If a veteran defaults long enough on a VA loan, it goes into foreclosure, just as any other loan would. But it doesn’t happen as quickly as it might with any other loan program.
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The VA has a department that helps financially distressed veterans. It’s up to you, the veteran, to reach out for help, though. As soon as you know that you are having trouble making your payments, you should get in contact with the VA. Your counselor will then help you decide the best course of action. Your counselor can also get in contact with your bank to see what programs they may have available that can help you avoid foreclosure
What Happens if You Can’t Avoid Foreclosure?
If you can’t avoid foreclosure despite your best efforts, you will lose your home. Not only does this affect where you live, it affects your credit and your
VA loan entitlement.
Obviously, the bank will take possession of the home. The bank will then deal with the VA to get their portion of the loan guarantee since you defaulted. Your credit score will likely take a large hit because it will show that you lost your home in foreclosure. It could be three years or more before you are able to get another loan.
Finally, a VA loan foreclosure will affect your entitlement. Since the VA will suffer a loss because of your default, you will lose that portion of your entitlement. This could affect your ability to secure a VA loan in the future. The amount of entitlement you have left depends on how much entitlement you used from the start.
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For example:
Joe is a veteran. He used $200,000 of his entitlement to buy a home. Five years later Joe lost his job and was unable to make his mortgage payments. As a result, Joe lost his home in foreclosure. Because the VA had to bail the lender out, Joe lost his entitlement of $200,000. Because the VA provides veterans with a total of $453,100 in entitlement, Joe still has $253,100 in entitlement left. Once he waits the necessary two years after the foreclosure, Joe can get another VA loan using only the remaining entitlement.
Now, if Joe had used all $453,100 of his entitlement and lost the home in foreclosure, he would be left with no entitlement. This means that Joe would not be
eligible for a VA loan once he was able to repair his credit and get back on his feet.
While it’s not an ideal situation to lose a home in foreclosure, it helps to know that the VA is there to help you. If you contact them for help long before you default on your loan, they may be able to work something out with your lender so that you don’t lose your home. If you do lose it, do your best to get yourself back on your feet and see what you can do about getting a new VA loan using your remaining entitlement.
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