What Happens If You Default on a VA Loan?

Defaulting on a VA home loan can have serious consequences. As a veteran who relies on VA benefits, you need to understand the implications of missing mortgage payments and how to get help if you are struggling This article will explain what happens when you default on a VA-backed mortgage, your options for avoiding foreclosure, and where to turn for assistance

What is Default on a Mortgage?

Default occurs when you miss multiple mortgage payments in a row. After 90 days of no payment, the loan is considered to be in default. At 120 days late, the lender can start the foreclosure process.

Defaulting on your mortgage means breaking the loan agreement you signed with the lender. When you take out a mortgage you agree to make monthly payments of principal interest, taxes, and insurance. If you stop making those payments, you are in breach of contract.

Consequences of Default on a VA Loan

Defaulting on a VA home loan triggers serious repercussions:

• Foreclosure: If you don’t cure the default, the lender can seize and sell your home through foreclosure. You will be forced to move out.

• Credit damage: Default and foreclosure will devastate your credit score. It can plummet 100 points or more. A low score makes it very hard to qualify for credit or loans.

• Future VA loan ineligibility: You won’t be able to get another VA mortgage for the home you lost. You’ll need to restore your entitlement first.

• VA debt: If VA has to pay your lender due to default, you owe that money back to the government.

• Tax consequences: Any loan amount forgiven through foreclosure may count as taxable income. You may owe taxes on that sum.

• Emotional turmoil: Losing your home is devastating. It causes extreme stress and disruption.

Clearly, you want to avoid default if at all possible. The repercussions can haunt you financially and emotionally for years.

VA Technicians Can Help You Avoid Default

The key is to seek help at the first sign of trouble making mortgage payments. If you have a VA-backed loan, VA loan technicians can assist you. Here are some ways VA can help:

• Provide counseling and education on options to avoid foreclosure
• Intervene on your behalf with the mortgage servicer
• Explore repayment plans, forbearance, loan modifications, and other relief
• Review you for VA mortgage refinancing if it will help

VA urges all veterans with VA loans to call 877-827-3702 at the first hint of financial hardship. The sooner you ask for help, the more options will be available. VA has trained loan experts who can negotiate with lenders on your behalf.

Options for Avoiding Foreclosure After Default

If you are already in default, you may still be able to avoid foreclosure. Here are some potential solutions:

• Repayment plan: You resume making monthly payments, plus part of the missed payments.

• Forbearance: The lender postpones foreclosure to give you time to catch up on missed payments.

• Loan modification: Your loan is modified by adding missed payments to the balance and creating a new payment schedule.

• Short sale: You sell the home yourself and the lender accepts the proceeds as payment in full, even if it’s less than you owe.

• Deed in lieu of foreclosure: You voluntarily sign the property over to the lender instead of going through lengthy foreclosure.

• Refinancing: If rates have fallen, refinancing with a new VA loan may help you avoid default.

• Veterans Assistance Support Program (VASP): VA purchases the modified loan from the servicer after all other options are exhausted.

Talk to your lender immediately if you are behind on payments. The sooner you can negotiate an alternative solution, the more likely you can save your VA home loan.

What to Expect in the Foreclosure Process

If you can’t cure the default, the foreclosure process will move forward. Here is the general timeline after initial missed payments:

• 91 days past due: Your VA loan is reported to credit bureaus as being in “pre-foreclosure.”

• 120 days past due: The lender can start foreclosure by filing a Notice of Default (NOD).

• 30 days after NOD: Notice of Sale issued announcing date of foreclosure auction.

• 24 days before sale: Final public notice of auction published.

• Foreclosure sale date: Your home will be sold at public auction to the highest bidder, which is usually the lender. You must vacate the property.

This timeline can vary by state. But within 4-6 months of default, you can expect to lose the home if no alternative is reached.

Repaying VA After Foreclosure

If VA has to compensate your lender for losses from your foreclosed VA loan, you owe that money back to the government. VA will pursue collection if you don’t repay the debt.

For loans issued before 1990, you are obligated to repay this debt to VA in full. For newer loans, you only repay if VA finds evidence of fraud. Otherwise, the debt is waived.

You can apply for a waiver on older loans if you can’t afford to repay. Get the waiver application from VA. Make your case for financial hardship.

Restoring Your VA Home Loan Eligibility After Default

Foreclosure or deed surrender results in you losing your VA loan benefit for that home. To restore your entitlement in the future, you need to pay back the amount VA lost on your claim.

Obtain your “residual entitlement” buydown amount from VA. This is what you must repay before getting your full eligibility back. Save records of your repayment to VA.

Restoring your entitlement opens the door for another VA purchase in the future. Without it, you can’t use your benefit again.

Get Free Foreclosure Help for Veterans

If you’re struggling with mortgage payments, get advice and assistance from these free resources:

• VA financial counseling: Veterans Benefits Banking Program offers free counseling on foreclosure avoidance.

• HUD: The Department of Housing and Urban Development provides foreclosure prevention help.

• HOPE NOW: This nonprofit alliance connects homeowners to counselors and mortgage assistance programs.

Don’t wait until an avalanche of late payments buries your financial stability. At the first sign of trouble, reach out. VA, HUD and HOPE NOW offer veterans specialized support. They understand your unique needs and will advocate for you.

Avoiding default preserves your VA home loan benefits and prevents significant credit damage. If you do fall behind, notify your lender immediately and be proactive. The sooner you ask for help, the more options will be available to save your home from foreclosure.