The purpose of VA loans is not only to minimize financial losses among veteran borrowers and other eligible individuals, but also to prevent foreclosures. This is why U.S. participating VA lenders are required to provide options other than foreclosure when borrowers seem to be on the brink of defaulting on a mortgage.
What Causes Negative Credit Equity?
A mortgage default, or default in finance, is the failure to meet the legal conditions of a loan. For VA loan borrowers, these can occur in several situations:
- Negative Borrower Equity – This is a condition when the current loan balance is greater than the present value of the mortgaged house or property. A decline in home prices in a particular geography can cause this condition.
- Original Loan to Value – A decline in house values will also likely result in negative equity, especially with loans with a higher original LTV.
- The age of the mortgage – This can affect the existing loan balance due to the amortization of the loan principal.
Aside from these, Venturebankonline.com says loans for veterans in Eagan can be affected by adverse conditions like the loss of a job, or sudden illness.
Alternative to Foreclosure
With these tendencies for troubled loans, a policy is in place for borrowers to have better options than foreclosure. One is refunding, wherein the VA loan may purchase the defaulted loan for reamortization.
Another is forbearance, where a borrower gets a grace period to settle missed dues. Borrowers waiting for a tax refund are usually given this type of delinquency assistance.
Repayment plan, loan modification, and short sales are also alternative options for troubled loans. The first allows borrowers to repay part of their dues, along with regular installment each month. The second renews the loan and adds the delinquency balance to the loan, whereas the third allows the borrower to sell the home at a lower price than its current value.
Lenders with VA loans have the responsibility to provide better options for borrowers with delinquent loans. It doesn’t matter if you live in Eagan or other U.S. cities, because it’s a general policy for lenders servicing veterans.