VA Loan Modification Guidelines 2023 Everything You Need to Know
The VA loan program offers a helpful solution for borrowers facing financial hardship – loan modifications. VA loan modifications allow borrowers to adjust their loan terms to make their monthly payments more affordable. With the COVID-19 pandemic causing widespread economic disruption, VA has implemented special temporary loan modification options to assist borrowers affected by the crisis.
In this article, we will cover the key details of VA’s loan modification guidelines for 2023, including:
- An overview of regular VA loan modifications
- A summary of COVID-19 related temporary loan modification options
- Eligibility criteria to qualify for a VA loan modification
- The process of applying and getting approved
- Terms and features of modified VA loans
- Tips for succeeding with a VA loan modification
Understanding Regular VA Loan Modifications
The VA Home Loan program has standard loan modification options available to help borrowers who face financial hardship. Some key things to know:
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VA loan mods do not require a minimum payment reduction percentage. The focus is making the payment affordable based on the borrower’s current circumstances.
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Modifications can extend the repayment term up to 30 years from the date of modification. This reduces the monthly principal and interest payments
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Interest rates can be reduced to the current market rate. This provides payment relief in times of falling interest rates.
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Unlike conventional loans, VA does not require you to be delinquent to qualify for a loan modification.
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VA loan mods allow adding missed payments to the loan balance. This eliminates arrears and reinstates the loan as current.
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Mods can also provide forbearance for a portion of the balance to further reduce payments.
COVID-19 Related Temporary Loan Modification Options
To assist borrowers specifically impacted by COVID-19, VA has authorized the following temporary loan modification programs:
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COVID-19 Refund Modification – VA refunds up to 30% of the unpaid principal balance to achieve a minimum 10% payment reduction. The refunded amount becomes a no-interest, no-payment junior lien held by VA.
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COVID-19 Retention Waterfall – A step-by-step approach to determine the optimal loan modification structure based on the borrower’s unique situation. Provides payment relief targets at each step before escalating to the next option.
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Extend Modification – Allows extending the term up to 40 years from the first payment date to reduce the monthly principal and interest payments.
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Loan Deferments – Pause or reduce payments for a specified period of time to provide temporary payment relief.
These COVID-19 related options are available through December 31, 2023 per the latest guidance from VA.
Am I Eligible for a VA Loan Modification?
The basic eligibility criteria to qualify for a VA loan modification include:
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Experiencing a financial hardship and unable to make the current monthly payments
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Occupy the property as your primary residence
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Your mortgage must be a VA-backed home loan
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Must have experienced an eligible hardship such as job loss, reduced income, divorce, medical expenses etc.
VA has relaxed some of the eligibility rules for COVID-19 related loan modifications. Borrowers who received a COVID-19 forbearance and missed payments can qualify regardless of reason for hardship. Loans can be modified even if previously modified.
How Do I Apply for a VA Loan Modification?
Here are the key steps to getting a VA loan modification approved:
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Contact your mortgage servicer (the company you make payments to) to apply for mortgage assistance.
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Provide documents to verify your hardship and income. Pay stubs, bank statements, hardship letter etc.
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Your servicer will evaluate your situation and determine the optimal loan modification terms to make the payments affordable.
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Servicers have delegated authority from VA to approve certain modifications without prior VA approval.
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For COVID-19 related modifications, your servicer will follow the VA COVID retention waterfall to determine the optimal loan modification structure.
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After modification, make the reduced payments on time to retain the modified loan terms.
What are the Terms of a Modified VA Loan?
Here are some key terms borrowers can expect on a modified VA loan:
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Fixed interest rate near current market rates, capped at VA’s published limits
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Loan term extended up to 30 years from modification date to reduce monthly payments
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Missed payments and allowed late fees added to the balance
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Temporary interest rate reduction to as low as 1% for COVID-19 modifications
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Principal deferment or forbearance up to 30% of the balance
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No trial period required. Modified terms effective immediately upon approval
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Fees limited to actual costs incurred, late fees waived
Tips for Succeeding with a VA Loan Modification
Here are some tips to increase your chances of success when applying for a VA loan modification:
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Act quickly – Do not wait until you miss multiple payments. The sooner you apply, the more options available.
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Provide accurate documentation – Include all required income and hardship verification documents.
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Be responsive – Respond promptly to all requests from your mortgage servicer. Faster processing means faster relief.
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Make trial payments if required – Some mods require 2-3 on-time trial payments before final approval.
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Continue paying escrow – Even in forbearance, continue paying property taxes and insurance to avoid defaults.
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Ask about payment assistance – If approved monthly payment is still unaffordable, ask about grants, HAF, and other assistance.
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Seek HUD counseling – Free counseling can help assess all options and strengthen your modification application.
The Bottom Line
VA offers helpful options like loan modifications and temporary special programs to help borrowers retain their homes when facing financial difficulties. Contact your mortgage servicer as soon as you experience hardship to discuss available relief programs. Act quickly to improve your chances of getting approved for a loan modification.
See What You Qualify For
Select a VA Home Loan Option to Continue:
Basic VA Home Loan Foreclosure Avoidance Options
What are the options to avoid having your VA loan go into default and foreclosure? In general:
- VA Loan Repayment plan–for those who have missed payments and who can afford a temporary larger payment schedule to accommodate the missed payments.
- VA Home Loan Special forbearance–where the lender allows a borrower who has fallen behind on payments to make up those payments.
- Loan Modification–where the VA lender permits you to add missed payments and their associated costs to the loan balance. This requires the lender to modify the term of your loan in order to have the missed mortgage payments made up.
- Private Sale–a situation where your lender agrees to delay a foreclosure action to give you time to sell the home instead.
- Short Sale–in cases where a borrower is upside down on their mortgage (owing more money on the mortgage than the home is actually worth on today’s market), they agree to sell the home with the lender accepting the proceeds from that sale (the full amount) to declare the loan paid in full. This option can hurt credit scores.
- Deed in lieu of foreclosure–VA borrowers avoid the foreclosure process by signing over the deed to the home to the lender. The lender then legally owns the home. This option can hurt credit scores.
For certain VA borrowers, VA loan modification is the best option of those listed above. We’ll explore the reasons why below but it’s important to keep in mind that your individual circumstances will play a big part in the choices you and the lender make about saving your loan.
Of the options from the list above, two actively hurt your credit scores; deed-in-lieu and short sale options should be done as a last resort to avoid foreclosure. Those who need to use one of these two foreclosure prevention paths often have waited too long once they experienced financial trouble to explore any other options.
That is something to keep in mind–the longer you wait when you get into financial hardship, the fewer your options are. Private sales are not much better than deed-in-lieu or short sales, but may offer better results (depending entirely on circumstances and variables like the age and condition of the home, etc.).
VA Loan Updates and Changes in 2024: What #veterans and #military should consider before buying
Will VA accept a partial claim payment after October 28 2022?
3 38 C.F.R. § 36.4809(c) (“the Secretary will not accept a request for a partial claim payment after October 28, 2022.”). 4 VA-guaranteed loans are hereafter referred to as “guaranteed loans.”
How does a VA loan modification work?
Under this type of loan modification, VA consents to the servicer’s modification of a guaranteed loan and purchases a portion of a borrower’s indebtedness from the servicer.12 The indebtedness is then secured as a junior lien in favor of VA.
When will VA funding fee rates change?
PURPOSE: To announce a scheduled change to VA funding fee rates for loans closed on or after April 7, 2023, as listed on the loan fee table located in 38 U.S.C. §3729 (b) (2). PURPOSE: This change extends the effective date of Circular 26-23-3 to April 1, 2023.
Who can apply for a VA loan?
Here’s a look at who can apply and the requirements to qualify for a VA loan. Backed by the U.S. Department of Veterans Affairs, VA loans are a benefit for active-duty and veteran service members and some surviving spouses. You’re eligible to apply for a VA loan if: You are on active duty and have served 90 continuous days.