Why VA Loans Lead in Foreclosure Avoidance

Why VA Loans Lead in Foreclosure Avoidance

04/25/2013 BY: GUEST CONTRIBUTOR: CHRIS BIRK

A no-down payment loan program has quietly become the mortgage industry leader when it comes for foreclosure avoidance.

For most of the last five years VA loans have maintained the lowest foreclosure rate of any major loan product, besting even prime loans. In the same span, the VA has helped nearly 300,000 military homeowners avoid foreclosure, mostly through supplemental servicing and encouraging lenders to explore viable alternatives.

VA loans closed Q4 2012 with a foreclosure inventory rate of 2.08 percent, just ahead of prime loans (2.10 percent) and well ahead of FHA loans (3.85 percent) and prime ARMs (6.68 percent). In addition, the program recently saw its streak of 14 consecutive quarters with the lowest delinquency rate come to a close.

The relative safety of the program is all the more compelling given that 9 in 10 borrowers put no money down on a VA purchase.

There are a couple key reasons why VA loans have emerged as a safe haven for homeowners in jeopardy:

Avoidance a priority

The Loan Guaranty Program employs about 300 people who focus on veteran borrowers in default. These foreclosure specialists are in constant contact with financial institutions nationwide and keep tabs on every VA homeowner on the edge of default. They often wind up acting as intermediaries between the veterans and servicers and help push for options such as repayment plans, forbearance and loan modifications.

Residual income standard

This is a unique VA underwriting requirement. Borrowers must meet a monthly benchmark for residual income that varies by geography and family size. For example, a family of four purchasing in the Midwest must have at least $1,003 left over each month after making major installment payments like a mortgage or student loans. The minimums are higher on the coasts. This type of standard can help identify veterans who might present significant lending risks.

Even veterans with non-VA loans can at least receive guidance from the department’s foreclosure prevention specialists. But the VA has no legal standing to intervene in these cases. In either case, it’s imperative that service members in jeopardy contact their servicer immediately.

Active duty service members also have foreclosure protections as part of the Service members Civil Relief Act (SCRA), which insulates active military from certain financial and civil obligations. The SCRA may also provide qualified homeowners with a lower interest rate or an interest rate cap and forbearance.

Chris Birk is a former journalist and the author of “The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.” He is also content development director for Veterans United Home Loans. Connect with Chris on Google+.

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