What Happens If You Default on a VA Loan?

When a homeowner faces financial hardship and cannot meet their mortgage obligations, understanding the potential consequences and available remedies is important. For those with a VA loan, the process of missed payments and potential default involves specific steps and protections designed to assist veterans and their families. This article outlines the progression of a VA loan default, from initial missed payments to the implications of foreclosure, and the unique assistance offered by the Department of Veterans Affairs.

Initial Period of Missed Payments

Loans are typically considered in default if payments are delinquent for at least 61 days. Mortgage servicers are generally required to attempt contact with borrowers within 36 days of a missed payment to discuss options. If direct phone contact is unsuccessful within 30 days of delinquency, servicers must send a letter to the borrower. This letter notifies the borrower of the default, states the total amount due, and provides contact information for resolution.

Early communication with the loan servicer is important when encountering financial difficulty, preferably before any payments are missed. The Department of Veterans Affairs (VA) encourages servicers to work proactively with borrowers to resolve delinquencies. When a loan becomes 61 days delinquent, the servicer must electronically report an “Early Default Notification” (EDN) to the VA. Upon this notification, a VA technician is assigned to the case, providing additional oversight and potential assistance to the borrower.

Strategies to Avoid Foreclosure

Various loss mitigation options are available to VA loan borrowers to help prevent foreclosure. The VA actively encourages servicers to utilize these techniques, often providing incentives for successful implementation. These strategies aim to help borrowers bring their loan current or make payments more manageable.

Forbearance allows for a temporary suspension or reduction of mortgage payments. While it provides a temporary financial reprieve, the missed payments are not forgiven and must be repaid later, often through a lump sum, a repayment plan, or a loan modification. A repayment plan structures the missed payments to be spread out and added to the regular monthly payments over a specified period, typically three months or more, enabling the borrower to catch up gradually.

Loan modification involves altering the original terms of the mortgage to make payments more affordable. This can include adding missed payments and associated costs to the principal balance, extending the loan term, or adjusting the interest rate. Recently, the VA launched the VA Servicing Purchase (VASP) program, which allows the VA to purchase and modify defaulted loans from servicers, offering a fixed interest rate, often 2.5%, and potentially extending the loan term up to 40 years.

The VA plays an active role in assisting borrowers facing default. VA loan technicians are available to provide financial counseling and can act as mediators between the borrower and the loan servicer. This assistance helps veterans retain their homes, leveraging the VA’s loan guarantee.

The Foreclosure Process

If loss mitigation efforts prove unsuccessful, the formal foreclosure process begins. While VA foreclosure procedures are generally similar to those for other mortgage types, state laws govern the specific progression. Lenders are typically prohibited from initiating foreclosure proceedings until a borrower is more than 120 days delinquent on payments, allowing time for resolution efforts.

The initial legal step often involves the servicer issuing a Notice of Default or Intent to Accelerate, formally notifying the borrower and the VA that foreclosure action has been initiated. Depending on state regulations, the foreclosure may proceed through a judicial process, requiring court involvement, or a non-judicial process, which typically moves more quickly without direct court oversight. Before a foreclosure sale is scheduled, the servicer must notify the VA, and an appraisal for liquidation purposes is generally required at least 30 days prior to the sale.

The foreclosure sale involves the auction of the property, where it may be sold to a third party. Properties sold at these sales are often conveyed “as is,” meaning any necessary repairs become the responsibility of the new owner. Due to the VA’s guarantee, if the sale does not cover the outstanding loan balance, the VA may acquire the property from the lender. The VA’s pre-foreclosure review ensures that all avenues to avoid home loss have been explored before the sale proceeds.

Implications After Foreclosure

A significant benefit for VA loan borrowers following foreclosure is the VA’s policy regarding deficiency waivers. For VA loans closed on or after January 1, 1990, the VA typically waives its right to collect a deficiency, which is the difference between the sale price of the home and the outstanding loan balance. This waiver applies unless there is evidence of fraud, misrepresentation, or bad faith on the part of the borrower.

Despite this protection against deficiency judgments, a foreclosure will be reported to credit bureaus and can substantially impact a borrower’s credit score. Credit scores may decline by 85 to 165 points. The negative reporting often begins from the date of the first missed payment and remains on the credit report for up to seven years.

While a foreclosure can affect future borrowing capacity, it does not permanently disqualify a veteran from obtaining another VA loan. Generally, a two-year waiting period is required from the date of the foreclosure’s completion before a veteran can regain eligibility for a new VA loan. In certain extenuating circumstances, this waiting period might be reduced to one year. However, the previous foreclosure may impact the veteran’s available VA loan entitlement, potentially requiring a down payment on a future home purchase if the lost entitlement is not fully repaid to the VA. Rebuilding a positive credit history and demonstrating financial stability are important steps toward future VA loan eligibility.