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VA Loan Foreclosure: How to Prevent it From Happening

What Is A VA Loan Foreclosure And How Can I Prevent It?

When individuals purchase a home, they often assume they will always manage to keep up with payments and avoid financial difficulties. However, life is unpredictable, and one might face financial challenges. In such cases, your loan servicer could offer assistance to prevent the loss of your home. For service members holding a mortgage through the Department of Veterans Affairs (VA), we will discuss how to circumvent foreclosure on a VA loan.

What Does VA Loan Foreclosure Entail? 

Foreclosure occurs when a lender takes back possession of your home after all other remedies have been explored. A VA loan foreclosure happens specifically when the mortgage in question is guaranteed by the VA.

Understanding the VA Loan Foreclosure Procedure 

The process of a VA loan foreclosure is similar to the foreclosure process of any mortgage. There are rare situations where foreclosure might happen more swiftly (such as when due-on-sale clauses are activated). Typically, the foreclosure process begins after payments have been missed, during which your lender and/or mortgage servicer attempts to reach out to find a resolution to avoid foreclosure.

Typically, foreclosure proceedings under the VA can start after payments are overdue by 4 months. You will receive a formal notification by letter. We urge clients of Rocket Mortgage® who are facing difficulties with their payments to get in touch with us by completing our Application for Success.

What Support Does the VA Offer to Prevent Foreclosure? 

The VA provides several forms of assistance for borrowers grappling with their mortgage payments, applicable to both VA-backed mortgages and others. Financial counseling is available to offer advice tailored to your specific circumstances and can be particularly beneficial if you’re apprehensive about reaching out to your servicer. (Remember: Your servicer is there to collaborate with you.)

Active-duty service members enjoy additional safeguards under the Servicemembers Civil Relief Act (SCRA), which includes:

  • Waiving late fees and fees for insufficient funds
  • Halting foreclosure or other legal actions
  • Treating payments as current under forbearance agreements, provided any agreed payments are made
  • Reducing interest rates to 6% if they are above this rate, during active duty and for one year thereafter

7 Strategies to Avoid VA Loan Foreclosure Facing financial difficulties doesn’t mean foreclosure is inevitable. There are various steps you can take to avert foreclosure.

Collaborating with your servicer is crucial. They prefer to keep you in your home since foreclosure is an arduous process for everyone involved. Before considering foreclosure, your servicer will explore different options for avoidance with you.

It’s worth mentioning that these options might affect your credit negatively, depending on the context of the relief. For instance, leniency is often granted following natural disasters.

  1. VA Loan Forbearance: This is a temporary halt on mortgage payments, allowing you time to stabilize your finances. It’s usually the first solution offered by servicers during financial hardship.
  2. Repayment Plan: Suitable after forbearance or a few missed payments, this plan divides overdue amounts into manageable installments, added to your regular mortgage payments until caught up.
  3. Loan Modification: This permanently alters your loan terms (such as length and interest rate) to include overdue payments in your balance, making it easier to stay in your home.
  4. Reinstatement: This option involves paying all overdue amounts in one go to update the loan. It’s viable if you’re expecting a lump sum, such as back pay from employment.
  5. Selling Your Home: If other options are unfeasible and staying in your home isn’t possible, selling and using the proceeds to settle your mortgage could be the next step. Any remaining funds might help with your next housing arrangement, whether that’s purchasing another home or renting.
  6. Short Sale: If the market value of your home has dropped and it’s not possible to sell it for the amount you owe on the mortgage, your servicer might agree to a short sale. This requires collaboration with your servicer. During a short sale, your servicer will assess the property’s value and decide on the acceptable offer amount. The proceeds from the sale go to them. You may be eligible for an incentive for cooperating with your servicer in arranging a short sale.
  7. Deed in Lieu of Foreclosure: This option allows you to voluntarily transfer ownership of your home back to the servicer, avoiding the foreclosure process. Like a short sale, this requires the servicer’s consent and might be a viable solution if remaining in the home is not an option. Participating in a deed in lieu of foreclosure could also qualify you for an incentive from your servicer.

Stay Alert to VA Loan Foreclosure Relief Fraud

Regrettably, veterans and individuals facing financial difficulties are often targeted by scams promising foreclosure relief. Remember, if an offer seems too good to be true, it likely is. Should you have doubts about any communication received, it’s wise to directly contact your servicer (to whom you normally make mortgage payments).

In the unfortunate event that you fall prey to a scam, reporting it to the police is crucial, as this documentation is important for credit bureaus in cases of identity theft or other related issues. Additionally, lodging a complaint with the Federal Trade Commission is advisable.

VA Loan Foreclosure: Common Questions Answered

With a basic understanding established, let’s address some commonly asked questions regarding the VA loan foreclosure process.

Can I obtain another VA loan if I default on my current one?

Defaulting on your VA loan, be it through foreclosure, a short sale, or a deed in lieu, initiates a two-year waiting period before you can apply for another VA loan. Upon reapplication, lenders will conduct a detailed underwriting review to ensure you’re capable of managing mortgage payments once more.

How long can I stay in my home if foreclosure is unavoidable?

Although VA loans offer specific protections, like those under the SCRA, which may delay foreclosure, the timeline for remaining in your home once proceedings begin depends on state law. In some states, the process can be swift, especially without judicial review. Other states may allow for court proceedings, potentially extending your stay until the property’s deed transfers to the lender, with some states offering a brief additional occupancy period.

Should I hire a lawyer if foreclosure proceedings start?

Foreclosure involves civil court proceedings, meaning there’s no automatic entitlement to legal representation. However, resources are available. The U.S. Department of Justice provides a list of affordable or free legal service providers. For those opting to self-represent, the National Consumer Law Center offers guidance.

If I’m unable to pay off the full loan amount, will I owe the VA?

There are distinctions between VA requirements and lender actions. For loans issued before January 1, 1990, borrowers had to reimburse the government for any payments made to lenders due to loan insurance. Nowadays, repayment to the VA is only necessary if fraud, misrepresentation, or bad faith is proven.

While the VA has its stipulations, lenders, depending on state laws, may seek a deficiency judgment for the amount remaining after the foreclosure sale. This judgment can impact your credit report for at least seven years or until settled, with renewal possibilities in certain states.

What becomes of my home post-foreclosure?

Typically, foreclosed homes revert to the VA, which then auctions them. Unsold properties enter the VA’s sales inventory. Like other mortgage investors, these properties often attract real estate investors or house flippers.

How does the foreclosures impact my VA Loan Entitlement?

If you experience a foreclosure on a VA-backed loan and do not reimburse the VA for any loss incurred during the foreclosure, that amount will be deducted from your available VA loan entitlement for future home purchases. This reduction in entitlement could limit the loan amount you’re eligible for next time.

In some cases, to cover the gap between your reduced entitlement and the total loan amount, you might need to make a down payment. This down payment compensates for the difference between your original full entitlement and the reduced guarantee amount the VA can provide to your lender due to the foreclosure.

Key Takeaways

A VA foreclosure means that a property secured by a VA loan has been repossessed. Veterans and service members facing the prospect of foreclosure have access to various resources, including financial counseling and foreclosure prevention advice directly from the VA, as well as assistance from their mortgage servicers. Moreover, active-duty service members enjoy additional protections under the Servicemembers Civil Relief Act (SCRA).

There are numerous options available to avoid foreclosure, such as forbearance, repayment plans, and loan modification. If you’re struggling with your mortgage payments, it’s crucial to communicate with your mortgage servicer immediately. For those with Rocket Mortgage, completing our Application for Success is a recommended step.

 

Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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