If you fall behind with your mortgage payments, your Veterans Affairs loan holder should contact you to ascertain the reason for the default. The lender will make any one of a number of recommendations to help you cure your delinquency. Once you are two payments past due, the holder must notify the VA that your loan is in default. The VA's free mortgage counselors will work with you to get you back on track and, as far as possible, avoid foreclosure.
The most common way of resolving a debt situation is by negotiating a repayment schedule that allows you to pay off the delinquency by monthly installments. While the VA cannot require the loan holder to offer a repayment schedule, the lender usually will as long as you are financially able to pay off the debt. Your VA lender may also agree to suspend repayments for a limited period until you are back on track.
Reamortization and Refinance Remedies
Reamortizing your loan means adding your delinquency to the loan balance. This brings your repayments up to date but increases your loan amount and therefore your monthly payments unless you simultaneously extend the term of your loan. The VA offers a loan modification program that refinances eligible mortgages into a product the homeowner can afford by lowering the interest rate.
Sales and Compromises
Borrowers suffering serious financial hardship might have to sell their home to pay off their debt. If your home is worth less than the balance of your loan, the VA may pay a “compromise claim” for the difference to help you go through with the private sale. The buyer can arrange her own financing or assume the VA loan, subject to eligibility. Should the VA agree to a compromise sale, your VA entitlement used to guaranty the compromised loan will remain tied up until you repay the VA in full.
Deed in Lieu of Foreclosure
If you cannot pay off the delinquency or sell your home, and there are no liens on the property, the VA is able -- but not obliged -- to buy your mortgage out of default. The VA does this by paying the loan holder the difference between the market value of the property and the balance of the loan and taking legal ownership of the property. A deed in lieu of foreclosure may release you from all further liability in respect to the debt, or you might have to pay back some or all of the amount the VA paid to secure your deed.
If foreclosure is unavoidable, you will lose your home and your credit score will take a hit. Typically, you will have to wait two years and repair your credit record before applying for another VA loan. Foreclosure also affects your VA loan entitlement. You can restore this by paying back the amount of money the government lost as a result of your delinquency.
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