What Are the Consequences of Foreclosing on a VA Loan?

A VA loan guaranty can help reduce the expense of your mortgage. If you are, or were, a member of the armed forces, the US Department of Veterans Affairs will provide this service to you free of charge if you qualify. Essentially, the organization offers to buy your mortgage out of default from a private lender should you be unable to pay. This is beneficial to both you and the lender alike, making it easier to get and keep a home loan. If you happen to default, though, you are not simply off the hook.

Ongoing Debt Obligation

When you default on a loan, private or federally-guaranteed, you are not suddenly released of obligation to repay. In fact, the lender can hold you responsible for the loan sum long into the future. Defaulting on a VA loan means you will be in debt to the federal government, which is the most senior type of debt there is. This can result in liquidation of your assets or income withholding. You will be unlikely to secure any loan, even a private loan, as long as this debt remains.

Loss of Asset

To help cover the remaining debt obligation you have to the VA, your home may be liquidated. This means you will face foreclosure, move out of your home and have no further claim to the asset. You will not be paid for the home's foreclosure. Instead, the VA will sell the home and use the profits to pay the remainder of the loan. Often, the profits earned are still not enough to cover the outstanding debt. As such, you can be continually held accountable for this loan sum.

Preclusion from Future Government Loans

One of the greatest drawbacks of defaulting on a federal loan is the fact you will be unable to take other federal loans in the future. For example, you will be precluded from receiving federal student loans, loan guarantees from the Federal Housing Administration, Farm Service Agency financing or even Small Business Administration loan guarantees. As a veteran, you would have had the opportunity to receive more VA loans, including loans for construction or repair of your property. These loans will no longer be accessible to you if you have defaulted on the loan.

Preventing Default

If you think default may occur, try prevention tactics. Start by asking for deferment of loan payments, which is a temporary stop in payments due to a financial emergency. Deferment is only an option if you have not yet defaulted on the loan. If your loan is already delinquent, or in default, ask about the possibility of rehabilitating the loan. You may have a chance to restart loan payments and bring the debt current. It is also possible to have the debt forgiven if you simply believe you will not be able to repay the loan in any circumstances. Forgiveness is hard to achieve, and it is only granted under extreme financial circumstances that you could not have prevented and will not likely recover from.

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