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VA Loans & Foreclosure
When a major financial hardship happens in life, and you find yourself not being able to make your mortgage payments, if this goes on long enough you may find yourself facing foreclosure.
Foreclosure is what happens when a homeowner cannot make their mortgage payments and defaults on the loan. In this case, the lender will choose to take possession of the property so they can recover some of the loss.
This is a stressful time for you, as you lose your home and your credit score goes down, sometimes by as much as 160 points; this can take months or years to repair. Since the VA has more flexible requirements for credit scores, you may not have to wait until your credit has gotten back to what it was before you defaulted on your loan.
Avoiding Foreclosure
There is a lot of time and money involved in the foreclosure process for the lender, and in some states, they even have to involve the court system. To avoid all of that, some lenders will give you alternatives to foreclosure.
The VA can help you retain your home and avoid foreclosure. The VA has free mortgage counselors available who can help you and give you advice to help get you back on track with your mortgage. They will work directly with your lender to help negotiate an alternative to foreclosure for you.
A repayment plan is one of the options the VA has, which means you will continue making your mortgage payment, plus a little extra to make up for what is missing. You may be able to get special forbearance, which will stall the foreclosure so you can make your missing payments.
Sometimes, a loan modification is available, that creates a new payment schedule, which includes your missed payments.
You may be able to have a deed-in-lieu of foreclosure, where you hand the deed back to the lender instead of foreclosing.
The last option is a short sale, where the lender lets you sell the home for less than you owe on the loan.
If you go with the short sale or deed-in-lieu of foreclosure, they will still harm your credit, and there will be a waiting period before you can obtain a new home loan.
Getting a New VA Loan After Foreclosure
Since the VA loan is set up a little differently than other loans, if it has been at least two years since the foreclosure, they can disregard it when looking at your qualifications for the loan. If you had a foreclosure from an FHA loan, there is a three-year waiting period. This waiting period will allow you to rebuild your credit after the foreclosure.
Your VA loan entitlement will be reduced by the foreclosure, which will limit the amount of money you can borrow without a down payment. You can get your entitlement back if you pay back the VA in full. If you did not use all of your entitlement on the home that was foreclosed upon, you can use what you have remaining on your new loan.