Foreclosure is understandably a bitter pill to swallow for a lot of military homeowners. But it’s important to remember that defaulting on a home loan, even a VA-backed one, doesn’t mean another VA loan is forever out of reach.
The reality is it’s possible to get another VA loan after experiencing a foreclosure, a short sale or a deed-in-lieu of foreclosure. You’ll typically need to wait two years in order to pursue a new mortgage. Many people spend that time working to repair and strengthen their credit, which is something Veterans United’s Lighthouse program can help you with.
Some lenders, including Veterans United, don’t have a waiting period following a short sale in most cases, as long as it’s clear the borrower wasn’t trying to take advantage of the market. FHA homeowners who experience a short sale may not be able to move forward right away. Defaulting on federal debt can force would-be buyers to wait three years before being eligible for a VA-backed home loan. Check out this article to learn more about how delinquency and default on federal debts can affect your home loan chances.
Looking down the road toward that next home purchase, one of the key questions is how much VA loan entitlement you have remaining, if at all, since some will be tied up in that foreclosed property. The answer will help shape the course of your homebuying journey.
VA Loan Entitlement
As we’ve written about many times here, veterans who are eligible for a VA mortgage have what’s called entitlement, which is basically a financial promise from the VA to repay a portion of your loan if you default. In most parts of the country, the VA will repay up to $104,250. Since the agency pledges to repay up to a quarter of the loan amount, the most veterans can borrow without putting down money is generally $417,000 (that’s $104,250 x 4).
When you purchase a home, some or all of that entitlement is used depending on the loan amount. If you lose your home to foreclosure, that VA loan entitlement remains with that property, at least until the loan is repaid in full. And that’s not a likely outcome in a foreclosure. So, in essence, a chunk of your entitlement may be lost and gone forever in the event of default.
That, thankfully, isn’t the end of the story.
Depending on your previous loan amount and where in the country you’re buying, you may have enough VA loan entitlement left over to qualify for another loan. You’ll want to get a look at your Certificate of Eligibility to see how much you have left, if any. Prospective buyers can do this themselves or ask a lender for help.
Along with any required waiting period, you’d also need to meet the standard credit, debt-and-income and related requirements for any VA-backed mortgage.
But let’s keep the focus on entitlement. Let’s pretend you defaulted on a VA loan and lost $65,000 in entitlement. A lender is going to check out your VA Certificate of Eligibility and do a couple of quick calculations to let you know what might be possible.
First, the lender will determine how much entitlement you have left. In this case, $104,250 – $65,000 = $39,250. Now, remember that the VA generally promises to repay about a quarter of the loan amount. One more little bit of math ($39,250 x 4) will determine how much you may be able to borrow without putting money down. In this example, it’s $157,000.
Again, there’s no guarantee here. Just because you’re eligible and you have entitlement doesn’t mean you can get a loan. You’ll still have to satisfy the VA and the lender like on any other loan.
But there’s one additional wrinkle here worth mentioning. In these situations where you’re having to utilize your additional layer of entitlement (you’ll also hear it called secondary or second-tier entitlement), there’s actually a minimum loan amount of $144,001. You can count financing of the VA Funding Fee toward this minimum.
So if you don’t have enough entitlement or a down payment to get you to that amount, the VA program isn’t a viable option.
Post-foreclosure financing can be tricky, even for people in the mortgage industry. This is something Veterans United loan specialists deal with a lot. You can contact a loan specialist at 888-212-1958 or fill out this VA loan application to see what might be possible for you moving forward from default.
Photo courtesy Smudge 9000