How To Cope With An Impending VA Foreclosure
Kevin Graham11-minute read
July 02, 2021
No one ever intends to fall behind on payments, but life often gets in the way of our other plans. Service members, veterans and surviving spouses sacrifice a lot already, and the idea of losing your home is traumatic for anyone. For now, foreclosure moratoriums initially put in place through the CARES Act have been extended through the end of July with other protections extended through September, but that’s short-term.
We're going to go over how the VA foreclosure process works and ways you can avoid it. We’ll also cover what it means for you if it’s unavoidable.
What Is A VA Loan Foreclosure?
Forbearance and foreclosure sound similar, and indeed, they may be confused for each other. Before going further, let’s briefly touch on the difference.
Forbearance is a temporary pause or reduction of your monthly mortgage payments. It’s one of the options that may be offered to help you avoid foreclosure. Foreclosure is the process under which a lender repossesses your home after other options have been exhausted.
What Protections Does The CARES Act Offer Against Foreclosure?
If your financial troubles stem in some way from the COVID-19 pandemic, you’re eligible for specific forbearance protections under the CARES Act. Under the law, clients may request an initial forbearance of up to 6 months, with the option to extend the forbearance up to a full year should you need it.
Clients on forbearance through Rocket Mortgage® are approved in 3-month increments. You can exit forbearance at any time. Whenever you come off forbearance, your lender will then go over options to repay your paused payments. We’ll discuss repayment later. Anything you can pay during forbearance will lessen the amount you owe coming out of it.
Forbearances under the CARES Act feature some special protections, chief among them that they don’t have a negative impact on your credit. This isn’t the case with all forbearances.
Although the original act was passed last March, there have been some foreclosure moratorium and forbearance request extensions as time has gone on. Anyone with a federally backed mortgage or one from the government-sponsored entities Fannie Mae and Freddie Mac has a reprieve from foreclosure until July 31, 2021. If you need a forbearance related to COVID-19, you have until September 30 to enter into one.
Rocket Mortgage clients who find themselves in need of assistance may fill out our Application for Success. We’ll reach out to go over the options available to you based on the circumstances of your situation.
How Does The Forbearance Extension Work?
This entire pandemic has been a fluid situation. You may have been able to keep up with your mortgage payments earlier on, but perhaps things have now changed. If that’s the case for you, you do have the option of requesting a COVID-19 forbearance through September 30, 2021.
These COVID-19 forbearances are offered under the same terms as those under the original CARES Act. This means that while your lender has to be the one to approve the forbearance, you just have to certify that your forbearance is related to COVID-19.
Aside From Forbearance, What Can I Do To Prevent Foreclosure?
Before considering a forbearance, there are some other steps you can take to avoid foreclosure. We’ll go over specific protections for active duty service members, but a good first step if you think you’re facing foreclosure is always to talk to your mortgage servicer. This is the entity you make your payments to. It may or may not be your lender.
Additionally, it’s not a bad idea to seek financial counseling offered through the VA. It’s available to eligible service members, veterans and surviving spouses. Additionally, your mortgage need not be issued through the VA to receive counseling. A financial counselor may be able to offer the best advice for your individual situation.
Protection For Active Duty Service Members
If your mortgage was originated prior to being called to active duty and you’re on active duty now, you may be eligible for protection under the Servicemembers Civil Relief Act (SCRA). Among the other major benefits, your property can’t be foreclosed upon while you’re on active duty.
Additionally, if you were current on your payments prior to being called to active duty and have entered a forbearance since your call up, your loan will be reported as current as long as you’re making any minimum payment amounts required under your forbearance. Additionally, late fees and nonsufficient funds charges get waived.
Finally, under the SCRA, if your interest rate is higher than 6% while on active duty, it’ll be reduced to that level for as long as you remain on duty and the year following. Finally, active duty service members may be eligible to refinance or have their loan modified to stay in their home.
Refinance With A VA IRRRL
If you’re currently keeping up with your payments, one option to lower your interest rate or change your loan term in an effort to make your mortgage payments more affordable is a VA Streamline – also known as an Interest Rate Reduction Refinance Loan or VA IRRRL (pronounced “Earl”).
The benefits of a VA Streamline include the ability to change your term in an attempt to lower your payment and/or lower your interest rate to do the same. Additionally, you can use it to go from an adjustable-rate mortgage to a fixed-rate option in order to give yourself more payment certainty in the future. Finally, the VA funding fee is only 0.5%.
In order to be eligible to refinance through a VA Streamline, you need to have at least 6 consecutive months of payments. Additionally, 212 days must’ve passed between the close of your previous loan and the close of your new one. However, since you’re already in a VA loan, there may be less need for documentation and you may or may not need an appraisal.
It’s worth noting that if you want to do a VA cash-out refinance, there’s more documentation involved and an appraisal required. It’s a full VA refinance process.
Strategies To Try If Foreclosure Seems Like A Possibility
Financial counseling can help you come up with a plan to get on better financial footing. Forbearance also gives you time to implement any necessary changes. However, if forbearance ends and you can’t do a VA Streamline, what happens next? The short answer is it’s time to start making up those payments. Don’t panic. Your servicer will work with you to determine what you might qualify for.
It will be important to work closely with your servicer. Lenders want you to be able to stay in your home. In addition to the process being very unpleasant for all involved, a foreclosure is very expensive for lenders. It’s often hard to get back the amount they loaned in a foreclosure sale. Before going that route, they’ll go through various options with you.
One of the more common options for becoming current after a forbearance involves a repayment plan. Under this option, part of your past-due balance is added to your monthly payment for a number of months until the back payments are paid off.
If a repayment plan doesn’t work, your servicer might next try to qualify you for a loan modification. Under this option, back payments and fees would be added into your loan. Additionally, your interest rate and term can change when your loan is modified in an attempt to keep you in your home.
If you have the funds, the easiest way to become current on your mortgage is to make one payment and pay off your back payments in full. We understand this isn’t possible for everyone, but if you have the money, it’s an option.
If you feel you can sell the property at the current market price and have at least enough to pay off your lender, this may be the best option because you’ll pay the loan off and there’s no credit penalty. If you intend to do this, communicate with your lender or servicer to determine the kind of timeline you’ll need to follow.
A short sale involves working out a deal with your lender to sell your property for less than the amount of your loan. You would typically only do this when a market downturn has made it such that you owe more on your loan than the home is worth on the open market. The lender manages the sale and has to approve any offers.
For VA clients facing foreclosure, the nice thing about a short sale is that it’s less of a credit hit then a traditional foreclosure. In certain instances, you may also be able to get funds from your lender to help with relocation. It’s important to note that depending on circumstances and applicable local law, a lender may pursue a deficiency judgement for the difference between the sale price of the home and the value of the home loan.
Deed In Lieu Of Foreclosure
A deed in lieu of foreclosure allows you to sign your deed over to your lender before they go through any formal foreclosure proceedings. This has two advantages. The first is that it’s not as big of a credit impact as a foreclosure would be. Second, foreclosure is a very public process with notices on your door. A deed in lieu could help you avoid scrutiny from the neighbors.
As with a short sale, it’s possible for a deficiency judgment to come into play.
This doesn’t happen very often, but in some instances lenders or servicers may be unwilling to work with a borrower to pursue alternatives to foreclosure even if the client is now or will soon be able to make the payment. In these cases, the VA has the discretion to purchase the loan back from the lender and have the borrower make payments directly to the VA.
Most lenders and servicers will work with you because no one likes to foreclose. Additionally, if the borrower can truly catch up on the payments, by selling to the VA, the lender is giving up on future loan income.
Redemption can take place before or after foreclosure. Redemption before foreclosure works very similarly to reinstatement, when you pay back what you owe plus fees in order to catch up and become current. In some states, you have the opportunity to redeem your mortgage even after a foreclosed property has been sold.
In these states, you would reimburse the buyer of the foreclosed home for the purchase price. You also have to pay costs associated with the foreclosure of the property, but it is possible to literally buy your home back at the 11th hour in some instances.
VA Foreclosure FAQs
Now that we've gone over VA foreclosure and the alternatives for avoiding it, it's time to answer some questions that might come to mind.
If I default on my VA loan, will I be approved for another VA loan?
If you do default on your VA loan – whether through a foreclosure, short sale or deed in lieu – the waiting period to get another VA loan is 2 years. When you reapply, your lender will put you through special underwriting assessment in order to make sure that you can handle a mortgage payment again.
If I can’t avoid foreclosure, how long can I stay in the home?
While VA loans have some special protections such as the SCRA that can sometimes delay the foreclosure process, once foreclosure proceedings have started, your ability to stay in the home for a period of time is dependent on the laws of the state where the property is located. Particularly in deed of trust states, there may be no judicial review and the process can move very quickly.
In some states, there’s an opportunity for a court proceeding and this can take longer. Generally, you’re allowed to remain in your home until the deed to the property is transferred to the lender. In some states, you have a short occupation time frame beyond that.
If my lender starts a foreclosure action, do I get a lawyer to defend me?
Although a foreclosure always involves some kind of court proceeding, it's a civil action. That means you don't have an automatic right to an attorney. However, there are resources available to you.
The U.S. Department of Justice has a list of free or low-cost legal service providers. Should you choose to represent yourself, the National Consumer Law Center has advice on the best way to move forward.
If I can’t satisfy the full loan amount, will I have to pay back my loan?
There are two separate pieces to this: There’s what the VA requires and then there’s what lenders do. Let’s take the VA piece of this first.
For loans closed before January 1, 1990, clients would have to pay back the government for whatever amount it had to pay the lender as a result of insuring the loan. Given the time frame, it’s unlikely that many of these loans exist without having been refinanced or paid off by now.
For loans after that date, you’ll only have to pay the loan amount back to the VA if there is evidence of fraud, misrepresentation or bad faith from you.
While all of the above is true, depending on state law, lenders can often choose to pursue a deficiency judgement for the difference between the sale price of your foreclosure and the total amount owed to the lender on your loan. This judgement can stay on your credit report until it’s paid off if you live in a state where creditors are allowed to renew the judgement. Otherwise, it remains on your credit report for at least 7 years.
What happens to my home after foreclosure?
Generally, once a home has been foreclosed on, it goes back to the VA after the administration pays the fee to the lender as the insurer of that loan. Then the VA lists the property for auction. If the property isn’t sold at auction, it goes into an inventory of properties the VA markets for sale.
As is common with other mortgage investors, VA foreclosure houses are purchased by real estate investors or house flippers most often.
How will foreclosure affect my VA loan entitlement?
Unless you repay the VA for any fee paid to a lender as a result of insuring the foreclosed loan, this amount is subtracted from your VA entitlement when you’re trying to purchase a home with a VA loan in the future. This may affect the size of the loan amount you can apply for.
Beware Of Scams Aimed At Financially Distressed VA Borrowers
Unscrupulous individuals are always looking to capitalize on distress and the pandemic has caused a fair amount of that. The Consumer Financial Protection Bureau and the VA are warning of scammers who are working to take advantage of people under strain with offers to help you refinance that are too good to be true.
The Bottom Line: You’ve Done So Much For Our Country. Now Use Your Resources To Stay In Your Home.
No one likes being in a rough financial position, but talking about it with your lender can often be the first step on a road to better financial standing. Additionally, the VA offers free financial counseling to eligible service members, veterans and surviving spouses regardless of whether the underlying mortgage is a VA loan or not.
If you’re current on your loan, consider applying for a VA Streamline in order to lower your rate or change your term to help with payment affordability.
If you’re a Rocket Mortgage client concerned about falling behind and facing foreclosure, the time to contact us is now. Fill out an Application for Success and we’ll be in touch. We’re here to help!
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