What Happens If You Foreclose on a VA Loan? A Complete Guide

Foreclosure can be an extremely difficult and stressful experience for any homeowner However, when you have a VA-backed loan, there are some unique factors to be aware of if you end up in foreclosure. In this comprehensive guide, we will walk through everything you need to know about what happens if you foreclose on a VA loan

Overview of VA Loan Foreclosure

A VA loan foreclosure occurs when a borrower defaults on their VA-guaranteed mortgage The foreclosure process is essentially the same as any other type of loan The lender seizes the home through legal action since the borrower has failed to make their monthly payments.

However, VA loans have a key difference – the Department of Veterans Affairs guarantees a portion of the loan amount. Due to this VA backing, there are a few additional steps and potential impacts we will cover.

Foreclosure can occur in a few different ways:

• Judicial foreclosure – This involves filing a lawsuit and getting a court order to foreclose. It is required in about 40% of states.

• Non-judicial foreclosure – The lender can sell the home without going through the courts. This is allowed in most states.

• Strict foreclosure – Rare today, the lender takes ownership of the property without a sale. The borrower loses all rights to the home.

In all cases, foreclosure severely damages your credit and finances. Your score can drop by over 100 points. It will also be very difficult to qualify for another mortgage for years afterwards.

Alternatives to Full Foreclosure

Rather than undergo foreclosure, the VA and your lender may offer alternatives:

• Short sale – The lender agrees to allow you to sell the home for less than you owe on the mortgage. This avoids foreclosure and forgiveness the remaining mortgage debt.

• Deed-in-lieu of foreclosure – You voluntarily transfer ownership of the property back to the lender to avoid foreclosure. This also cancels the remaining mortgage debt.

• Loan modification – Your loan is modified by adding missed payments to the balance, lowering the interest rate, or extending the repayment term to make it more affordable.

• Forbearance – Your lender temporarily reduces or suspends mortgage payments for a set time period.

Pursuing alternatives like these can help you avoid foreclosure and the most severe financial consequences.

VA Foreclosure Process

The VA has specific procedures when a VA-backed loan goes into default:

• After 61 days of missed payments, the VA will assign a loan technician to review your file. They can provide counseling and discuss options.

• The lender must attempt to make contact with the borrower beginning after the second missed monthly payment.

• Before initiating foreclosure, the lender must send a Notice of Default to the borrower providing at least 30 days to resolve the delinquency.

• VA lenders are required to thoroughly evaluate borrowers for alternatives before completing a foreclosure. This includes options like repayment plans, loan modifications, short sales, or deed-in-lieu of foreclosure.

• The VA may purchase the loan from the lender through its Veterans Affairs Servicing Purchase (VASP) program. This avoids foreclosure by having the VA take over the mortgage.

Take advantage of VA assistance as early as possible if you get behind on payments. VA loan technicians can be invaluable in avoiding foreclosure.

Impacts to Your Credit

As mentioned above, foreclosure wrecks your credit score and credit history. According to FICO, someone with excellent credit (780+) can expect their score to plunge by as much as 160 points due to a foreclosure.

A foreclosure remains on your credit report for 7 years from the date it occurred. This severely damages your ability to qualify for other types of credit and loans. You may have trouble getting approved for credit cards, auto loans, personal loans, and especially mortgages.

Also, expect to pay much higher interest rates due to the hit to your credit. It can take years to fully recover.

Waiting Period to Buy Again with VA Loan

If your VA loan ends in foreclosure, you must wait a certain period before the VA will back a new purchase:

• 2 years – The standard waiting period after a VA foreclosure is 2 years from the date of the foreclosure sale. Some lenders require longer.

• 3 years – If you had an FHA-insured loan that was foreclosed, the waiting period is increased to 3 years before the VA will guarantee a purchase loan.

• 2 years – For VA loans modified prior to default, there is also a 2 year waiting period following the modification before you can obtain another VA-backed purchase mortgage.

These mandatory waiting periods give you time to restore financial stability before becoming eligible again.

Restoration of VA Entitlement

When the VA pays a claim on a foreclosed loan, the dollar amount they covered is deducted from your available VA entitlement. This reduces how much entitlement you have remaining to purchase another home with a VA loan.

You can restore your entitlement in two ways:

1. Repay the VA – You can repay the full claim amount the VA covered due to loss on a foreclosed VA loan. This will restore your full entitlement.

2. Use your one-time restoration – Veterans who had their entitlement reduced get a one-time restoration of partial entitlement. This allows you to still buy again with some VA financing before fully repaying the VA.

Without restoration of entitlement, you would need to make a down payment on your next VA purchase loan.

Recourse vs. Non-Recourse States

If the VA has to pay a claim on your foreclosed loan, whether or not you are responsible for repaying this amount depends on if you live in a recourse or non-recourse state:

• Recourse – The VA can require you to repay the full claim amount they covered even after foreclosure. This applies to loans made after 1990.

• Non-recourse – The VA cannot pursue you for repayment on a foreclosed loan. The lender bears the full loss. This generally applies to older VA loans, often depends on state law.

In recourse states especially, you remain liable for the VA claim payment unless you qualify for a waiver such as financial hardship.

Avoiding VA Loan Foreclosure

If you start struggling to make payments, take action quickly to avoid foreclosure:

• Contact your mortgage servicer immediately to discuss alternatives
• Consider options like forbearance, repayment plan, loan modification, short sale, or deed-in-lieu
• Request assistance from a VA loan technician
• Avoid scams – only work with trusted organizations
• Seek credit counseling if needed

Also look into mortgage relief programs and the VA’s foreclosure prevention options. Acting fast gives you the best chance of overcoming a hardship and keeping your home.

What to Do if VA Loan is Foreclosed

If you exhaust all options and foreclosure does occur, take these steps:

• Continue communicating with your servicer and the VA
• Request an updated Certificate of Eligibility when ready to buy again
• Work to restore credit and finances during the waiting period
• Save for a down payment in case entitlement was reduced
• Research steps to restore VA entitlement and repay any loan guarantee claim

With time and perseverance, you can recover and become eligible for another VA home loan in the future.

Losing a home to foreclosure is a devastating outcome for a borrower. If you have a VA-guaranteed loan, make every effort to avoid foreclosure by utilizing alternatives such as repayment plans, modifications, short sales, and deed-in-lieu transfers.

Act immediately if you default on a VA loan – both the VA and your lender have programs that may help you stay in your home if possible. If foreclosure does occur, be aware it damages your credit, reduces entitlement, and delays future eligibility. But with patience, you can get back on your feet and purchase again with a VA loan down the road.