A foreclosure can occur when a borrower defaults or cannot repay a mortgage loan amount. In that case, the lender takes possession of the property to recover a portion of the loss. In these shifting times when personal, medical, and economic issues have upended many lives, it’s not unusual to find borrowers, including those with VA loans, facing financial hardships and struggling to make their mortgage payments. For most people, losing their homes to foreclosure is one of their most dreaded fears. Our Q & A on the subject offers up some clarity on this difficult topic.
What should I do if I’m having trouble making my VA loan payments?
Contact your lender or servicer immediately. Of course, no one wants to make that phone call, but the worst mistake you can make is ignoring the situation. But when you first notice that your payments are getting hard to handle, reach out to the VA and request that they assign a VA loan technician to your loan. The VA provides free financial counseling to Veterans and surviving spouses. This service is available even if your loan isn’t a VA-backed loan. These counselors provide invaluable assistance to Veterans and active-duty members who are financially stressed. In addition, they work directly with your loan servicer to negotiate repayment plans, forbearance, and loan modifications – all of which can offer alternatives to losing your home.
What happens if I miss a payment?
Once you fail to make a payment or multiple payments, your lender must attempt to contact you by phone and mail. Their goal is to try to reach an agreement with you to bring the loan current, as well as to discuss loss mitigation options. Federal mortgage servicing laws require the servicer to reach out to the borrower to resolve the delinquency. After all, helping you out is in the best interest of all parties because foreclosure is a losing proposition for both the borrower and lender.
Is a VA loan foreclosure different than foreclosures on conventional loans?
No, once the foreclosure on a VA loan has begun, the process is the same as other types of loans because state law governs foreclosures. However, the VA encourages lenders to continue loss mitigation efforts even after the foreclosure starts to allow the borrower every opportunity possible to avoid foreclosure.
What are my options to mitigate the loss?
Loss mitigation options exist to help veterans avoid foreclosure on delinquent loans. The VA encourages lenders to do everything possible to avoid foreclosure. According to the U.S. Department of Veterans Affairs, the six loss mitigation options for VA-backed loans are as follows:
- Repayment plan: If you’ve missed a few mortgage payments, this plan lets you go back to making your regular payments, with an added amount each month to cover the ones you’ve missed.
- Special forbearance: This plan gives you some extra time to repay the missed mortgage payments.
- Loan modification: This plan lets you add the missed mortgage payments and any related legal costs to your total loan balance. You and your servicer then come up with a new mortgage payment schedule.
- Extra time to arrange a private sale: If you need to sell your home, this plan lets you delay a foreclosure, so you have time to sell.
- Short sale: If you owe more money than your house is worth, your servicer might agree to a short sale. This means the servicer will accept the total proceeds from the home sale (even if it’s less than the total amount you owe on the mortgage) as full payment of the debt you owe.
- Deed in lieu of foreclosure: This plan lets you avoid the foreclosure process by signing over the deed to the home to your servicer. The home will then belong to the servicer.
What is a preforeclosure period?
Federal law requires a preforeclosure period stating that most borrowers, including those with VA loans, get 120 days to work out an alternative before the foreclosure can move forward. However, if you can’t work out any of the mitigation options above or any other, the foreclosure will proceed.
How long is the foreclosure process when defaulting on a VA-backed loan?
The foreclosure timeline depends on the state laws that apply where the process takes place. It can take months or more than a year. However, the result is the loss of a home and a big ding to your credit score. Avoiding a foreclosure at all costs is what you want to strive for, but if you find yourself in such an unfortunate position, you can expect this basic timeline of the process:
- After you miss the first mortgage payment, the lender will contact you and encourage you to resolve the delinquencies.
- A VA-backed loan is considered in default after 61 days without a payment
- The lender typically issues a notice of default, indicating its intention to foreclose, when the loan becomes 61 days past due. Typically, this marks the beginning of preforeclosure.
- If you can’t get your mortgage payments back on track, the lender petitions the court to begin foreclosure, and the court appoints a trustee to oversee the auctioning of the property. The foreclosure timeline varies the most, depending on the state. For instance:
- In jurisdictions that allow nonjudicial foreclosures, filing the necessary documents with the court is all that’s needed to get the process moving. Here, foreclosures are often completed within months. For example, West Virginia boasts the fastest process in the first quarter of 2021, and the average foreclosure took only 48 days.
- On the other end of the spectrum, jurisdictions requiring judicial foreclosures, in which each step of the process requires court approval, foreclosures can drag on. Case in point, Arizona, the state with the lengthiest process in the first quarter of 2021. The average foreclosure took more than five years.
- Note that foreclosures were delayed nationwide for much of 2020 and 2021 by a federal moratorium intended to prevent Americans from losing their homes due to financial hardship related to the COVID-19 pandemic. However, the most recent extension of that moratorium expired on June 30, 2021.
- During the weeks before the auction, per local laws, the trustee posts notices of trustee sale in public places and publishes notices in local newspapers, describing the property and its location and specifying when the auction will occur.
- The trustee puts the property up for auction, setting a minimum bid based on the property’s appraised value, the remaining balance on the mortgage, and any unpaid tax bills or other liens associated with the property. The highest bidder who meets or exceeds the minimum bid takes ownership of the property.
- If no one meets the minimum bid, the foreclosed property becomes an REO (real estate-owned) or under the lender’s ownership. REO properties are offered for sale as-is, and buyers can often pick them up at below-market prices.
- When the property sells or becomes an REO, you’re issued an order to vacate in the unlikely event that you’re still living in the property. Law enforcement officials will escort anyone who refuses to leave off the property, impound their belongings, and lock up the property on behalf of the new owners.
Is it possible to reinstate the loan to stop the foreclosure?
Yes, there is some good news. Under VA guidelines, you can typically reinstate the loan and stop a foreclosure sale by bringing the delinquent loan current by paying all overdue payments, late charges, and foreclosure expenses. However, as with most things, exceptions exist. For example, some states don’t give borrowers the right to reinstate. So, check with your VA lender to see if it’s possible to reinstate your loan and stop a foreclosure.
Can I get another VA home loan after foreclosure, and how long will it take?
Yes, you can become eligible for a VA loan two years after foreclosure in most cases. Diligent VA borrowers who have a foreclosure in the past can repair their credit and get another VA home loan. Most lenders review applications of potential borrowers with foreclosures in their history on a case-by-case basis. Naturally, the loan officer will ask you to explain the circumstances that led to the foreclosure. But as long as you’ve repaid the loss to the VA and kept your credit in good standing, you should be able to qualify for another VA home loan. You must repay the loss to the VA to restore the entitlement needed to get another government-backed loan.
As you can see, the foreclosure experience is grueling, and it takes an emotional toll on anyone experiencing it. For that reason, you must seek help and advice from your lender or servicer as soon as you recognize that you’re having difficulty covering the monthly mortgage. And don’t forget that the VA offers free financial help to those who are eligible. So, take advantage of the resources available to get you back on solid financial footing.
Contact one of our experienced VA loan professionals at Aligned Mortgage for more information about VA loans and foreclosure.
