The VA loan provides veterans with 100% financing for a primary residence. The benefits are for the veteran alone. So what happens if the veteran dies?
If a veteran dies before the VA loan is paid off, it becomes the responsibility of the spouse (if there is one). If the veteran did not have a spouse, the debt becomes the obligation of his estate. In other words, the debt does not just go away. The VA does not pay off the debt for the veteran. It works just like any other mortgage – somehow the loan must be paid in full despite the death of the veteran.
Paying the Loan in Full
One way or another, the VA loan must be paid despite the veteran’s death. If there is a surviving spouse and she/he can afford the payment, they can take over the mortgage. The spouse pays the loan just like the veteran did until it is paid in full. The home is then under the ownership of the spouse.
If there isn’t a spouse, the loan becomes the debt of the estate. In other words, whoever handles the estate must either make the mortgage payments or sell the home. The proceeds from the home will then first go towards paying off the loan. Any money left after paying off the VA loan would go toward the estate of the deceased.
Mortgage Life Insurance
Veterans that are worried about paying the loan in full in the event of their death, can secure mortgage life insurance. This works differently than standard life insurance. Its sole purpose is to pay off the mortgage in the event of your death.
In other words, the mortgage company is the beneficiary of the policy. Typically, veterans roll the cost of the insurance into their VA loan. This increases the loan payment and the amount you finance. This means paying more interest in the long run.
However, if you are not a good candidate for affordable life insurance, where the proceeds would go to your loved ones who could then pay off the mortgage, it’s a good alternative. It can ensure that the loan gets paid off and that your estate and beneficiaries get your home rather than turning it over to the bank.
The VA Does not Play a Role
It’s important to understand the VA does not play any role in the process if you die before you pay off the VA loan. The VA guarantee is strictly for the lender in order for them to write loans to veterans for 100% of a home’s purchase price.
If you think about it, VA loans are rather risky. They don’t have high credit score requirements or strict debt ratio rules. Borrowers can have a low credit score, high debt ratio and still get 100% financing for their home. They don’t have to put any money down, yet they can secure a loan up to $453,100 in many cases.
The VA guarantees 25% of each loan written in their name. This gives the lenders reassurance that they will see some of the money they could lose if a borrower defaults. However, the VA has a very low default rate! What the VA does not do is guarantee the loan for the veteran or their family. If the veteran dies, the VA does not pay off the loan. They strictly back up the lender, not the borrower.
If you are worried about paying your VA loan in full before you die, consider your insurance options. Mortgage insurance is often costly, but can protect your loved ones in the event of your passing. Life insurance is another great way to help your loved ones own the home free and clear once you are gone. Either way, just know that the VA does not take care of the loan in the event that a veteran dies. This way you can effectively plan should you lose your loved one and still have a VA loan.