For Veterans facing financial hardship or foreclosure, the VA refunding program can help you save your home.
If you or your spouse are veterans and you are facing the prospect of a foreclosure on your home, the Veteran's Administration (VA) refunding program might be able to help you keep your home. As one of several VA foreclosure alternatives, under the refunding program, the VA will step in to purchase your home from the lender. The VA will then work directly with you to craft a payment plan to get your mortgage current, assuming you meet the program’s requirements.
VA refunding basics
One of the first things you will need to consider when pursuing assistance through the VA refunding program is if the home loan you have in peril of falling into foreclosure is a VA loan. The VA does not make direct loans to veterans, but it does place the full faith and credit of the federal government behind VA loans to guarantee them. This assurance is one reason why lenders who offer VA loans can do so with more generous terms (usually at lower interest rates and with lower down-payment requirements.)
It is also important to note that the VA will not consider a VA refund on loans that have been in default for an excessive period of time (usually defined as 6 months or more). Loans in default for six months or longer are generally considered to be an insoluble default. In these cases, the lender may have already started the process by sending the homeowner an official Notice of Default, putting the property in pre-foreclosure status. Without some resolution, foreclosure proceedings against the borrower will be the next step in the process.
Before it gets that bad…
Even the most reliable borrowers sometimes cannot make every payment on its due date. There are many good and understandable reasons for this failure, such as an unexpected drop in earnings or an illness in the family. If you think you will be unable to make a mortgage payment when it is due, the best course of action would be to contact your lender directly to let them know. In most cases, your lender can work with you to find a satisfactory plan to make up any late or missed payments. Try to contact your lender before your lender contacts you about a late or missed payment. If you can, offer some plan for catching up on your payments and request advice and guidance from your lender. If you and your family are in serious financial trouble, VA Regional Loan Centers have technicians available to conduct financial counseling. This counseling is designed to help you avoid foreclosure on your VA loan. If you want this assistance, call 1-877-827-3702 to reach a Loan Service Representative that can assist you.
Beware of scams and added debt
Veterans who are behind on their VA loan payments are often the focus of some shady operators hoping to scam them. While there are hundreds of dubious schemes sold to help distressed homeowners promising quick and easy relief, one of the more common ones is what’s called milking or equity skimming.
In one form of this racket, unknown persons offering to pay the delinquent installments approach veterans who are behind on VA loan payments. In exchange for these payments, veterans are asked to sign over some or all control and interest in the VA loan. The veteran later learns that he or she has signed a deed and can get the property back only by signing another contract at a much higher price. When the veteran finds the stiff terms of the new contract cannot be met, legal action is started to take possession of the veteran's home.
In another version of this scam, unknown individuals (to learn whether veterans are having trouble meeting VA loan payments) will visit a housing development. If the veterans are having trouble, these individuals offer each veteran a small amount of cash for the equity in the property, plus the privilege of buying another home in a lower cost neighborhood on a land sales contract. The veteran agrees to give possession in 60 days, not knowing that he or she is signing a deed to the property. When the 60 days are up, the veteran is told that no houses are available in the lower cost development. The veteran is then put out of the home.
2013-onflickr.jpg "if an offer sounds too good to be true...it probably is")
A third version of this scam is used in States where there is a long foreclosure or mortgage redemption period. A veteran, falling behind in home loan payments, is offered a small sum of cash for a "quit claim" deed to the property with a promise that all back payments will be made up. The veteran moves out believing that the loan will be brought up to date. Instead, the individual holding the quit claim deed rents the house without making up any back payments. Most of the money received as rent is profit until foreclosure is final, and the veteran (not knowing what has happened) may still owe the lender, and quite possibly, the U.S. Government if the VA pays a claim on the loan.
Veterans who are facing financial hardship and may be behind on a VA loan may be tempted to borrow money on a short-term basis to cover any arrears. There are many businesses that cater to military communities offering high-interest, short-term loans. (Some even may try to have these loans secured by taking an equity interest in the home.) While this option may seem like an immediate solution, it can create problems down the road. Adding more debt burden to an already precarious financial situation isn’t always the wisest course of action.
Although these practices may be legal in many states, they are considered unethical by most mortgage lenders and real estate brokers. You will be protecting your own interests and doing other veterans a service if you report any such propositions to the holder of your mortgage and to the nearest VA Regional Office.
VA refunding
When a VA loan has been in default for an extended period of time, the VA may choose to purchase the loan in an effort to assist the borrower. The loan is purchased from the lender and the VA takes over full service of the loan and the remaining mortgage payments.
This does not occur often, since most lenders are able to work out most non-payment issues with borrowers, but in circumstances in which the lender does not have any other foreclosure alternatives, the VA may purchase the loan to try to save the borrower's home. Instances in which VA refunding occurs often involve situations where the borrower is not able to make payments due to extreme difficulties, but has solved, or will solve, their extenuating circumstances in the near future and continue payment on the loan.
A few other considerations
While staving off a foreclosure will go a long way in helping you stabilize your financial circumstances, and alternative to foreclosure nearly always create less damage to your credit score than foreclosure, there are some unique aspects of a VA loan you should be aware of if you find yourself in financial distress.
If your VA loan closed before January 1, 1990, and if, as a result of a foreclosure, the VA had to pay a claim to the lender under the guaranty, the amount of such claim will be a debt you will owe to the Government.
If your VA loan closed on or after March 1, 1988, it is unlawful to allow someone to take over your loan without the prior approval of VA or your lender. Contact the VA or your lender to find out how to apply for approval of your sale and/or a release of liability.
If you decide to sell your home and the VA loan is not paid in full as part of the sale (in essence, a short sale) you should protect yourself by obtaining a release of liability from the VA prior to completing the sale.
The VA refunding program will stop foreclosure on your VA home loan, but it's rarely done. You'll have to be persistent when applying for this program through your mortgage servicer. Since this is a rarely-used program, the person you speak with at your mortgage company might not be familiar with it. If that's the case, ask to speak to a supervisor. You'll have to provide financial information, fill out VA Form 5655 and VA Form 26-6807a, and write a hardship letter explaining your financial difficulty.
If you're having trouble making monthly mortgage payments, contact the VA and your lender right away. Even if it's your first time ever being late on a payment, you should make those calls. Keeping your loan officer and the VA in the loop is important because they'll be able to help you through it and suggest several ways to get you back on track. If you open the lines of communication early, you'll never have to resort to submitting a VA refunding request or be threatened with foreclosure. If you have a hardship beyond your control, the VA might be able to help you keep your home.
Photo credit: Beverly & Pack via Comfight CC.