What Is A VA Loan Foreclosure And How Can I Prevent It?

For homeowners who experience financial hardship, falling behind on mortgage payments and the possibility of losing their home can be a major stressor. For qualified service members, veterans and surviving spouses with a VA loan, the house would go through foreclosure if payments are not made and attempts to bring you current to stay in your home or otherwise exit gracefully fail.

If you’re concerned about making your VA mortgage payments on time, there are several ways to prevent a VA loan foreclosure. We recommend that you first speak with your mortgage servicer. The Department of Veterans Affairs also offers solutions that can help borrowers avoid foreclosure.

What Is A VA Loan Foreclosure?

Foreclosure is the process under which a lender repossesses your home after other options have been exhausted. A foreclosure on a VA home loan takes place when the underlying mortgage is backed by the VA.

How The VA Loan Foreclosure Process Works

VA foreclosure works similarly to any mortgage foreclosure process. There are limited cases in which you could be foreclosed upon much more quickly (for example, triggering due-on-sale provisions). But generally, after mortgage payments are missed, the lender or mortgage servicer will contact you to see if there’s a solution to avoid foreclosure.

In general, VA foreclosure actions can be initiated once you’re 4 months behind on your monthly mortgage payments. You’ll likely be officially notified via a letter in the mail.

How Does The VA Help Borrowers Avoid Foreclosure?

The VA offers several resources if you’re struggling with your mortgage payments. It’s possible to get financial counseling services through the Veterans Benefits Banking Program (VBBP). The program lets borrowers schedule up to three free sessions with a credit or financial counselor to help avoid foreclosure.

In certain circumstances, the VA may agree to take over the servicing of your loan from your existing mortgage servicer to help you stay in your home if you agree to the terms of a loan modification.

There are also protections for active-duty service members under the Servicemembers Civil Relief Act (SCRA). This law was designed to offer additional safeguards for service members if legal or financial matters could harm their rights while serving on active duty in any branch of the military or while on active-duty status as a commissioned officer of the Public Health Service or National Oceanic and Atmospheric Administration.

The protections also apply to reservists who have been called to active duty and members of the National Guard active for more than 30 consecutive days when responding to a national emergency.

Under the SCRA, eligible service members are protected with the following provisions:

• Reduced interest rate: Service members can have the interest rate on their VA loan reduced to 6% every year during their time of military service and for 1 year after they return from service.
• Foreclosure protection: Service members are protected against foreclosure for 1 year from the date they leave active duty, as long as the mortgage originated before the period of military service.
• No sale without court order: Lenders can’t foreclose on a service member’s property while they’re on active duty or within 1 year after active duty without a court order.
• Extended redemption period: Service members may be entitled to an extended redemption period after a foreclosure sale, which can give them more time to reclaim the property. Redemption periods are paused while the service member is on active duty.
• Legal assistance: Service members can seek legal assistance to help them understand their rights under the SCRA and defend against potential foreclosure proceedings.

In addition to these protections, if your home loan is serviced by Rocket Mortgage^®, we have the following policies that apply to clients eligible for relief under the SCRA:

• Loan status: If you’re in a period of forbearance – a pause or reduction in payments – for relief under SCRA, your loan is reported as current.
• Fee relief: We won’t charge you fees for insufficient funds or late payments.

8 Ways To Prevent A VA Loan Foreclosure

If you find yourself in financial trouble, or if you’re anticipating financial difficulties, you don’t have to accept the worst as an inevitable certainty. There are several strategies you can undertake to prevent loan foreclosure.

It will be important to work closely with your servicer. Servicers want you to stay in your home. They’ll go through various foreclosure avoidance options with you before going that route.

It’s important to note before moving forward that these foreclosure avoidance options often come with their own negative credit impact. Whether this is the case depends on the circumstances leading up to the relief. For example, there’s often special leniency following a natural disaster.

Here are some of the common avenues to preventing foreclosure that your servicer will attempt to qualify you for:

1. Mortgage Reinstatement

A mortgage reinstatement involves paying all of your missed payments at once to bring the loan up to date. While this isn’t always feasible, there are situations when it is. Reinstatement is always the best option as it is the fastest way to bring your loan current and won’t result in any changes to your loan status. Often clients are able to reinstate after a change to their financial situation, such as receiving back pay from an employer.

2. VA Loan Forbearance

A forbearance lets you temporarily pause or reduce the amount of your mortgage payments to give you time to get your finances back on track. It’s often the first defense used by loan servicers to provide relief in the event of financial trouble. You must contact your lender or mortgage servicer to request a forbearance and this must be approved by them.

Once your VA forbearance plan is complete, you have to make any payments you missed during the pause.

3. Repayment Plan

If you choose to go through the VA loan forbearance option and you’re not able to bring your loan current when it ends or you’re behind on your monthly mortgage payments, one option you may qualify for is a repayment plan.

Under this option, your past due payments are divided into equal parts and are added to your existing monthly mortgage payment for a specific amount of time. They’re added until the missed payment amounts are fully paid back. Then you resume your regular payment schedule on your VA loan.

4. Loan Modification

A loan modification permanently changes one or more terms of your loan, including the length of the loan term, the interest rate and the monthly payment amount. With a VA loan modification, your servicer adds past due payments back into your mortgage balance so that you can make the payments and stay in your home.

5. VA Loan Refinance

Refinancing a VA loan can be a viable option to avoid foreclosure, especially if you can secure a lower interest rate or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Refinancing may allow you to extend your loan term, which can result in lower monthly payments. Lower payments can reduce your monthly mortgage burden and make it easier to keep up with your VA loan.

If you’re exploring this option, you’ll want to look into this more affordable payment before running into trouble because your ability to qualify is adversely impacted based on your credit score falling. Mortgage lenders also have limits regarding the number of payments that can be late for you to still qualify.

6. Selling Your Home

If you’ve explored other options and determined you can’t afford to stay in your home, the next step may be to move forward with selling your property and using the funds from the sale to pay off your existing mortgage.

If there are funds left over, they can be used to cover a down payment on your next home or rent if buying isn’t right for you at this time.

7. Short Sale

If your property value has decreased and you can’t sell your property for what you owe on your mortgage, your servicer may consider accepting a short sale. You must seek their approval.

In a short sale, your servicer will request a value of the property and determine the offer amount they will accept. They will get the proceeds from the sale. There are situations when you might qualify for an incentive for working with your servicer on the short sale.

8. Deed In Lieu Of Foreclosure

A deed in lieu of foreclosure involves voluntarily signing your home over to the servicer and exiting the property rather than completing the foreclosure process. As with a short sale, the servicer has to agree to this, but it can be an attractive alternative when you know you can’t stay in the home. The servicer might also give you an incentive in exchange for working with them.

VA Loan Foreclosure FAQs

Now that we’ve touched on the basics, let’s answer some of your frequently asked questions regarding the VA loan foreclosure process.

If I default on my VA loan, will I be approved for another VA loan?

If you default on your VA loan – whether through a foreclosure, short sale or deed in lieu – the waiting period to get another VA loan is generally 2 years, and this is the requirement at Rocket Mortgage. When you reapply, your lender will put you through a special underwriting assessment 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?

In the event of a VA loan foreclosure, the length of time you can stay in the home varies by state law. As noted earlier, special protections may apply if you qualify for foreclosure relief under the SCRA while on active duty.

If my lender starts a foreclosure action, do I get a lawyer to defend me?

Foreclosure is a civil action, so you don’t automatically get a lawyer. However, there are resources like free or low-cost legal service providers listed by the U.S. Department of Justice. The National Consumer Law Center also offers guidance if you decide to represent yourself.

If I can’t satisfy the full loan amount, will I have to pay back my loan?

For loans closed before January 1, 1990, clients had to repay the government for any amount it paid the lender due to insuring the loan. For loans after that date, repayment to the VA is required only in cases of fraud, misrepresentation or bad faith.

Lenders can pursue a deficiency judgment in some states, where the difference between the foreclosure sale price and the total owed can remain on your credit report until paid, or for at least 7 years in states without renewal provisions.

What happens to my home after foreclosure?

After foreclosure, the home typically goes back to the VA, which then auctions it. If it doesn’t sell for a price the administration finds acceptable, the VA adds it to its inventory of properties for sale. Similar to mortgage investors, VA foreclosure properties are often bought by real estate investors or house flippers.

How will foreclosure affect my VA loan entitlement?

Foreclosure on a VA loan can impact your VA entitlement for future home purchases. You might need to repay the VA for fees paid to the lender or provide a down payment to cover the difference between your full entitlement (without the past foreclosure) and the guarantee your lender can get from the VA.

The Bottom Line: Foreclosure Is A Last Resort

A VA foreclosure is the repossession of a home backed by a VA loan. Service members and veterans facing foreclosure may have several resources including financial counseling and assistance from their mortgage servicers. Active-duty service members may have more rights under the SCRA.

Some of the alternatives to foreclosure include a reinstatement, VA loan forbearance, repayment plans, loan modification, short sale or deed in lieu. You might also consider refinancing your VA loan. If this sounds like a viable option for you, start your application today.

Clients who find themselves in current payment trouble should reach out to their servicer for assistance. Rocket Mortgage clients having difficulty with their mortgage payment can fill out our Application for Success.