VA Compromise Sale: How to Sell a VA-Financed Home for Less Than You Owe
A VA compromise sale (called a "short sale" in 38 CFR 36.4322 and VA's Servicer Handbook M26-4) is a sale to a third party for an amount less than the total debt on the loan. [M26-4 §5.08.a] The servicer releases the lien in exchange for the proceeds, and VA may pay a claim on the shortfall.
What it is
- A sale for less than the debt. The servicer agrees to release the lien in exchange for the net sale proceeds when a private sale at full value is not feasible. [M26-4 §5.08.a]
- The loan must be insoluble. The servicer must determine that the loan cannot be resolved through home-retention options before approving a short sale. [38 CFR 36.4322(e)(1)(i)]
- The borrower receives nothing. The current owner of the property will not receive any proceeds from the sale. [M26-4 §5.08.a.3]
Loss mitigation comes first
- Waterfall applies. If you want to keep the home, the servicer must follow the VA Loss Mitigation Waterfall, which reviews repayment plans, forbearances, modifications, and partial claims before alternatives. [M26-4 §5.01.a]
- Non-retention path. If you do not wish to retain the home, the servicer discusses alternatives including a private sale, short sale, and deed-in-lieu of foreclosure. [M26-4 §5.01.a]
- Servicer must notify you. VA expects servicers to proactively notify borrowers of the availability of alternatives to foreclosure. [M26-4 §5.10.b]
Relocation assistance
- $1,500 from VA. VA authorizes servicers to advance $1,500 in relocation assistance to borrower occupants who complete a short sale or execute a deed-in-lieu. [M26-4 §5.10.a]
- VA reimburses the servicer. VA treats the advance as a reimbursable expense included in the claim. [M26-4 §5.10.a]
- Written agreement required. The servicer must obtain the homeowner's written agreement on conditions for receipt of the assistance. [M26-4 §5.10.b]
Entitlement afterward
- Used entitlement can be restored. The Secretary may exclude previously used entitlement if the property has been disposed of and the loan has been repaid in full or the loss has been paid in full. [38 USC 3702(b)(1)]
- Repay to restore. If VA suffered a loss on the loan, the loss must be paid in full before entitlement can be restored. [38 USC 3702(b)(1)(B)]
- Post-1989 loans. For loans closed after December 31, 1989, the borrower "shall have no liability to the Secretary with respect to the loan for any loss resulting from any default [...] except in the case of fraud, misrepresentation, or bad faith." [38 USC 3703(e)(1); VA.gov trouble-making-payments]
Top questions before you dig in
Can you sell a VA-financed home for less than you owe?
Yes. Under 38 CFR 36.4322(e), the servicer may approve a short sale without VA's prior approval if the loan is insoluble, the net proceeds equal or exceed the net value of the property, and the borrower receives no proceeds. [38 CFR 36.4322(e)(1)] M26-4 calls this a "short sale"; M26-4 Chapter 7 uses "compromise sale" for the servicer incentive payment. [M26-4 §5.08; M26-4 §7]
Does the servicer have to try other options first?
If you want to keep the home, yes. The servicer must follow the VA Loss Mitigation Waterfall, which reviews repayment plans, special forbearances, loan modifications, and VA partial claims. [M26-4 §5.01.a] If you do not wish to retain the home, the servicer moves to alternatives: private sale, short sale, or deed-in-lieu. [M26-4 §5.01.a]
Can you get your VA entitlement back after a compromise sale?
The Secretary may restore entitlement if the property has been disposed of and the loan has been repaid in full, or if VA suffered a loss, that loss has been paid in full. [38 USC 3702(b)(1)] For loans closed after December 31, 1989, the borrower "shall have no liability to the Secretary [...] for any loss resulting from any default [...] except in the case of fraud, misrepresentation, or bad faith." [38 USC 3703(e)(1)]
The Bottom Line Up Front
A VA compromise sale lets you sell an underwater VA-financed home for less than the outstanding debt, avoiding foreclosure.
The servicer must determine the loan is insoluble, the net sale proceeds must equal or exceed the net property value, and you cannot receive any proceeds from the sale. [38 CFR 36.4322(e)(1)] VA authorizes $1,500 in relocation assistance for borrower occupants who complete a short sale or deed-in-lieu. [M26-4 §5.10.a] Entitlement can be restored after a claim, but only if the loss has been paid in full. [38 USC 3702(b)(1)(B)]
A Note on Terminology
38 CFR 36.4322(e) and M26-4 Chapter 5 call this a "short sale." [38 CFR 36.4322(e); M26-4 §5.08] M26-4 Chapter 7 lists five servicer incentive types: Repayment Plan, Special Forbearance, Loan Modification, Compromise Sale, and Deed-in-Lieu. [M26-4 §7] 38 CFR 36.4319(b) lists the same five: Repayment Plan, Special Forbearance, Loan Modification, Short Sale, and Deed in Lieu of Foreclosure. [38 CFR 36.4319(b)] The lists match one to one: what M26-4 calls a "Compromise Sale" incentive, the CFR calls a "Short Sale" incentive.
The Three Conditions the Servicer Must Verify
Under 38 CFR 36.4322(e)(1), the servicer may approve a short sale without VA's prior approval if all three conditions are met: [38 CFR 36.4322(e)(1)]
- The loan is insoluble. The servicer has determined that the loan cannot be resolved through home-retention options. If the loan is 60 or more days delinquent and the borrower has requested a short sale, the servicer does not need to evaluate the borrower's financial information. [M26-4 §5.08.a.1]
- Net proceeds equal or exceed net value. The credit to the indebtedness (consisting of the net proceeds from the short sale and any waiver of indebtedness by the holder) must equal or exceed the net value of the property. [38 CFR 36.4322(e)(1)(ii)]
- The borrower receives no proceeds. The current owner of the property will not receive any proceeds from the sale. [38 CFR 36.4322(e)(1)(iii); M26-4 §5.08.a.3]
If the conditions are not met but the servicer believes a short sale would benefit both the borrower and the Government, the servicer must submit a request for pre-approval in VALERI. [M26-4 §5.08.c]
How the Process Works
The servicer manages the compromise sale through VA's VALERI system. The process follows these steps from M26-4 Chapter 5:
- Step 1: Loss mitigation review. The servicer follows the VA Loss Mitigation Waterfall. If the borrower does not wish to retain the home, the servicer discusses alternatives to foreclosure including a private sale, short sale, and deed-in-lieu. [M26-4 §5.01.a]
- Step 2: Determine the loan is insoluble. The servicer determines the loan cannot be resolved through home-retention options. [M26-4 §5.08.a.1]
- Step 3: Obtain a liquidation appraisal. At least 30 days before the anticipated sale, the servicer requests that VA assign an appraiser. An existing liquidation appraisal from a scheduled foreclosure may be reused for a subsequent short sale. [38 CFR 36.4322(b)(1); M26-4 §5.08.b]
- Step 4: Verify the three conditions. Net proceeds must equal or exceed net value, and the borrower receives no proceeds. [38 CFR 36.4322(e)(1)]
- Step 5: Close and report. The servicer reports the compromise sale complete event in VALERI, which triggers the incentive payment process. [M26-4 §7]
Compromise Sale vs. Deed-in-Lieu of Foreclosure
A deed-in-lieu (DIL) is a voluntary transfer of the property from the borrower to the servicer in exchange for a release of all obligations under the mortgage. [M26-4 §5.09.a] Under 38 CFR 36.4322(f), the servicer must first consider a short sale and determine it is not practical before accepting a DIL. [38 CFR 36.4322(f)(1)(iii)]
| Factor | Compromise Sale (Short Sale) | Deed-in-Lieu (DIL) |
|---|---|---|
| What happens | Property sold to a third party at market value | Property transferred to servicer |
| Regulatory basis | 38 CFR 36.4322(e) [38 CFR 36.4322(e)] | 38 CFR 36.4322(f) [38 CFR 36.4322(f)] |
| Order in waterfall | Considered first | Considered only if short sale is not practical [38 CFR 36.4322(f)(1)(iii)] |
| Borrower proceeds | None [M26-4 §5.08.a.3] | None |
| Relocation assistance | $1,500 [M26-4 §5.10.a] | $1,500 [M26-4 §5.10.a] |
| Title requirement | Buyer receives marketable title at sale | Borrower must convey clear and marketable title [38 CFR 36.4322(f)(1)(iv)] |
For the full range of loss mitigation options including repayment plans, forbearances, modifications, and partial claims, see VA Foreclosure Avoidance Options.
What Happens to Your VA Entitlement
When VA pays a claim after a compromise sale, the entitlement used for that loan is consumed. Under 38 USC 3702(b), the Secretary may restore previously used entitlement if:
- "The property which secured the loan has been disposed of by the [V]eteran or has been destroyed by fire or other natural hazard," and [38 USC 3702(b)(1)(A)]
- "The loan has been repaid in full, or the Secretary has been released from liability as to the loan, or if the Secretary has suffered a loss on such loan, such loss has been paid in full." [38 USC 3702(b)(1)(B)]
For loans closed after December 31, 1989, the borrower "shall have no liability to the Secretary [...] for any loss resulting from any default [...] except in the case of fraud, misrepresentation, or bad faith." [38 USC 3703(e)(1)] If the loss is not collected, the entitlement used for that loan remains consumed until the loss is paid. For details on entitlement after foreclosure, see What Happens to My Entitlement If I Foreclose?.
Contact VA for Help
If you are behind on your VA mortgage, contact your servicer immediately. You can also reach a VA loan technician at 877-827-3702 and select 6 (TTY: 711), Monday through Friday, 8 a.m. to 6 p.m. ET, or through VA's Loan Guaranty support portal at yourit.va.gov/csp. [VA.gov trouble-making-payments]
For what happens when the Veteran has died and the family is facing the mortgage, see What Happens to a VA Loan When the Veteran Dies. For buying a VA-owned property after a claim, see VA Vendee Financing Guide.
Frequently Asked Questions
Does the servicer need VA's approval to complete a short sale?
Not if the three regulatory conditions are met: the loan is insoluble, net proceeds equal or exceed net value, and the borrower receives no proceeds. [38 CFR 36.4322(e)(1)] If any condition is not met, the servicer must request pre-approval in VALERI. [M26-4 §5.08.c]
Can the borrower receive any money from the sale?
No. "The current owner of the property will not receive any proceeds from the sale of the property." [M26-4 §5.08.a.3]
Does the servicer evaluate the borrower's finances?
Not always. If the loan is 60 or more days delinquent and the borrower has requested a short sale, the servicer does not need to establish employment status, income, expenses, or debt obligations. [M26-4 §5.08.a.1 Note]
Can the servicer reuse an appraisal from a canceled foreclosure?
Yes. Any liquidation appraisal for a property originally scheduled for foreclosure does not require a second appraisal if a subsequent short sale offer is made. [M26-4 §5.08.b]
Does a deed-in-lieu come before or after a short sale?
After. Under 38 CFR 36.4322(f), the servicer must first consider a short sale and determine it is not practical before accepting a deed-in-lieu. [38 CFR 36.4322(f)(1)(iii)]
Can you get $1,500 in relocation assistance?
Yes. "VA authorizes servicers to advance $1,500 in relocation assistance to borrower occupants who complete a short sale or who execute a DIL." [M26-4 §5.10.a]
Can you use your VA loan benefit again after a compromise sale?
Entitlement restoration requires that the property has been disposed of and "the loan has been repaid in full, or [...] if the Secretary has suffered a loss on such loan, such loss has been paid in full." [38 USC 3702(b)(1)] Until the loss is repaid, the entitlement used for that loan remains consumed.
Does VA collect the shortfall from the borrower?
For loans closed after December 31, 1989, the borrower "shall have no liability to the Secretary [...] for any loss resulting from any default [...] except in the case of fraud, misrepresentation, or bad faith." [38 USC 3703(e)(1)] The entitlement impact still applies regardless of whether the debt is collected.
Can you appeal if the servicer refuses a compromise sale?
If conditions are not met but the servicer believes a short sale would benefit both the borrower and the Government, the servicer must request pre-approval from VA in VALERI. [M26-4 §5.08.c; 38 CFR 36.4322(e)(2)] The servicer can also request advance approval from the Secretary for a short sale that does not meet all regulatory conditions. [38 CFR 36.4322(e)(2)]
Does VA Form 26-6705 apply to a compromise sale?
No. VA Form 26-6705, "Offer to Purchase and Contract of Sale," is used for offers on VA-acquired (REO) property that VA already owns after a foreclosure claim. [VA Form 26-6705] It is not part of the compromise sale process. For more on buying VA-owned property, see VA Vendee Financing Guide.
How We Researched This Page
This page was built from 38 CFR 36.4322, which governs loan termination including short sales and deeds-in-lieu. The process rules come from VA Servicer Handbook M26-4, Chapter 5 (Loss Mitigation) and Chapter 7 (Incentive Payment). Entitlement restoration language is from 38 USC 3702. The VA counseling contact and post-foreclosure collection rule come from VA.gov's trouble-making-payments page. Every claim is mapped to a verbatim line from these sources.
Resources Used
- 38 CFR 36.4322: Loan Termination
- 38 CFR 36.4319: Servicer Loss-Mitigation Options and Incentives
- 38 USC 3702: Basic Entitlement
- VA.gov: Trouble Making Payments
- VA Servicer Handbook M26-4, Chapter 5: Loss Mitigation (KnowVA)
- VA Servicer Handbook M26-4, Chapter 7: Incentive Payment (KnowVA)