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

When people buy a home, they generally expect that they will always be able to make the payment and will never run into trouble. But life doesn’t always go as planned and you may experience a financial hardship. Your servicer may be able to help you avoid losing your home. If you’re a service member with a mortgage through the Department of Veterans Affairs (VA), we’ll touch on VA loan foreclosure and avoiding it.

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

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). However, generally, after payments are missed there’s a process in which your lender and/or mortgage servicer will be making efforts to contact you to see if there is a solution to avoid foreclosure.

In general, VA foreclosure actions can be initiated once you’re 4 months behind on payments. You will be officially notified via a letter. We encourage any Rocket Mortgage^® clients struggling with their payment to contact us by filling out our Application for Success.

The VA offers a couple of different resources if you’re struggling with your mortgage payment, whether it’s in mortgage backed by the VA or otherwise. It’s possible to get financial counseling to get advice specific to your situation. They can also help if you’re nervous about contacting your servicer. (Side note: Don’t be nervous. They’re here to work with you.)

There are also protections for active-duty service members under the Servicemembers Civil Relief Act (SCRA). Among the provisions incorporated in this law while you’re on active duty are

• Fees for late and insufficient funds are waived
• Can’t go forward with foreclosure or other legal proceedings
• If you’re on forbearance, the payment will be reported as current as long as you make any payments under your agreement

If your current interest rate is higher than 6%, it’s reduced to 6% during your time on active-duty and for a year afterward

If you find yourself in or anticipating financial trouble, you don’t have to except 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. The process of foreclosure is very unpleasant for all involved. Before going that route, they’ll go through various foreclosure avoidance options with you.

It’s important to note before moving forward that these foreclosure avoidance options often come with their own negative credit impact. Whether or not this is the case depends on the circumstances leading up to the relief. For example, there’s often special leniency following a natural disaster.

1. VA Loan Forbearance

Forbearance involves a temporary pause in your mortgage payment to give you time to get your finances back in order. It’s often the first defense used by loan servicers to provide relief in the event of financial trouble.

Once your forbearance plan is complete, you have to pay back any payments missed during the pause. Clients with VA loans may have several options that we’ll cover in upcoming sections.

2. Repayment Plan

After forbearance or when you have missed only a couple of payments, one of the most common options you may qualify for is a repayment plan. Under this option, your past due payments are divided into equal parts and is added to your existing monthly mortgage payment for a specific amount of time until these amounts are fully paid back and then you resume your regular payment.

3. Loan Modification

A loan modification permanently changes one or more terms of your loan, including its length and/or interest rate for the purpose of adding past-due payments back into your mortgage balance so that you can make the payments and stay in your home.

4. Reinstatement

Reinstatement involves paying all past-due payment at once to bring the loan current. While this isn’t always possible, there may be situations in which you can make it happen. For example, this may work for you if you’ve worked for a while with the promise of back pay and your employer finally comes through.

Reinstatement via a lump sum payment is never the only option.

5. Selling Your Home

If you’ve explored the other options listed above and determined you cannot afford to stay in your home, the next option is to move forward with selling your property and use 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.

6. 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 work with your servicer on a short sale.

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

7. Deed In Lieu Of Foreclosure

A deed in lieu of foreclosure involves voluntarily signing your home over to the servicer 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 for when  you know you can’t stay in the home. There are situations where you might qualify for an incentive for working with your servicer on the deed in lieu.

Unfortunately, veterans and those who are in financial distress generally are ripe targets for foreclosure relief scams. If it sounds too good to be true, it probably is. If you have any concerns about communications you receive, you can always contact your servicer (wherever you normally send your mortgage payment).

If you’ve been the victim of a scam, you should file a police report as this is often key for the credit bureaus to have on record in the event of identity theft among other issues. You can also file a report with the Federal Trade Commission.

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 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. 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.

Alternatively, you may be required to provide a down payment for the difference between what your full entitlement would be without the past foreclosure and the guarantee your lender can get from the VA.

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

There are many alternatives to foreclosure including but not limited to forbearance, repayment plans and loan modification. If you find yourself in payment trouble, please reach out to your mortgage servicer. Rocket Mortgage clients can fill out our Application for Success.