays is rumor, but it does make sense that the gov. (VA) would try to get their money back any way possible, especially if the military member promotes or their financial "needs" change in a positive way.

    I guess unless they get something legal signed with an attorney on the short sale, I would not sleep tight at night wondering if at some point the bank will come back after them once they start faring better in their financial situation. But, I'm a paranoid person... Even after we have our HAP check in hand and have closed on our house, I will still wonder if they'll decide to take it back. LOL. So, maybe I'm just a skeptic.

    Anyway, yes, making 130K per year and claiming financial hardship to sell for 170K seems a bit unreasonable, but one has to also account for other bills they have that may eat up that 130K pretty quickly. However, I was also under the impression that with a short sale, if they do have other assets, they can be forced to sell/cash them out as payment toward the loan prior to short sale, so they likely won't get away free and clear in that case either.

    Again, just my .02, take it or leave it. I'm not a professional.
    Joe and Deb - VR SAMUser is Offline
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    Dec 20, 2009 05:23 AM
    • Correct Answer?

    There is no question that banks / lenders will look very closely at your income, assets, employment status before accepting an offer on a short sale.  They will the decide whether to take the offer or counter with an offer that may have a higher price and / or require the homeowner to sign a note for any / all of the shortage.   If there is a note, that may alter the state tax issue as well as it may negate any negative tax implications (check with your CPA!).  

    In some cases if they deem that their best option is to accept the offer and simply write off the shortgage, it is likely a case where the seller's next move would be a declaration of bankruptcy.  You should know that not all bankruptcies are equal.  There are chapter 7 bankruptcies and chapter 11.   You would need a bankruptcy attorney to determine which is the best (or lease worst) course and the corresponding implications. 

    Your point is very well taken on short sales and foreclosures.  Neither completely precludes the lender/s from later action for a period of years, unless the short sale documents specifically state that the debt is forgiven.   Choose wisely and with the proper legal / accounting advice.  

    Joe

     

     

    Veteran Realty Serving America’s Military, Inc., VR SAM®,  is a partnership of retired Military Officers and Spouses, all Military Realtors, serving Military Families purchasing or selling homes in the Northern Virginia region including Fairfax County, Prince William County, Loudoun County, Fauquier County, Stafford County, Arlington, and Alexandria,  Many of our purchaser clients are PCSing to the Pentagon, NRO, Fort Belvoir, Fort Meyer, Anacostia, Bolling AFB, Andrews AFB, Navy Yard, Quantico, Coast Guard Headquarters, and other NOVA military installations.   VR SAM also serves a large number of defense contractor employees and Federal Employees from the FBI, NCIS, CIA and other agencies.  Call VR SAM today to learn about our industry leading purchaser client credit and competitive listing programs and rates. 

    VR SAM is affiliated with Jobin Realty Manassas, 9327 Main Street, Manassas, VA 20110.   703 365-9090

    Joe and Deb Gladden
    703 754-3036
    Fax: 703 848-3690
    homesformilitary@vrsam.com
    http://www.vrsam.com
    Specializing in Military, Defense Contractors, Fed Employees Relocation.
    Ask us About Fawn Lake - Virginia's Best Kept Secret!
    Henbob6
    Posts:831


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    Dec 21, 2009 10:50 AM
    • Correct Answer?
    Anon1 - I agree with the fear that the VA would come after them for the $, but I haven't been able to find where that's explicitly stated. (I'd be a bit paranoid too when it comes to over $100K!!!!) I'm also not comfortable with their "full-service" realtor taking care of everything. At the beginning, he told them that they "might" need to sign a note, but it's no big deal - he's had people "fight" it and have it set aside.

    Foreclosure and Chapter 7 or 11 are not on the table - they are far from being in financial trouble. Two vacations this year, and a $25k car. They're able to pay all their other bills. They simply want to move, but their house isn't worth nearly what they paid 18 months ago.

    From what you're saying, I don't see how they bank or VA would even approve a short sale, so hopefully my concerns are moot.

    Thank you for your advice and opinions. I'll be seeing them over the holidays, and will gently suggest they talk to a lawyer and CPA who is not affiliated with their realtor.
    Karen
    Posts:831


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    Dec 30, 2009 04:09 PM
    • Correct Answer?
    A friend of mine, a realtor, just closed on a short sale which was a VA loan. They are being told that if they don't pay the money back to the VA then they will never be able to apply for a VA loan again. I am sure some people don't care about that and will go through with a short sale.

    Karen
    Henbob6
    Posts:831


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    Jan 06, 2010 04:37 PM
    • Correct Answer?
    Thanks again for all your advice. My friends are moving forward with their plans regardless of any future ramifications or unsolicited concern from me. They even brushed off my question when I asked if we lived in a non-recourse state...they're just relying 100% on their realtor's advice, and could care less about having a lawyer review their short sale paperwork, if/when the sale happens. (FWIW - we don't live in a non-recourse state, and contract law allows 6 years unless the short sale paperwork specifies otherwise. )

    Thanks again! Cheers!
    Joe and Deb - VR SAMUser is Offline
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    Jan 07, 2010 04:21 AM
    • Correct Answer?

    The growing trend in short sales is for banks to require that they sign "note to pay the deficiency" prior to agreeing to the sale.  

    I think they are in for a big disappointment, but they are most fortunate to have a friend who trys to offer good advice.   That's about all you can do. 

     

    Joe

    Joe and Deb Gladden
    703 754-3036
    Fax: 703 848-3690
    homesformilitary@vrsam.com
    http://www.vrsam.com
    Specializing in Military, Defense Contractors, Fed Employees Relocation.
    Ask us About Fawn Lake - Virginia's Best Kept Secret!
    exJarhead
    Posts:831


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    Oct 22, 2010 09:56 PM
    • Correct Answer?
    Does the VA go after a strategic default or not? Does anyone really know???
    WS902N
    Posts:831


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    May 19, 2012 11:21 AM
    • Correct Answer?
    WOULD THE VA STOP MY DISABILITY PENSION IF I DEFAULTED ON MY VA LOAN? I AM
    CURRENT ON MY PAYMENTS BUT UNDERWATER ON THE HOUSE BY UP TO $20k
    Shawn
    Posts:831


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    May 23, 2012 08:22 PM
    • Correct Answer?

    From all my reading the answer is no.  You will lose that part of your entitlement but could still get another loan after 3 years or so if you have entitlement left or pay back the other to gain the entire amount. Your disability can only be touched for certain things (back taxes, child support, etc.)

    Mrschief
    Posts:831


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    Jul 07, 2012 04:10 PM
    • Correct Answer?
    Have to put husband in nursing home. He has dementia & I can no longer care for him at home. Our income is SSDI & military retirement.We have 2 kids 17 & 14. This is unexpected he is still kind of young, 63, & was diagnosed at 58. I'm pretty sure I will no longer be able to keep up the mortgage resulting in default.The mortgage is in his name only. Is this considered a hardship & how does the VA handle a situation like this? Will the VA punish him & withhold any of his retirement & SS payments? The reason I'm asking is I'm trying to find out how much we'll have to live on after nursing home costs.
    Joe and Deb - VR SAMUser is Offline
    VR SAM
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    Jul 08, 2012 06:28 AM
    • Correct Answer?

    Very sorry to hear about your problems and dilemma.   We are not part of the VA and unfortunately this is a bit out of our area of expertise.  I don't know what state you live in nor do I know if the home loan is a VA loan.  But, I think every state has several VA offices that should be able to answer your questions.   I would suggest you start with a call to the nearest office and also contact your local social security office.   In some states medicaid may offer assistance with a nursing home but all states have different laws on this.  If you live near a military installation, you may see if their legal services office can offer legal advice on this.  

    Joe

    Joe and Deb Gladden
    703 754-3036
    Fax: 703 848-3690
    homesformilitary@vrsam.com
    http://www.vrsam.com
    Specializing in Military, Defense Contractors, Fed Employees Relocation.
    Ask us About Fawn Lake - Virginia's Best Kept Secret!
    Illcomm
    Posts:831


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    Sep 11, 2012 12:04 PM
    • Correct Answer?
    I went through this. VA didn't seem to play much of a role in the process at all. I talked to them once and there only statement was that in a "short sale" you wouldn't be eliible for another VA loan unless you paid them the deficiency. They don't come after any disability either. I receive it now and it's never been a question. All hardship letters, income verification, etc were completed through the mortgage lender. I missed a total of 18 payments before the sale actually completed. I had a good offer after the 6th missed payment but the bank appraiser fumbled on his valuation and the bank rejected. 12 months later they accepted an offer ($165K on a $250K loan). The previous offer was ($195K). Anyway, all you have to do in the negotiation process is to be sure you get a letter from them that says how the short sale will report (settled in full for less than the full balance in my case) and also that upon closing the debt will be settled in full and no amounts will be due or owing from the propety owner (seller). This is included in the documentation you sign when the bank offers you the terms of the short sale. There is a lot of misinformation and fear tactics out there that had me up many nights and reading a lot but in the end its a simple process (albeit time consuming). We had a VA loan where we got military orders out of state and my spouse lost her job due to the relocation. We were ineligible for the Homeowners Assistance Program because our lone closed on Aug 1, 2006..only a month after their bogus deadline for being eligible...
    Illcomm
    Posts:831


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    Sep 11, 2012 12:07 PM
    • Correct Answer?

    Also, this was an in Florida (a recourse state) but the signed letter of terms is fully binding.  I had it reviewed by a real estate attorney.  It's now been about a year since closing and I haven't heard anything more about it.  My credit went from 790 before missed payments down to 705 for 6 months following the short sale.  I haven't missed any other payments on anything and it is now at 738.

    recently retired
    Posts:831


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    Jan 06, 2013 12:30 AM
    • Correct Answer?
    Interesting and infomative thread. I live in a judical foreclosure state. I am too far behind on my home payments to consider any alternatives other than foreclosure. I was granted a Ch 7 and the home debt was discharged to $0 (loan was not reaffirmed). However, after the bankruptcy, I defaulted on the loan (could not keep up after a bitter divorce and support requriements) and this was a VA backed loan when I refinanced in 2008 at 420K. Having read many blogs and researching different websites, there is conflicting information on what will happen once the property is sold and the bank requests the VA to pay a percentage of the loan, to my understanding (up to 25% or 144K). Some suggest that I will only lose my entitlement. Others say that I will not only lose my entitlement but will have to repay the full amount the VA paid to the bank and that not only my retirement would be subject to garnishment but my entire VA disability would also be taken until the debt is satisified regardless on whether or not I will use the VA loan again. Tried working with the bank on loan modifcation, short sell options all lead to a dead end. I have not contacted the VA loan office. Any suggestions and facts about the VA loan program and foreclosure would be helpful before I contact them.
    Illcomm
    Posts:831


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    Feb 12, 2013 01:25 PM
    • Correct Answer?
    Hi recently retired. The answer is you will only lose your elegibility for future use of the VA home lone program. You won't have to pay anything back to the VA. Read the VA rider in your original loand documents or go ahead and call the VA and ask. VA isn't out to get you or anything and taking to them and asking them questions won't hurt. I've read the same hundred stories as you have about having to pay back the VA (misinformation) but I can't remember one time where I read a post by someone that sounded legitimate where they said they were forced to pay it back or were garnished.
    Recently retired
    Posts:831


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    Feb 23, 2013 08:53 PM
    • Correct Answer?

    Thanks Illcomm for the information and congratulations the short sale. I too missed out on HAP by two months. If I understand your original post, the bank accepted the short sale with your portion of debt forgiven. In turn, did the bank receive any money from the VA on the loan guaranty to cover the debt or did the bank just agree to take the loss? 

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