VA Loans and Foreclosure
A veteran who at risk of losing his or her home due to foreclosure proceedings may wonder if it’s possible to apply for another VA loan in the future. It’s easy to assume that once you’ve lost a home due to foreclosure on a VA mortgage that you won’t get a second chance, but that assumption isn’t necessarily true.
While it’s not an easy road back to home ownership in some cases, VA borrowers should know that there are rules built into the VA Lender’s Handbook that provide a way to get veterans back on the road to home ownership. While nearly any alternative is preferable to foreclosure, in some cases it can’t be avoided and under the right circumstances doesn’t bar the veteran from trying again when financial circumstances are more stable and secure.
The first thing a VA loan applicant should know is that there’s a minimum two-year waiting period between the foreclosure and any subsequent VA loan application. This applies regardless of the status of the original loan–conventional, VA, FHA, sub-prime, etc.
There are no exceptions to this rule; the borrower must wait 24 months at a minimum. During this time a borrower should be working on credit repair by establishing a record of on-time payments and reliability in employment.
Once a borrower is past the waiting period, when it comes time to apply for a new VA mortgage loan, the lender must determine “…if there is evidence that a prior loan has been foreclosed…verify whether the Government has incurred a loss, and, if so, whether the loss has been paid in full.” according to VA instructions to the lender.
This can be the sticking point for some borrowers. When a VA insured loan is foreclosed upon, the government must pay a claim to the lender. This means the government has incurred a loss which must be repaid by the borrower before the Department of Veterans Affairs will approve a new VA home loan.
The VA rules also add, “…even if no debt was established or a debt was waived or compromised or discharged in bankruptcy, any loss to the Government resulting from prior use of entitlement must be repaid before restoration of entitlement is allowable.” For the borrower, this means it’s important to contact the Department of Veterans Affairs to learn the status of any indebtedness to the government following the foreclosure action. Chances are good that a borrower is already aware of this but when in doubt, contact the VA directly for information on the debt and how to satisfy it.
In cases where there is no debt (usually because it has already been paid) the borrower must request a restoration of their VA loan entitlement before the process can move forward. VA entitlement restoration is not automatic even for those who have purchased and paid off a VA mortgage loan with no problems.
About Joe Wallace
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association.