The foreclosure process for VA loans follows the same legal framework as other types of mortgages. However, VA guidelines require loan servicers to make every effort to help borrowers avoid foreclosure. This additional protection gives VA loan holders more opportunities to stay in their homes.
Temporary foreclosure moratorium by the VA
The U.S. Department of Veterans Affairs has urged servicers to halt foreclosures on VA-guaranteed loans until December 31, 2024. However, exceptions apply in cases where:
- The property is vacant or abandoned.
- The borrower does not wish to keep the home.
- The borrower has not made a payment in at least 210 days and is unresponsive.
- All loss mitigation options, including the VA Servicing Purchase (VASP) program, have been exhausted.
How VA loans work
VA loans are issued by private lenders but backed by the VA, reducing lender risk. The VA guarantees a portion of the loan, making it easier for veterans and service members to secure home financing. In some cases, the VA also offers direct home loans.
If a borrower falls behind on payments, the servicer must attempt to help them avoid foreclosure. However, if no solution is found, state laws will dictate how the foreclosure proceeds.
VA loan foreclosure: preforeclosure requirements
Before foreclosure, the servicer must make several attempts to contact the borrower:
- They must reach out via phone and mail.
- A face-to-face meeting may be required in certain cases.
- A written notice must be sent within 30 days of delinquency if the borrower does not respond.
The letter should:
- Notify the borrower of the default.
- Explain the seriousness of the situation and urge immediate action.
- State the total amount owed.
- Provide contact details for arranging repayment.
A follow-up letter regarding loss mitigation options must be sent within 45 to 75 days.
Special protections for active-duty service members
Active-duty service members may qualify for additional foreclosure protections under the Servicemembers Civil Relief Act (SCRA) or specific state laws.
Similarities between VA and other foreclosures
Federal law grants most homeowners, including VA borrowers, 120 days to find an alternative before foreclosure begins. Once the process starts, state laws dictate the proceedings, including required foreclosure notices. The VA, however, encourages servicers to continue working with borrowers even after foreclosure has started.
Options to prevent VA loan foreclosure
Borrowers with VA loans have several options to prevent foreclosure:
Financial counseling
- Veterans and surviving spouses can receive financial counseling even if their loan is not VA-backed.
- Borrowers with VA-backed loans can request a VA loan technician for assistance.
- If a VA loan is over 61 days past due, the VA will assign a technician automatically.
Right to reinstate the loan
Most VA borrowers can stop foreclosure by paying all overdue amounts, including late fees and foreclosure costs. However, some state laws may limit reinstatement rights.
Loss mitigation options for VA borrowers
The VA expects servicers to explore all possible solutions before proceeding with foreclosure. Available options include:
- Repayment plans
- Special forbearance agreements
- Loan modifications
- Assumption of the loan by a new borrower
- VA refunding (VA buys the loan and services it directly)
- The Veterans Affairs Servicing Purchase (VASP) program
- Compromise sales (short sales)
- Deeds in lieu of foreclosure
The VA servicing purchase (VASP) program
The VASP program allows the VA to purchase defaulted VA loans and modify them with a fixed 2.5% interest rate. To qualify, borrowers must:
- Be delinquent by 3 to 60 months.
- Not be in active bankruptcy.
- Have a VA-backed loan in first lien position.
- Occupy the home themselves or have an immediate family member living there.
- Show financial stability and ability to make future payments.
- Have made at least six payments on their loan or loan modification.
Consequences of VA loan foreclosure
A VA loan foreclosure can have serious repercussions, including:
- Credit score damage: A foreclosure can lower your credit score, making it harder to qualify for future loans.
- Deficiency judgments: Although VA loans taken out after 1990 generally do not result in personal liability, exceptions apply in cases of fraud or misrepresentation.
- Tax consequences: Cancelation of debt may be considered taxable income by the IRS.
Buying a foreclosed property with a VA loan
It is possible to purchase a foreclosed property with a VA loan, provided the home meets VA requirements for safety and structural integrity. However, timing is crucial, as the full purchase price is often due shortly after the foreclosure sale.
A more practical approach may be waiting to see if the lender retains ownership and lists the home for sale as real estate owned (REO). In that case, buyers can go through the traditional VA loan process.
Seeking help with VA loan foreclosure
If you’re facing foreclosure, seek help from:
- VA loan technicians: Contact the VA Regional Loan Center at 877-827-3702 (Monday-Friday, 8 AM – 6 PM EST).
- Foreclosure attorneys: A legal professional can help you explore your rights and potential defenses.
- HUD-approved housing counselors: These professionals offer guidance on available loss mitigation strategies.
