The VA guarantees loans for eligible veterans. That’s probably one of the most misunderstood statements when it comes to VA loans. Many veterans either don’t realize that they are eligible for a VA loan or they don’t understand how the VA loan works.
One of the largest myths pertaining to VA loans, though, is what happens to the loan if the veteran dies. Many people assume that the VA pays the loan off for the veteran, but this isn’t the case. The VA only guarantees loans for lenders, not veterans.
What Happens if a Veteran Dies?
The hope is that the veteran has a will and/or trust that includes who inherits the property. If the veteran is married and the spouse is still alive, the mortgage becomes the responsibility of the spouse. If there isn’t a spouse or the veteran’s spouse isn’t alive, the veteran’s beneficiaries are responsible for selling the property and paying off the loan.
What is the VA Guaranty?
You might be scratching your head if you don’t know how the VA loan guaranty works. While it sounds like it would be a benefit for the veteran, it’s actually a benefit for the lender. Indirectly, though, it does benefit you, the borrower.
The VA guarantees loans for lenders, which means the VA pays the lender back a portion of what they lose if you default on your loan. Because of this guaranty, VA lenders won’t require you to make a down payment.
Lenders rely on down payments because you invest in the property. This makes you more likely to make your payments or you risk losing your own money. With the VA guaranty, though, the lender doesn’t have to worry as much about down payments. This means you may have an easier time getting the loan because you don’t have to wait until you save enough money for the down payment. The VA will pay the lender back up to 25% of the amount you default on with your mortgage.
What are the Options for the Estate?
If a veteran dies, the spouse and/or beneficiaries will have to decide what to do with the property. The one thing you should know, though, is that the VA loan doesn’t just go away. Someone has to pay the loan. The following options are usually available:
- Sell the home and use the proceeds to pay the loan in full
- Beneficiaries can refinance the loan into their name and make the payments
- Use mortgage life insurance to pay off the loan
The bottom line is that the VA loan must be paid one way or another. If no one pays the loan, the VA will foreclose on the property. This means that even if you inherited the property, you will not have access to it any longer. The bank will take possession of it and try to sell it to reduce the loss they incurred from the mortgage.
As a veteran, it’s a good idea to take care of what will happen with your home upon your passing. If you don’t want your loved ones to be burdened with the debt, you may want to consider purchasing mortgage life insurance. This way you protect those that you love, avoiding financial stress in your wake.