VA Issues Guidance For Principal Reduction On VA Home Loans
The Department of Veterans Affairs has issued some guidance for lenders about principal reduction for VA mortgages.
Borrowers who get into trouble with conventional or FHA home loans often wind up discussing foreclosure avoidance options that include principal reduction — where the lender may modify the home loan in order to help the borrower get into lower payments and avoid losing the home to foreclosure proceedings.
The VA issued a circular in late June, 2013, to help lenders understand their options for principal reduction on VA home loans. This would allow lenders to offer similar options for a VA mortgage to qualified borrowers in certain circumstances.
According to VA Circular 26-13-12, “Principal Reduction Alternative (PRA) For Department of Veterans Affairs (VA) Loans”, lenders may offer options similar to the HAMP program.
“VA authorizes loan holders to modify VA-guaranteed home loans without VA prior approval, as long as all conditions listed in the regulation are satisfied. When the Department of Treasury established the Home Affordable Modification Program (HAMP), VA issued Circular 26-10-6 to authorize modifications of loans in accordance with the HAMP guidelines, including principal deferment, even when the terms of modification differed from those allowed for traditional modifications under 38 CFR 36.4315.”
What does this mean for the borrower and lender?
“VA encourages all holders and servicers of VA-guaranteed home loans to consider the possibility of a PRA when reviewing loans for possible modifications.”
When it comes to the lender, what is the incentive for offering such loan modification? “VA is not able to reimburse for any principal reduction, as a VA claim is payable only upon termination of a loan, and any forgiven amount is no longer part of the eligible indebtedness” the circular says, which might lead some to believe that there’s no benefit to the financial institution for helping out the VA borrower.
But the VA circular adds, “…review of a PRA in connection with a loan modification may produce a higher expected return for a servicer than termination of the loan, especially when the sum of the net property value plus VA’s maximum claim liability is less than the total indebtedness on the loan.”
For more information on your options, discuss your situation with your loan officer or contact the VA directly for assistance.
Do you have questions about VA home loans? Ask us in the comments section.