The VA puts a lot of effort into making sure only qualified veterans secure a VA loan, but sometimes default still happens. We can’t predict what will happen in the future, which means some veterans just have no choice but to walk away from their home.
What happens to you if you have to walk away from your home and let it foreclose? Keep reading to find out more.
Your Credit Score Drops
You probably figured that your credit score would drop if you have a defaulted mortgage in your history. But, did you know how many points you’ll lose? The average ranges from 85 points to 165 points. That’s a damaging credit score.
Just how much your credit score drops depends on the exact circumstances. There is no way to tell just how many points you’ll lose. It’s safe to say that you’ll have a low credit score after you lose your VA home in a foreclosure, though.
The Government Bails You Out
The VA guarantees VA loans. That is why the lender was able to give you a 100% loan without having strict requirements. They knew that if you defaulted, the VA would bail them out of the mess. The VA pays the lender 25% of the money they lost. That’s larger than most down payments, which is why lenders are willing to extend the financing.
Because the government bails you out, though, you lose that portion of your entitlement. The entitlement is the portion of the loan that the VA will guaranty. If you use it because you lost your home, the VA cannot give it back to you.
Dealing With Entitlement
You know that you’ll lose some entitlement, but where does that leave you? Each veteran starts the process with enough entitlement to secure at least a $453,100 loan. Let’s say your loan was $300,000. If you lost that home to foreclosure, you lose the $300,000 in entitlement.
You still have $153,100 in entitlement left, though. Once you recover from the foreclosure and can prove yourself again, you may use the remaining entitlement to buy a home. The VA requires that you wait two years before you apply for another VA loan, though.
Improve Your Credit
While you wait the two years to let everything settle and for you to get back on your feet, you should work on your credit. We already mentioned how many points you’ll lose as a result of the foreclosure. Now you have to work to get them back.
Make all of your payments on time. Bring any past due accounts current. Take care of any collections and make sure your information is correct on your credit report. You can view a free copy of your credit report here. If there is incorrect information reporting, make sure you write to the credit bureau and provide proof of the error to have it fixed.
Remember, your credit score won’t change overnight. It will take some time for it to recover. Just keep your habits consistent and your credit score will change eventually.
You May Need a Down Payment
Each lender is different, but you may come across several that require a down payment from you after a foreclosure. Even though VA loans don’t require a down payment as long as you have enough entitlement to cover the loan, it helps reduce the risk of default. Lenders are going to be on guard once they realize you lost a home to foreclosure. Give them a reason to think you are a good risk and aren’t a high risk of default.
Getting a VA loan after foreclosures is tough, but it’s not impossible. Just make your financial habits after the foreclosure as stable as possible so that your credit score increases and the lender can see you as a good risk. The VA and lenders understand that life happens and you sometimes can’t control what occurs – they just don’t want a repeat of the occurrence.