Sometimes you can’t help but fall behind on your VA loan. Despite the VA’s effort to make sure you get a loan that doesn’t put you in financial danger, life happens. If you find yourself in a position that you can’t pay your VA loan and you consider walking away from the home, think about the following consequences.
Your Credit Score Will Fall
Naturally, if you foreclose on your mortgage, your credit score will fall. Just how much it will decrease depends on many factors. On average, you can expect it to fall anywhere between 85 and 165 points, though. If you already have a low credit score, losing that many points can be detrimental to your financial future.
You’ll Lose Your Entitlement
Each veteran gets entitlement, which allows them to purchase a home without a down payment. Once you use some of your entitlement, it stays tied up with the home that you bought until you pay the loan off in full and sell the home.
If you lose your home in a foreclosure, you obviously don’t sell the home or pay the loan off in full. Because of this, you’ll lose the entitlement that was tied up with that home. This means you can’t request reinstatement of the entitlement – it’s gone forever.
If you have remaining unused entitlement, you can use it at some point in the future, but if it’s not enough to cover your full loan amount, you’ll need to put a down payment on the loan. In 2018, veterans were able to secure up to a $453,100 loan with no down payment if they had full entitlement. In 2019, that number increased to $484,350. If you don’t use that full amount, whatever is left may be available for use on a future purchase.
You Can’t Have Another VA Loan for Two Years
The VA puts a mandatory 2-year waiting period on another VA loan after you lose a home in foreclosure. This two-year period is supposed to give you time to recover from the foreclosure, rebuild your credit, and save money to be able to afford another home.
Keep in mind that just because the VA gives the green light for you to take out another VA loan after two years, it doesn’t mean that you’ll qualify. You must prove to a VA-approved lender that you can afford the new loan and that you aren’t a risk of default again.
Lenders May Add Overlays
Once you have a foreclosure on your credit report, lenders put up their guard. They worry that you will default on a future mortgage if they give you one. Because the VA guidelines are relaxed, many lenders add what they call lender overlays. If you lost your home in a foreclosure, chances are that you will be subject to these overlays.
Just what overlays lenders will impose on you depend on the situation. Some lenders require a rather high credit score compared to the average VA credit score of 620. Others may impose a low debt ratio to protect themselves from foreclosure. Technically, the VA allows you to spend up to 43% of your gross monthly income and still get approved for a mortgage. This may be too high for some lenders as it increases your risk of default.
Other lenders may add their own requirements just to make themselves feel better about lending you money. Their goal is to protect themselves from losing money, but in reality, it protects you too.
You May Need Money for a Down Payment
As we discussed above, you’ll lose your entitlement that was tied up with the home that you lost. You can use your remaining entitlement, but if it’s not enough to cover the full loan amount that you need, you’ll need to make a down payment.
The VA requires that you make a 25% down payment on the difference between the purchase price and the entitlement. For example, if you have $200,000 in entitlement left, but you need a $225,000 loan, you’ll need a down payment of $6,250. This may take you some time to save up, which could extend the VA’s 2-year waiting period much longer for you.
Before you lose your home in a foreclosure, utilize the many offerings of assistance the VA has. Talk to your loan servicer to see what they can do. Many lenders offer forbearance or payment arrangement programs to help you catch up and avoid losing your home. Exhaust all of these options before you let your home get lost in a foreclosure.