Help for Veterans Struggling With Mortgage Payments

Learn about various ways to avoid a foreclosure if you have a VA loan.

By , Attorney

Veterans struggling to make mortgage payments might be able to avoid foreclosure by:

  • refinancing with a VA streamline refinance loan
  • working out a loss mitigation option, like a repayment plan, special forbearance, or loan modification
  • or "refunding" the loan.

Also, special loss mitigation options are available during the COVID-19 pandemic.

Options for giving up the property include completing a compromise sale (a short sale) or a deed in lieu of foreclosure.

Refinancing Your VA Loan With a Streamline Refinance

A VA streamline refinance is officially known as an "Interest Rate Reduction Refinance Loan" (IRRRL). An IRRRL is a VA-guaranteed loan that lowers your interest rate, which in turn decreases the monthly principal and interest payments.

Who's Eligible for an IRRRL?

If you have an existing VA-guaranteed loan, then you can apply for an IRRRL. The IRRRL must be in a first-lien position, so if you have a second mortgage, that lien holder must agree to subordinate its loan.

Your Loan Entitlement

An IRRRL will reuse the entitlement you originally used. (VA loan entitlement is the amount for which the VA will guarantee a loan. Most lenders will lend up to four times the amount of the total entitlement. The basic entitlement available to an eligible veteran is $36,000.)

In other words, an IRRRL is a VA-to-VA refinance that reuses the veteran-applicant's entitlement.

Refinancing Property That's "Underwater"

Generally, an IRRRL doesn't require an appraisal, credit information, or underwriting. So, you can refinance an underwater home. The basis for the loan is the existing VA loan, not the current market value of the property.

You Don't Have to Live in the Home

Additionally, you don't have to currently occupy the property to qualify for an IRRRL—though it might be easier to get approved if you live there. You do need to certify that you previously occupied the home, though.

Cost of an IRRRL

Veterans using the VA Home Loan Guaranty benefit generally must pay a funding fee. The funding fee is a percentage of the loan amount, which varies based on the type of loan and your military category, as well as if you're a first-time or subsequent loan user, and whether you make a down payment.

You don't have to pay the fee if you are:

  • receiving VA compensation for a service-connected disability
  • entitled to receive compensation for a service-connected disability if you didn't receive retirement or active duty pay, or
  • you are the surviving spouse of a veteran who died in service or from a service-connected disability.

The IRRRL can be completed with no money out of pocket by including all costs in the new loan or by making the new loan at an interest rate high enough to enable the lender to pay the costs. The funding fee can be paid in cash at closing or added to the new loan.

Loan proceeds may only be applied to paying off the existing VA loan and to the costs of obtaining or closing the IRRRL. You can't get any cash out from the loan proceeds. To learn more about an IRRRL, go to the U.S. Department of Veterans Affairs website.

Loss Mitigation Options

Loss mitigation options are also available to help veterans avoid foreclosure on delinquent loans. The main options for VA-guaranteed loans are:

  • Repayment plans. You pay the regular monthly payment and an agreed-upon portion of the arrearage to get caught up on the loan, usually over a period of three months or more.
  • Special forbearance. The servicer agrees to suspend all payments or accept reduced payments for a specific period, typically for three or four months.
  • Modifications. The servicer adds the unpaid payments, interest, taxes, insurance, certain assessments (like water and sewer charges), and sometimes legal fees and foreclosure costs to the new principal balance. The new principal balance is then amortized over a longer term with a different interest rate, which lowers the mortgage payments.

If the servicer fails to exhaust the alternatives discussed here, contact one of the VA Regional Loan Centers.

Another Option for Veterans: Refunding

If you're having trouble paying your mortgage and facing foreclosure, VA has the discretionary authority to purchase the loan from the private lender and take over the servicing of that loan. This process is called "refunding," which in this sense means "to fund again." The VA will then work with you to avoid foreclosure.

Refunding is rare. But if you're in default on your mortgage payments and you can't get a forbearance, repayment plan, or loan modification even though you can make the mortgage payments—or will have the ability to make them in the near future—you might qualify.

To find out about a potential refund, call your servicer. You can also contact a VA regional center to learn more.

Mortgage Relief During the COVID-19 Pandemic

You can make an initial request for a COVID-19 forbearance through the end of the nationally declared emergency. VA expects loan servicers to approve requests for up to six months. VA also expects that, if you need additional forbearance after the initial forbearance expires, your servicer will approve a request for an additional COVID-19 forbearance for up to six months.

A forbearance isn't the same as forgiveness. You'll eventually need to get caught up on those skipped amounts. On July 23, 2021, the White House announced that VA borrowers that have been financially affected by COVID-19 have certain options after a COVID-19 forbearance, including the following.

COVID-19 Refund Modification

Borrowers might be eligible to get up to a 20% reduction in the principal and interest portion of their mortgage payments with a COVID-19 Refund Modification. Under the COVID-19 Refund Modification, VA can purchase a veteran's past-due payments and amounts of unpaid principal, depending on how much assistance is necessary, subject to specific limits. The loan servicer will also modify the loan.

Like with VA's COVID-19 partial claim option (see below), the veteran's deferred indebtedness from a COVID-19 Refund Modification will be a junior lien on the property that doesn't accrue interest, won't require monthly payments, and only becomes due when the property is sold, the VA-guaranteed loan is paid off, or the VA-guaranteed loan is refinanced.

The Refund Modification will only be available from July 27, 2021 through July 1, 2023.

COVID-19 Partial Claim Option

The VA issued a final rule setting out a "partial claim" program that, effective July 27, 2021, allows homeowners to resume their new regular monthly mortgage payments without first having to pay the past mortgage payments that were forborne under a COVID-19 forbearance program. (86 Fed. Reg. 28,692 (May 28, 2021)).

With a partial claim, the loan servicer makes a claim on the VA for a portion of the outstanding mortgage balance—here, the portion equal to the forborne payments. The borrower then owes the partial claim amount to the VA at 0% interest, which becomes due at the end of the mortgage loan. The borrower doesn't have to make monthly payments to the VA to repay the partial claim.

After the VA pays the partial claim, the borrower resumes the pre-hardship mortgage payments to the mortgage servicer with the same monthly payment as before the forbearance. The partial claim program is available for VA-guaranteed borrowers exiting COVID-19 forbearance plans and who were current or less than 30 days past due as of March 1, 2020.

Borrowers must indicate to the mortgage servicer that they can resume their former monthly payment. The partial claim loan can't exceed 30% of the loan's unpaid principal balance. The availability of the VA partial claim payment program expires on October 28, 2022. (38 C.F.R. § 36.4809).

Loan Deferment

Under a loan deferment, the servicer defers repayment of the arrearages (principal, interest, taxes, and insurance) to the loan maturity date or until the borrower refinances the loan, transfers the property, or pays off the loan.

Options for Giving Up the Home: Short Sales and Deeds in Lieu of Foreclosure

In a "compromise sale," the homeowner sells the property to a third party for an amount insufficient to pay off the loan. The servicer releases the lien and waives the deficiency in exchange for the sale proceeds. (A "compromise sale" is what the VA calls a short sale.)

With a deed in lieu of foreclosure, the homeowner voluntarily transfers the property to the holder of the VA-guaranteed loan.

Getting Help

The VA assists veterans who are having problems making their mortgage payments.

Veterans with VA-Guaranteed Loans

If you're a veteran with a VA-guaranteed loan, the VA can provide a technician who can intervene with the servicer on your behalf and help you work with your servicer to explore all options to avoid foreclosure, as well as conduct financial counseling. To find the nearest VA Regional Loan Center near you, go to the VA's Regional Loan Center Contact Information website.

Veterans with Loans That Aren't VA Guaranteed

If you're a veteran, but your loan isn't guaranteed by the VA, the VA doesn't have the legal authority to intervene with the servicer on your behalf.

You can, however, call your nearest Regional Loan Center to speak to a technician who can give you advice on approaches to take with your servicer. Go to the Department of Veterans Affairs website to get more information about what to do if you're having difficulty keeping up with your mortgage payments.

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