If you have a VA mortgage and you are finding yourself struggling, you may think about walking away from the home. After all, you didn’t put any of your own money into the home since it didn’t require a down payment, so you probably don’t have a lot of money invested in the home.
We are here to tell you though that there are consequences that you will face for walking away from your VA loan.
You’ll Damage Your Credit
This probably goes without saying, but it’s worth mentioning. A foreclosure can hurt your credit score pretty badly. You can expect to lose an average of 150 points on your credit score. That’s huge, especially if you didn’t have the ‘best’ credit score to start. It can take a long time to recover from such a hit on your credit score.
You’ll Have to Wait 2 Years
Since you lost your home, chances are you aren’t going to be in the market for another one anytime soon. You have to be able to pick up the pieces and improve your credit score again. You’ll also need to save money for a down payment, but we’ll discuss that in more detail below.
If you want to use your VA benefit on another home, you will have to wait at least 2 years. That’s the first point that the VA will allow lenders to consider you for a mortgage. But, that doesn’t mean you can get a mortgage after exactly 2 years. It will depend on how well you recovered. Did you save money? Did you improve your credit score? These things will matter when the lender tries to approve you for the new loan.
You Will Lose Some or All of Your Entitlement
This is where things may get tricky. When you took out your original VA loan, you used your entitlement. Each veteran is eligible for entitlement of up to $113,275. This means the VA will guarantee up to $113,275 with a VA lender. Because the VA guarantees 25% of the loan amount, this means you can get a loan of up to $453,100.
If you foreclose on your home, you will lose the portion of the entitlement that you used on the home. If you used it all, you have no entitlement left and won’t be eligible for a VA loan even after the 2-year waiting period.
If you didn’t use all of your entitlement, you may be able to use the entitlement that remains to buy another home. This is assuming that you will qualify for the loan, which means improved credit and an allowable debt ratio.
Here’s how it would work. Let’s say you bought a home for $250,000 originally. You then lost that home in foreclosure. You then lost your entitlement to that $250,000. You still have $253,100 left untouched that you can use in the future when you qualify for a VA loan again. If you find a home for $253,100 or less, you can get the home with no down payment again. If you default on this loan, though, your VA benefits will be gone and you will be unable to get a VA loan in the future.
If you find a home that is more than $253,100, you will have to make a down payment on the home. The down payment will be worth 25% of the difference between your entitlement and the purchase price of the home. Let’s say you found a home for $275,000. You would have to pay 25% of $21,900 or $5,475 in order to secure VA financing.
You’ll Face Lender Overlays
Keep in mind, the above guidelines are the VA’s guidelines. VA approved lenders can also add their own requirements to the loan. Some lenders aren’t comfortable lending money to veterans that already defaulted on their loans. Others may be willing to do so but will have extra requirements to ensure that you do not default again.
The bottom line is if you have to face foreclosure, you’ll have an uphill battle against you as you try to buy a home again. You may have entitlement if you didn’t use it all. If you don’t, you will have to use a different loan program that will likely require a down payment, good credit, and a decent debt ratio in order for you to qualify.