What Happens When You Default on a VA Home Loan?
- Defaulting, or missing a payment, on a VA home loan can eventually result in foreclosure, in which a veteran is forced to give his property back to the lender. Both a lender, who makes a VA loan, and the VA, which guarantees a VA loan, want to avoid the costly process of foreclosure. A veteran in default must contact his loan servicer, who administers billing and loan payments, to discuss options to avoid foreclosure. The VA Loan Guaranty office also provides assistance to borrowers in financial trouble.
- Loan servicers provide assistance for borrowers in default to remain in their homes. Servicers can arrange a repayment plan for the borrower to make payments to bring the loan current. Servicers can initiate a special forbearance, or the agreement to postpone foreclosure, which gives a borrower time to make missed payments. A loan modification may be available, which adds the past-due balance to the loan and makes a new, affordable payment schedule.
- If a borrower in default cannot work out a plan to repay the loan, the servicer provides options to dispose of the house without foreclosing. The servicer may delay foreclosure to give the borrower needed time to arrange for a sale. The servicer may agree to a short sale, which allows a borrower to sell her home for a price that is less than the loan balance. If those options don't work, the servicer may agree to a deed in lieu of foreclosure, which allows the borrower to deed the house to the lender without going through foreclosure.
- In rare cases, the VA may purchase a loan in default from the private lender who made the loan to allow a veteran time to recover from financial hardship. The VA does this when a borrower encounters temporary financial difficulties that she expects will soon improve and allow her to resume making loan payments. It usually occurs when the lender is unwilling to wait for the borrower's situation to improve and wants to begin to foreclose on the loan. This is uncommon, as lenders generally want to work with veterans to save the loan.