How the VA Purchases Loans and Assures Quality of These Loans

How the VA Purchases Loans and Assures Quality of These Loans

Many veterans use the VA Home Loan Guarantee Program to purchase homes and multi-family properties.  Unfortunately some of these homes will eventually be foreclosed due to unforeseen circumstances and problems with finances.  The loss of a job, illness, and divorce contribute to foreclosure situations, and the VA is left with the decision of what to do with the home.

When a home in the VA Home Loan Guarantee Program is up for foreclosure the VA has the choice of whether or not to refund the loan.  This means that the VA could purchase the loan from the mortgage company. 

The VA has two choices when considering refunding.  One is to help the veteran retain their home by purchasing the home from the mortgage company and allow the veteran to make payments directly to the VA, and the second choice is to purchase the home in the case that the VA has guaranteed the home for enough money that they will lose money if they do no purchase the home and resell it themselves.  The VA chooses the option of refunding the home depending on:

• If every other effort has been made to avoid foreclosure and come out of default.
• The owner is no longer able to have the payments deferred or get a forbearance and is still unable to make the mortgage payments.
• If the veteran has overcome the original reason for default and foreclosure and is able to make the payments and retain their home.

In these circumstances the VA may consider refunding the home.  In order to help the VA decide to refund a loan or not, they track the progress of currently refunded loans and see if the homeowners are keeping up their end of the bargain.  The VA has found that:

• Within the first two months of the period the VA began monitoring the loans, close to 30% of refunded loans are not paying or complying with the terms of the refunding.
• Within the first year of monitoring the loans, close to 51% of refunded loans were not complying with the terms of their new VA refunded mortgage loans.
• The borrowers may not be able to make the new payments because they are often higher due to the VA purchasing the loan and readjusting the payments accordingly due to the fees and costs of purchasing the loan.
• The higher loan amount due to this readjustment in payments may cause the veteran to owe more on the property than it is worth if they tried to resell it right away.

Since the veteran may have a larger payment, and a higher overall loan amount due to fees that were added to the overall loan by the VA, they may again default on the loan and end up in foreclosure anyway.  By tracking the quality of the refunded VA loans, they are trying to avoid future foreclosures of these refunded properties.  The VA does this by:

• Carefully verifying the ability to pay through employment verification and income records.
• Looking at the original reason for default with the mortgage company and checking if it was a temporary reason that was overcome, or if it is likely to reoccur in the future.
• Checking the past credit history carefully to see if there are irresponsible spending trends and other factors that may make them likely to default again.
• Look at the reliability of their employment, and overall job security.
• Verifying income verses expenses to see what level of a mortgage payment is financially responsible.

Once all of this information has been collected, it will be determined if the veteran is likely to default with a VA refunded loan.  If the VA determines they are likely to default, then a refund will not be offered.  If the VA determines that they are able to financially support the payments, then the VA may refund the loan which will allow the veteran to retain their home.

If you are a veteran who is facing default and/or foreclosure, contact your VA Regional Loan Center to find out if refunding is an option for you.

TO APPLY FOR A VA LOAN RIGHT NOW, visit Get VA Loan Now. 

We are the leader in lending to Veterans through VA home loans and VA refinances.  If you have more questions, comments, or would like to get a VA Home Loan, please contact John Allen at 1(951) 543.4137 or email him at [email protected]