Veterans of the military receive many benefits. Among them, they can secure 100% financing for a home purchase. What you might not know, however, is the military debt consolidation loan benefit. This loan helps veterans who are in over their head in debt. You may hear it called other things as well, such as the VA Consolidation Loan. Either way, it means the same thing – you consolidate your debt into one payment.
What is the Military Debt Consolidation Loan?
If you have ever heard of a debt consolidation loan, you are familiar with the MCDL, or Military Debt Consolidation Loan. It helps you combine multiple debts into one payment. The one loan you receive pays off your other debts (assuming it is large enough). You then only have to worry about one payment each month.
You can pay off unsecured and secured debts with your MDCL. A few examples include credit cards, auto loans, personal loans, and medical debt. The loans should help you get more organized. Some people take out this loan to reduce their interest rates. Others need it just to keep track of their multiple debts. It can help you avoid late fees and default just from overlooking a due date.
The Tie-In to Your Home
The Military Debt Consolidation Loan is an extension of your current VA loan. In other words, you need a VA loan in order to use this benefit. You can consolidate your debts into your VA loan via the MDCL. Lenders view this loan as a cash-out loan. It operates under the same principles any other cash-out loan would, such as the FHA or conventional cash-out refinance.
The amount you receive for the debt consolidation loan depends on the value of your home. The lender will first need to know this information. They will order an appraisal on your home. From the appraised value, they will subtract your current loan amount. The money left is available for your debt consolidation. If you wrap the closing costs into the loan, though, you will need to subtract them from the total amount as well.
Here is an example:
Your home is worth $200,000. You owe $100,000 in a current VA Loan. You also want to wrap the closing costs into the loan. They amount to $5,000. You are left with the following:
- $200,000 – $100,000 – $5,000 = $95,000
You are free to use the $95,000 or whatever amount you need up to that point to consolidate your debt. Under no circumstances can your new loan amount exceed the value of your home.
The Benefit of the Military Debt Consolidation Loan
Why would you consolidate your debt into your home loan? There are several reasons. Usually, you can secure a lower interest rate. Let’s say you want to consolidate your credit card debt. These debts usually carry a pretty high interest rate. Would you rather pay 20% on your debt or 5%? This is just an example, but you get the idea. Credit cards have high rates and mortgages have much lower rates. VA loans in particular have low interest rates. This is because the VA guarantees the loans and because you put your home up as collateral.
You also get to spread the debt out over a longer period. You can opt for terms ranging from 10 years through 30 years. This gives you options when it comes to your payment. The longer you spread the term out, the lower your payments. Keep in mind, though, the longer you owe the bank the money, the more interest you pay. If you can only afford a 30-year payment now, consider making larger payments down the road. When you can afford higher payments, you pay down the balance and ultimately pay less interest.
The Downsides of Military Debt Consolidation Loans
Just as there are benefits of the MDCL, there are also some downsides you should know. The largest is the fact that you take equity out of your home. This can put you at risk for financial issues in the future. Make sure you understand the full ramifications of using your home’s equity. You no longer have it as an emergency, should something arise. As you pay the principal down on the loan, you will gain some equity back. This could be a long process, though.
Military debt consolidation loans also cost money. Consolidating with other methods, such as with a credit card may not cost as much. Of course, credit cards charge balance transfer fees, which can add up, but they usually are not nearly as much as a new mortgage. Think of the costs you paid when you took out your VA loan. You pay underwriting, processing, credit reporting, appraisal, and closing fees. You will pay these or similar fees again. You will also pay the VA funding fee. Your closing costs could total as much as 5% of your loan amount. That is something to really think about.
Choosing the MDCL Over Other Options
You may have other options for debt consolidation, but the MDCL offers some things no other loan can including:
- Simple qualification requirements – The VA has simple qualification guidelines. They often have lower credit score and debt ratio requirements than other loan programs. This makes it easier for veterans to consolidate their debt.
- Chance to borrow more money – Most loan programs do not allow you to borrow more than 80% of your home’s value. The MDCL, however, allows you to borrow as much as 100% of the value of your home.
- No mortgage insurance – Most loan programs require you to pay mortgage insurance, especially when you borrow more than 80% of the value of your home. The VA loan only requires an upfront funding fee. They do not require any monthly fees.
If debt consolidation is not something you would choose, there are other options you could explore. These include:
- Credit card consolidation
- Debt settlement
- Repayment plans
If you have all unsecured debt, credit card consolidation might be a good choice for you. Otherwise, you may have to opt for other options, such as debt settlement or bankruptcy. Of course, no one wants to file for bankruptcy, but debt settlement can be just as damaging to your credit. Debt settlement occurs when you involve a 3rd party to negotiate your accounts for you. When you cannot make your payments, they ask the creditor to settle for a lesser amount. However, they can’t do this until you have saved enough money in an escrow account, which they set up. Once you have enough saved up, they ask the creditor to accept the amount as a settlement. If they do not accept it, you could face serious consequences.
The Consequences of Defaulting on a VA Loan
The VA guarantees your VA loan. This means they will protect the lender if you default on your loan. Not only will you lose your house, though. You will face other consequences since it is a government program. These consequences include:
- Collection attempts by the VA
- Excessive fees as are a result of the collections
- Wage garnishments
- Decreased credit score
- Prevention of using VA benefits again
- Prevention of using any federal program again
Act Fast to Prevent Issues
The best thing you can do is act fast when you are in over your head in debt. Do not wait until you can’t afford everything. This only puts you in a position you may not be able to get out of. Instead, talk to your lender or shop for a new one. You only need a VA approved lender – it does not have to be your current lender. Find out how much you may qualify to borrow. Remember, the VA does not care about debt ratios. They only care about disposable income. If you can prove you can afford the new, higher loan amount and have the same disposable income, you may get the loan. Acting before you start defaulting on your loans can protect your credit score and your finances, though.
The VA military debt consolidation program is a great benefit for borrowers in debt. No one likes to admit they are in over their head, but it happens to the best of us. Instead of facing default, figure out how to pick up the pieces. The VA provides a great benefit that helps you save money and save your credit score. Defaulting on your debts only makes matters worse. Consult with a VA lender and see where you stand. The closing costs are usually fairly affordable on these loans. In addition, the VA allows you to get help with those costs to make the loan even more affordable.
In the end, the MDCL is a great way to get back on your feet. Use it as a blank slate and start fresh. Try not to rack up the debt again and consider it a second chance at your financial life.