Tips & Special Topics
VA Loan Guaranty Program Helps with Loan Modification
Added July 30, 2009
For VA home loan borrowers facing tough economic times, a loan modification can be just the thing to get them back on track. Though the VA doesn’t make the actual home loans, it does have many programs that can help veterans and active military personnel who own homes keep their homes when experiencing financial distress. Loan modification is one of those services provided by the VA.
Mortgage modification is a process where the terms of a mortgage are modified from the original contract. Typically, a loan can be modified in the following ways:
• Interest rate reduction
• Change from adjustable to fixed interest rate
• Reduction of principal
• Reduction in late fees or other penalties
• Lengthening the duration of the loan
• Capping the monthly payment to a percentage of the household income
Usually one or a combination of these loan modifications will result in a lower monthly payment and provide some relief for a veteran experiencing financial distress.
In order to qualify for a VA mortgage modification, a borrower must meet certain standards. The VA has established specific requirements that must be considered by lenders before modifying a loan. According to the Department of Veterans Affairs, the following conditions must all be met:
• loan is in default
• event or circumstance that caused the default has been or will be resolved and is not expected to reoccur
• lender has determined that the borrower is a reasonable credit risk based on review of the borrower’s credit report and financial information
• borrower has made at least 12 monthly payments since the closing date of the original loan
• all current owners are obligated to repay the loan and are party to the loan modification agreement
• loan will be restored to performing status by virtue of the loan modification
• loan has not been modified more than once within a three-year period and no more than three times within the life of the loan
Borrowers meeting all the above criteria may have their loans modified without VA approval. If all the criteria are not met, then a borrower will need to contact the VA for approval to modify a loan. Of course, there will be unusual cases that are not as black and white as the stated general criteria. These circumstances must be reviewed and concurred by the VA in order to modify a loan.
In all cases, a modified loan must have a fixed interest rate. The rate may be higher or lower than that of the defaulted loan. The interest rate may not exceed the Ginnie Mae rate plus one-half percent. Lenders must use the rate from the last business day of the month prior to the date the loan modification was approved.
In addition to mortgage specialists employed by VA-approved lenders, veterans have free mortgage counseling available to them when they need it. The VA outreach counselors are available in nine regional loan centers to discuss mortgage issues with homeowners experiencing difficulties paying their mortgages. Counselors can help determine whether loan modification is possible. To find out more about the VA Outreach Program contact the Regional Loan Center nearest you.
