The VA's new mortgage relief plan
On December 10 tThe Department of Veterans Affairs proposed a new mortgage relief plan to help seasoned homeowners who are behind with loan payments.
The VA's new plan is aimed at VA borrowers who have had financial problems due to COVID-19. Your goal is to help them smoothly transition into regular mortgage payments out of indulgence.
To do this, the VA plans to cover missed payments on up to 60,000 VA mortgages that have been deferred due to COVID.
If this applies to you, here are some things you should know about the VA proposal.
Check out today's VA loan rates (December 15, 2020).
The VA plans to help homeowners with leniency
The VA's proposed mortgage relief plan is called the COVID-19 Veterans Assistance Partial Claim Payment Program.
If adopted, this plan will ease the repayment process for veterans and service members who have fallen into forbearance with loans.
VA Loan Forbearance
As a reminder, forbearance is when a homeowner agrees with their mortgage servicer to stop or reduce home loan payments due to hardship related to COVID-19.
Under the CARES Act, individuals on VA loans can apply for forbearance home loans through at least December 31st.
But forbearance doesn't prevent money from being owed. It only delays payments.
After the grace period has expired, the missed amount must still be repaid.
Forbearance loan repayment
With the need to make up for missed mortgage payments, borrowers who have taken the forbearance of VA loans face additional debt once they get back on their feet.
Missed payments during the forbearance can usually be repaid in a number of ways.
The homeowner may have higher indulgence mortgage payments until the missed amount is paid back. The missed amount can be added to the mortgage loan, extending the repayment period (with interest). The borrower can defer repayment until the loan is repaid, or the house is sold or refinanced
Many homeowners will not be able to repay additional debt on top of their regular mortgage payments when the forbearance ends.
This is where VA support comes in.
The VA aims to provide a very affordable way for homeowners to get their mortgage payments back on track after COVID.
How veteran mortgage relief would work
The idea is that the VA debt incurred on VA loans will be repaid by December 31st during Forbearance.
However, the money offered by the VA is not a gift or grant.
Homeowners will still owe the money. But they will repay the VA instead of the mortgage lender. And the VA plans to offer very lenient terms on repayment.
Homeowners would have up to 60 days to defer paying the VAT. The debt could be repaid over a period of up to 10 years. The interest rate on VA debt would be set at 1%
Thanks to the VA's low interest rate offering, this would be a cheaper way to repay mortgage debt than repaying it to a lender at standard mortgage rates.
Homeowners would also have the option to defer their debt to the VA for up to 5 years – which means they don't have to start making payments.
However, be aware that if you defer repaying once you start paying, your payments will be higher because the VA loan will accrue interest during that time.
Loan relief in the form of a second mortgage
Under this plan, the new loan would be in the form of a second mortgage. In other words, it would be a secured loan with your home as collateral.
However, don't think of that particular second mortgage as a way of accessing cash. Because it's not a traditional home equity loan or a home equity line of credit (HELOC).
Most of what you can borrow is the amount you owe due to forbearance. And that goes straight to your mortgage account.
Should a borrower seriously default on their repayment to the VA, they could risk foreclosure.
However, the VA says, "One of the primary goals of the VA Loan Guarantee Service is to help veterans who are using their guaranteed loan services keep their homes and avoid foreclosure."
In many cases, the VA will do everything possible to help borrowers make payments and stay in their homes.
Who could be eligible for assistance?
According to the VA proposal, the new program is seen as a last resort. So if you already have any assistance options available, you may need to use them.
However, if you owe money for indulgence, and you and your mortgage servicer believe that the VA proposal is the best way to go, you are likely to be able, given certain conditions.
These conditions include:
You skipped at least one monthly payment due to an agreed CARES Act Forbearance Plan, and you still have at least one payment behind you. You will have sufficient income to make payments on your first and second mortgage after the forbearance. You have a decent debt / income ratio – you have enough income to cover your mortgages and make payments on your other debts. You must live in the house on which the mortgage is secured (unless you are a recognized exception, such as someone on active duty). There can only be one claim per Eligible Borrower, the amount that can be borrowed under the proposal is capped at 15% of the balance of your main VA loan
Additionally, prior to the COVID pandemic, you must have had a good reputation with your VA loan.
Borrowers must be less than 30 days late (preferably on time) with their mortgage payments by March 1, 2020.
These conditions should be low bars for most applicants.
How to apply for the new VA mortgage relief plan
Remember that the VA's new relief plan is not yet available. It is still in the proposal phase. However, keep an eye on the VA to see when it will be handed over.
Once it becomes available, seasoned homeowners apply for VA loan relief through their mortgage service providers. The servicer should set everything up.
Unlike a new mortgage or refinancing, there is no point looking for the best deal. This 1% interest rate is set by the VA and cannot be changed.
The documentation process should be simpler than it would be if you received your existing VA loan. However, you will need to provide documents showing that you meet the loan conditions (see below). And there will be some signatures.
After you are approved and the new loan is in place, simply pay your mortgage company for your first and second mortgages each month. The servicer would collect payments and distribute them to the VA.
What If You Still Need Forbearance?
When legislators passed the CARES bill in March, most assumed that the pandemic would actually be over by December 31, 2020.
But at the time this was written (mid-December) it was worse than ever.
Some borrowers will begin to need forbearance right now. And others will only partially make it.
Mortgage servants are still very likely to give VA Loan Forbearance after December 31st.
Forbearance obligations after this date are not covered by the VA's current discharge proposal. So work with your servicer to come up with a realistic repayment plan.
Still, there's a real chance the VA will later update its guidelines to help those who acquire forbearance debt in 2021.
When does the VA's new plan begin?
There is no official start date for the VA's new mortgage relief program yet.
At the time of writing, this is just a proposal that has yet to be approved.
The VA asked interested parties for comments by January 8th. She is currently proposing a deadline for new applications in September
Assuming the program is approved, look out for an announcement that it will start in January.
Check your new plan (December 15, 2020)