VA Loans and Foreclosure

The Department of Veteran Affairs, commonly referred to as VA, offers VA borrowers several options to prevent foreclosure on his or her home.  If a borrower defaults on a loan by not making a monthly payment, VA has guaranteed up to 25% of the original loan amount in the event that the lender forecloses upon the home and incurs a loss on the transaction.  

The decision to foreclose upon a veteran is dictated by VA's loss mitigation policy that sets the standards and process for the determination to foreclose.  This policy is built upon a foundation that lender should explore alternatives prior to pursuing foreclosure action.   VA offers delinquent home owners five alternatives to foreclosure: 1) forbearance, a repayment arrangement to make up the delinquent payments over a specified period of time, 2) loan modification, the amendment of the loan to lower the interest rate, re-amortize the remaining balance, and/or extending the current term of the loan in order to reduce the monthly payment for the borrower, 3) sale of the home, 4) deed-in-lieu of foreclosure, a process of signing the home over to the lender, and 5) refunding, a process whereby the VA assumes the servicing of the loan from the lender. 

Critical to the analysis of a borrower's alternatives to foreclosure is the determination of the reason for the default.  It is the lender's responsibility to gather enough information to determine if the default was due to a temporary set back or a permanent problem that will hinder the borrower's ability to continue making the mortgage payments in the future.  Borrower's involved with a temporary set back will have the greatest selection of alternatives including forbearance, modification and refunding of the loan.  Conversely, a home owner that faces a permanent loss of income, a ong term problem, or a situation that hinders the borrower from being able to make the monthly payment may only be able to sell the home, deed the home over, or face foreclosure.  In addition, it is the lender's responsibility to carefully search for alternatives, including the determination whether a relative, family member, employer or previous owner may step up and resolve the delinquency.  

Before deciding upon a course of action, the lender will complete a detailed financial analysis of the borrower to determine his or her current income and debt status.  The financial analysis may include but not limited to verification of employment, credit checks, and requests for personal financial information such as bank statements, paystubs, and tax returns. 

Furthermore, if the property has been abandoned by the borrower, the lender will initiate foreclosure action immediately.  Abandonment will also relinquish the borrower of many alternatives that he or she may have been eligible for. 

The recommendation to foreclose upon a home is only determined after the lender has tried to resolve the delinquency through flexible and adaptive collection techniques.   It is the lender's discretion to offer the borrower any of the possible alternatives. 

Forbearance 

Forbearance is an agreement between the lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time.  If a borrower is behind in his or her payment by $2,000, for example, the lender may allow the borrower to pay the money back through installment payments over six months.  The lender may decide, on the other hand,  to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining arrearages in one lump sum.

The forbearance may be an oral agreement or written contract between the lender and the borrower.  Generally these agreements will not exceed more than 12 months.  

Loan Modification 

A loan modification is a change in any of the terms of the original note.  This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender's discretion to assist the borrower through a temporary set back.  

Generally a lender will consider a loan modification when foreclosure is eminent and the borrower's income has been decreased or unable to make the mortgage payments, but will be able to keep the loan current after the loan modification.  

Sale of the Home

Selling a home is an alternative for borrowers that are unable to reinstate the loan and face eminent foreclosure.  This option allows a home owner to try to salvage his or her credit, pay off the loan, and retain any remaining equity in the home.

VA will permit a veteran to sell the home when the proceeds from the sale are not sufficient to pay off the VA loan due to a decrease in property value or if the home has not appreciated enough to cover the repayment of the delinquency, sales commissions, and normal closing costs.  In this type of situation, VA will consider a "compromise claim" in which it will pay the lender the difference between the net sales proceeds and the mortgage balance.  It is important to note that the borrower may be required to sign a promissory note to repay VA for a part or all of the compromise claim.

Deed-in-Lieu of Foreclosure (DIL)

A deed-in-lieu of foreclosure is a voluntary conveyance of title to VA.  Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure.  In return for the voluntary conveyance to VA, the borrower is often released of any personal responsibility for the mortgage.

In order to qualify for a DIL, there must not be a second mortgage or junior liens on the property.  The property must have a value of at least 75% of the original value.  Properties with values in excess of the amount owed against the home (to include normal closing costs) should consider selling the property before voluntarily conveying the home to VA.  

Refunding 

Refunding is the process where VA agrees to buy a loan in default from a lender and take over the servicing of the mortgage payments.  Though it is not the right of the borrower to demand that VA refunds the loan, refunding allows qualifying home buyers to avoid foreclosure when the lender is unwilling or unable to assist the borrower with foreclosure alternatives.

It is important to note that VA considers any loan that is in default for six or more payments to be an insoluble default.  An insoluble default will result in foreclosure action against the borrower.  The borrower may seek relief through forbearance if he or she can prove that the default was temporary and has been resolved.

Should foreclosure proceeding occur, the borrower may still reinstate the loan by procuring sufficient funds to bring the loan current.  In Arizona, this means that the borrower has until the last minute prior to the Trustee's Sale to reinstate the loan.

Timeline

If a borrower is later than 16 days with the mortgage payment from the day it is due, the lender is required to send the borrower a notice in writing.  The notice must be mailed by the 20th day and clearly state how much the borrower owes (to include late fees).  During this time the lender will try to contact the home owner by phone.  If telephone contact is not made within 30 days from the delinquency, the lender is required to send a second letter that should 1) state the loan is in default, 2) emphasize the seriousness of the situation and the importance of paying the delinquency, 3) show the borrower how much is owed (to include late fees), and 4) advise the borrower on how to contact the lender to arrange for payment. 

Should the borrower submit a partial payment in lieu of the full amount to reinstate the loan, the partial payment may be returned if:

• the property is investment property and the borrower keeps the rental income instead of turning it over to the lender

• the payment is less than one full monthly payment (including principal, interest, taxes, insurance and any applicable late fees)

• the payment is less than 50% of the total amount due

• the payment is less than agreed to in a written repayment plan

• the payment is in the form of a personal check and the borrower has been advised that payment must be in the form of certified funds

• the delinquency is 6 months or more

• foreclosure has been initiated

It is the responsibility of the lender to return the payment within 10 calendar days and include a letter explaining the reasons for the returned payment.  

Negotiating With Your Lender 

As a borrower prepares to speak with his or her lender, there are several key areas to focus on before any interviews begin.  As stated before, VA relies on the lender to determine a borrower's eligibility to include the type of hardship, the status of the property, and an evaluation of the borrower's financial situation.  Successful negotiations is determined by preparation and good communication.

When preparing for the interview, ask yourself the following:

• Why did I default on the loan?  Is it a result of just not making the payment or have I suffered a verifiable loss of income.  Lenders will listen if you have had a verifiable and temporary setback in income.  The key is being able to support your reasons for being late.  If the reasons are due to temporary layoffs for example, send the lender a letter from your employer stating that you have been laid off.  If you don't have a reason, you may limit your options.

• Can I cut back on my expenses anywhere?  After looking at your income, the lender will analyze your expenses.  Do you really need cable if you face the threat of losing your house?  

• Can I sell an asset to compensate for the deficiency or loss of income?  Do you have any assets that you are forced to make payments on?  Would selling the asset decrease your monthly expenses and/or generate sufficient cash to apply towards the loan?  In some cases a borrower may be able to sell a car, for example, to reduce the monthly expenses by eliminating the car loan.  Also, any profits from the sale of the asset could be used to bring the loan current.  

• Do I know anyone that could loan me the money to get back on my feet?  Do I have any family members, relatives, or other sources that could loan me the money.  Though most people are ashamed to ask, asking a family member, friend or relative may be the only hope of saving the family home.

• Is it worth the effort to save the home?  Would it be easier to sell and start over?  In some cases a borrower may not be able to handle the burden and stress of keeping the house.  

• Should I file for bankruptcy?  When facing a financial crisis, a borrower will often look towards bankruptcy as an option to alleviate the problems.  Before making a decision, determine how bankruptcy will affect your ability to keep the home.

• If I were the lender, would I justify the cause based upon the borrower's situation?  Though this is one of the most difficult questions to ask, be realistic.  If you loaned someone $100,000 dollars, would you believe his or her excuse for being late?  If not, you might want to reconsider your excuses.  Remember that lenders prefer to hear about temporary setbacks versus permanent situations.  

The lender will do a detailed analysis of the borrower's financial situation and scrutinize the reasons for the default  A borrower should compile the applicable paperwork including letters from employers show a decrease income, bills and receipts justifying an increase in expenses, and prepare to answer the questions about the reasons for the default.  Knowing your situation allows you to talk effectively with your lender.

The second key to successful negotiations with a lender lies in good communication.  Good communication is achieved by quick action, immediate responses, and positive cooperation.  If a home owner knows that he or she is going to be late, the borrower should call the lender.  Ignoring letters and phone calls from the lender actually increases the likelihood that the home owner will lose the home.  

Once the home owner has begun a dialogue with the lender, it is important that the borrower responds to the lender's requests.  The home owner should create a diary of events and log every call, letter, and meeting.  He or she should include the date, time, who called, the telephone number and extension of that individual, and detail what was spoken.  The home owner should keep copies of every letter sent to and received by the lender.  Furthermore, the borrower should emphasize his or her desire to work out a solution to the default each and every time the lender calls.  If the cause for the default has been resolved or will be resolved, the borrower should assure the lender that his or her problems are behind them and he or she is trying to get back on their feet.  The lender will generally be more lenient and willing to work with a home owner if the problem(s) are in the past.

Should the lender fail to follow VA procedures or appear to be uncooperative, the borrower has the right to request VA to assist in finding alternatives to foreclosure.  As mentioned before, this may include refunding and could also lead to forbearance or loan modification.  Though VA may look skeptically upon a borrower requesting VA intervention, citing a lender's failure to use proper procedure (such as the notification requirements explained above or return of payments) will undoubtedly assist the borrower's case.  Furthermore, should VA intervene with the loss mitigation process, the lender is required to delay the foreclosure proceedings until a solution can be found.

Finally, the borrower should remember to keep a positive attitude.  Threats, belligerent dialogue, and an unwillingness to cooperate does not prove to the lender that the borrower is serious about working out a solution.  In addition, the borrower shouldn't make promises that he or she cannot keep.  Though it may seem like an easy way to stall a foreclosure, the borrower may end up with a higher payment, owe more money than originally delinquent, destroy his or her credit, and may lose the house in the process.

Foreclosure is an expensive process for both the home owner and the lender.  However lenders realize that foreclosure is an effective means to demand payment from a home owner.  A borrower must be prepared and ready to face the consequences of his or her situation.  Knowing his or her options and expectations of the lender are crucial to successfully avoiding foreclosure.  

However, there is free help and assistance for home owner facing the possibility of foreclosure.  If you would like to talk with someone about your situation, click here.