When a servicemember seeks VA financing one of the first questions we ask is whether they’ve had a prior VA loan. The answer to this question may significantly impact the servicemember’s ability to obtain subsequent VA financing. It all boils down to the way the prior VA loan was paid-off, transferred, settled, assumed or foreclosed.
Let’s take a look at some of the ways a prior VA loan may have been terminated and how the termination method might affect the servicemember today.
The Home Was Sold
If the home securing the previous VA loan was sold, the previous VA loan should have been paid-off at closing. Sometimes when applying for a subsequent VA loan, VA’s records may not reflect that the prior loan was paid-off, notwithstanding the sale. If that’s the case, VA will usually ask for a copy of the Final Settlement Statement (also known as a HUD-1 or Closing Disclosure). The Settlement Statement contains information VA may to confirm the prior VA loan was paid-off (e.g., property address, name of the VA lien holder, amount paid to the VA lien holder, date, etc.). Once this information is received, typically VA can restore eligibility and guarantee another VA loan for the servicemember.
The Home Was Short Sold
In a short sale the bank agrees to accept a payoff that’s less than the amount owed. For example let’s assume that in 2006 the servicemember bought a $225,000 home using their VA benefit. When the real estate market crashed in 2008 the value of the home dropped to $160,000, but $209,000 was owed. Soon thereafter the servicemember received orders to relocate and listed the home for sale. To complete the sale our servicemember asked their VA lender to accept a lower payoff based on the current market value. The goal at that point was to sell the home within 90 days and move on to the next duty station. With VA’s concurrence, the lender agreed to accept a payoff of $148,500 ($160,000 less the costs to sell the home).
In 2015 the service member applied to buy another home using their VA eligibility. When the lender received the VA Certificate of Eligibility the Certificate states that VA suffered a loss when the previous home was sold. At that point circumstances related to the disposition of the previous home clearly affected the servicemember’s ability to obtain another VA loan.
But all is not loss. There are a few things that can be done. We’d start by determining the amount of the loss. The servicemember would have the option of paying VA the amount that was loss, and VA would fully restore the borrower’s eligibility. Secondly we’d consider the amount, if any, of the borrower’s remaining eligibility. In the example above the servicemember used $225,000 of their eligibility to purchase the home. Since maximum VA loan limits are determined by the servicemember’s county of residence, we’d have to know the property’s location to calculate the remaining eligibility. For example, the maximum VA loan limit in Sacramento County is $488,750. Assuming the home was in Sacramento, and VA took a full loss on the previous short sale, the servicemember would have $263,750 of remaining eligibility to purchase another home ($488,750 – $225,000 = $263,750). There are other solutions available under this scenario. To discuss additional options, we encourage you to call for a free no obligation consultation.
The Home Was Foreclosed
A foreclosure occurs when the servicemember defaults on the payment and the lender takes possession or forces a sale of the home. During the foreclosure process the servicemember forfeits all rights to the property.
The ramifications of a foreclosure to the servicemember are similar to those discussed in the short sale scenario described above. There are a few notable differences: With a short sale the lender takes a reduced payoff, but allows the servicemember the dignity of selling the home and maintaining possession until the sale is complete. The foreclosure is facilitated by the force of law. Moreover, the resulting entries on the servicemember’s credit report will differ. Lastly, subsequent notations on the servicemember’s Certificate of Eligibility will reflect that a previous VA loan was foreclosed, the amount of the loss VA suffered, and the amount of remaining eligibility, if any. Sidwell’s response to a prior foreclosure is the same as described in the short sale scenario. In sum, we’ll advocate for the servicemember and find a path forward to secure financing for their next home purchase.
When The Servicemember Signs A Deed In Lieu Of Foreclosure
A deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) avoids foreclosure proceedings by conveying all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that’s in default.
When a prior VA loan is terminated by the Servicemember signing a deed in lieu of foreclosure, for purposes of determining subsequent VA eligibility, it’s treated the same as a foreclosure. As such, subsequent notations on the servicemember’s Certificate of Eligibility will reflect that a previous VA loan was foreclosed, the amount of the loss VA suffered, and the amount of remaining eligibility, if any. Sidwell’s response to a prior Deed In Lieu of Foreclosure is the same as described in the short sale and foreclosure scenarios above. In sum, we’ll advocate for the servicemember and find a path forward to secure financing for their next home purchase.
When The Home Is Refinanced
If the prior VA loan was repaid by refinancing into a non-VA product (typically Conventional or FHA) the debt to VA has been fully satisfied. However, eligibility is not restored unless the loan is repaid AND the home is sold.
Here’s why: VA loans are made to servicemembers who intend to occupy the residence as their primary home. If VA permits servicemembers to buy homes using their VA eligibility, occupy for a while and refinance into a non-VA product, the servicemember could use their eligibility to buy a series of investment properties with no down payment. Again, VA does not permit this. (It should be noted there is a one time exception to the must-sell requirement. This exception allows servicemembers to keep the first home and obtain a VA loan for another home. Borrowers who choose to utilize the “one-time restoration” allowance will have to dispose of all property in the future if they again seek restoration of entitlement).
When The Prior VA Loan Is Assumed
A VA loan is assumed when the terms and balance of the loan are transferred from the servicemember to another qualified borrower in accordance with the VA lender’s guidelines.
At one time all VA loans were assumable without the new owner having to qualify. Rules have changed, and today before a VA loan can be assumed, VA or the lender/servicer representing VA has to approve the buyer beforehand. Approval of an assumption request is not guaranteed; it’s left solely to VA or the VA lender/servicer. (There is one exception to the requirement for prior approval: VA loans that closed before March 1, 1988. On loans closing before March 1, 1998, the VA loan assumption is unrestricted and requires no approval form VA or VA’s lender/servicer).
When the servicemember’s obligation on a prior VA loan is assumed by a non-veteran, the servicemember’s entitlement is tied to the property for the life of the loan. As such, the servicemember’s future eligibility will be offset by the prior VA loan that was assumed by the non-veteran. This will not prohibit the servicemember from purchasing another home with their remaining VA eligibility.
If the prior VA loan was assumed by another veteran, VA substitutes the eligibility of the assuming veteran for that of the selling veteran and releases the selling veteran’s full eligibility. On a qualifying assumption, the party assuming the VA loan must meet all VA/lender requirements including income, credit, debt ratios, employment, etc.
Lastly, there are other scenarios in which a prior VA loan can impact the servicemember’s ability to secure subsequent VA financing. For example, a divorce decree that grants ownership of the home securing the VA loan to the veteran’s spouse, or the inclusion of the prior VA mortgage in a bankruptcy. These and other similar obstacles aren’t conducive to an individual blog post – the variables are legion. Please call us for an individual consultation. We’re your advocate and our goal is to secure VA financing for each servicemember. Call today and tell us your story. In 23 years Sidwell has heard it all. Odds are your circumstance is not unique. The number is 1.844.SID.WELL (844.743.9355) or if you’d prefer submit a question or leave an inquiry on our site.
Until the next post … may health and happiness abound.