My VA Loan Was Foreclosed On. Can I Get Another VA Loan?

Military service members receive many benefits through the Department of Veterans Affairs (VA), a federal government agency charged with assisting service members and their families. One of these benefits is assistance with buying a home through the VA Home Loans program.

Unfortunately, every year some service members experience serious financial hardship causing their VA loans to be foreclosed on. Many of these service members wonder if they’ll ever be eligible for another VA loan. The short answer is probably, but it depends on the circumstances. 

The Benefits Of A VA Loan

VA mortgage loans carry many benefits that conventional loans don't. These benefits extend to veterans and their families as well as active service members. The most significant benefit of a VA loan is that it does not require a down payment. 

A second benefit is that even without a down payment, VA borrowers don’t need to purchase private mortgage insurance (PMI). This is important because conventional loans require borrowers to pay for mortgage insurance if they don’t have a certain down payment, usually 20% of the purchase price of the home. VA loans also have low interest rates. VA loan servicers, like Veterans United, can provide lower rates because the loans are less risky since the VA is guaranteeing part of the loan.

Lastly, the VA has a program for helping veterans refinance their homes to lower their monthly payments. This program, which is called the Interest Rate Reduction Refinance Loan (IRRRL) program, can also help veterans stabilize their mortgage payments by allowing them to switch their mortgage from a variable interest rate mortgage (whereby the interest rate can change over time) to a fixed interest rate mortgage. This is often called a streamline refinance.

VA Efforts To Prevent Foreclosure

There are many reasons the VA wants to prevent foreclosures. Not only is foreclosed property much more difficult to deal with, but the VA can be left on the hook for the money they guaranteed when property goes into foreclosure. This can be costly if the foreclosure sale doesn't cover the amount left on the mortgage. To prevent foreclosure, the VA provides free financial counseling for all veterans or surviving spouses, even if the loan the veteran or their family has isn't a VA loan. The VA also provides free loan technicians to those who do have VA-backed loans. The loan technician will help VA loan borrowers avoid foreclosure by providing them with advice and options.

A technician's suggestions will vary based on whether the borrower is trying to keep their home or not. 

Preventing Foreclosure On A VA Loan While Keeping Your Home

• Repayment Plan

Repayment plans allow borrowers to prevent foreclosure by paying an extra amount every month to catch up on previous missed payments. For many individuals whose homes are at risk of foreclosure, this may not be the right solution. However, if you missed payments because of some circumstance that has since passed, this may be a good way to prevent foreclosure.

• Forbearance

A forbearance is where your loan servicer allows you to stop making payments for a certain number of months to avoid delinquency. For example, if your employer has placed you on furlough for a certain number of months, you can ask your servicer for a forbearance during these months. Although you're allowed to miss a few payments during this time, you will still need to catch up later.

• Loan Modification

There may be situations where making up missed payments at a later time is not an option. In this case, your lender may be willing to modify the loan. This is where the terms of the loan are changed to make your monthly payments more affordable.

Preventing Foreclosure On A VA Loan And Losing Your Home

Though it is difficult to lose your home, it may be the best option in some cases to avoid foreclosure and figure out a more affordable housing option. There are many benefits to avoiding foreclosure. One advantage is that you’ll keep a foreclosure off your credit report and it won’t negatively affect your credit score. You may also save more of your VA loan entitlement (discussed below) since foreclosed properties often sell for less. Further, the foreclosure process is both stressful for homeowners and bad for VA lenders.

To avoid foreclosure this way, you have a few options. You can ask for extra time for a private sale, or you can sell your home in a short sale. A short sale is where a homeowner sells their home for less than it’s worth. This is usually done when the homeowner knows they don’t have a lot of time and need to sell the house quickly.

You can also hand the deed over to the lender so that they can sell it as any normal house would be sold. This is called a deed in lieu of foreclosure.

The VA Entitlement

Generally, the VA guarantees 25% of a VA loan. Borrowers who qualify for a VA loan are entitled to a basic benefit of  $36,000.This means they’ll qualify to buy a home worth $144,000 with their VA loan.

It’s important to remember that $36,000 is just the minimum benefit. Veterans can get additional benefits through their county since every county in America has a bonus VA benefit for home buying that’s based on the cost of housing in the area.

For example, if your county has a maximum benefit of $510,400, this means the VA will guarantee up to $127,600 of your mortgage. That's a lot more than the basic $36,000.

How Does Foreclosure Impact The Entitlement?

One of the most common questions veterans have is whether they can still get a VA home loan after foreclosure. The answer is often yes, but the size of the loan will be affected by the previous foreclosure and what your remaining entitlement benefits are. 

In reality, whether you go through a foreclosure, short sale, or deed in lieu of foreclosure, the outcome is the same: Any unpaid loss on a loan will reduce your VA loan entitlement to benefits. The amount will depend on how much you owe after one of the above events occurs.

For example, if your original entitlement was $127,600 and you bought a $240,000 house, you used only $60,000 (25% of $240,000) of your $127,600. Therefore, you're still entitled to $67,600 in entitlements on a new mortgage. This is an example of a complete loss. With a smaller loss than the total amount (which almost always the case), you would lose less of your VA loan entitlement.

Foreclosure And Wait Period

If you have a foreclosure on your record, the VA’s policy is that you must wait two years before you can apply for another VA loan. But the private loan servicers that actually provide the VA loans, like Veterans United, may have stricter eligibility rules. This is especially the case if the borrower is also filing for bankruptcy. So, just because you had a VA loan doesn’t mean you’ll always be eligible after two years. 

If you're planning to take out a new VA home loan after foreclosure, you need to do these three things:

1. Request a new Certificate of Eligibility (COE) that shows how much you're still entitled to in VA benefits.

2. Work with a credit counselor to increase your credit score during your two-year waiting period.

3. Make sure that the two-year waiting period is enough time for the new lender. (Although it's long enough for the VA, it may not be enough for some lenders.)

Let’s Summarize…

If your VA home loan is about to be foreclosed on you do have options. The most important thing you can do is act quickly and understand your financial situation enough to know which options are realistic for you. Also, remember that a VA technician is available to help you either prevent foreclosure or navigate the process so that you can recover and move forward.