The U.S. Department of Veterans Affairs (VA) guarantees home loans made to eligible veterans. The veteran cannot contact VA and obtain a new mortgage to purchase and refinance a home. Veterans must contact VA-approved lenders and provide the lender with proof of their VA benefit eligibility, along with all of the required loan documentation. If a VA mortgage defaults, then VA reimburses any losses experienced by the lender due to the foreclosure.
When veterans obtain a VA-guaranteed mortgage through an approved lender, they promise to repay the mortgage, usually over a term of 30 years. The lender requires a certain minimum payment each month, which pays for the interest charges, repays some of the principal and escrow. When a homeowner fails to make the required minimum monthly payment the mortgage defaults and the default clause outlined in the mortgage note activates. While most mortgage lenders do not foreclose on a home after only one or two 30-day late payments, they will foreclose after multiple late payments, or if a payment is not received for several months. Foreclosure is the process the lender uses to retake the home.
The final step in foreclosure is the sale of the home. Each state governs foreclosures differently, causing the time frame between the initial default and the actual foreclosure to vary from state to state. Eventually if payment is not received, the lender takes ownership of the home or sells it to another party at a foreclosure auction. Some states allow homeowners an additional amount of time after the home sells to redeem the mortgage note and keep the home. Contact a local foreclosure attorney for specifics on foreclosure laws in your state.
Immediate Credit Consequences
During the beginning of the default process, the mortgage lender reports the late payments to the three credit bureaus. These late payments usually drop the homeowner’s credit scores. Each time a mortgage payment is missed, it adds an additional late payment to the credit bureau. If the payment due in June is not paid, the credit bureaus reflect the 30-day late payment in July. If the payment is still not paid when August arrives in the credit bureaus reflect two 30-day late payments (one for June’s payment and one for July’s payment) and one 60-day the late payment. These late payments may prevent the homeowner from refinancing the current mortgage into a new affordable mortgage or obtaining new financing of other types.
Long-Term Credit Consequences
Once a home forecloses, the credit bureaus reflect a foreclosure on the credit reports for everyone obligated on the mortgage note. VA bars veterans who defaulted on a VA mortgage from obtaining a new VA guaranteed mortgage. Most other loan programs require a homeowner with a foreclosure to wait at least four years, sometimes seven years, before obtaining new mortgage financing.
- FTC: Mortgage Payments Sending You Reeling? Here's What to Do
- Mortgage News Daily; Foreclosure Happens, but There Are Solutions; Glenn Setzer; August 2005
- CNN; How Foreclosure Impacts Your Credit Score; Les Christie; April 2010
- LegalMatch. "Foreclosure Alternatives." Accessed June 20, 2020.
- Cornell Law School Legal Information Institute. "Foreclosure." Accessed June 20, 2020.
- NOLO. "Homeowners’ Associations (HOAs & COAs)." Accessed June 20, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed June 21, 2020.
- U.S. Department of Housing and Urban Development. "Are you at risk of foreclosure and losing your home?" Accessed June 21, 2020.
- Cornell Law School Legal Information Institute. "Equity of Redemption." Accessed June 21, 2020.
- FindLaw. "Regaining Ownership After Foreclosure: Statutory Redemption." Accessed June 21, 2020.
David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.