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The VA’s new mortgage relief plan

On December 10, the Department of Veterans Affairs proposed a new mortgage relief plan to help veteran homeowners who are behind on loan payments.

The VA’s new plan is targeted at VA loan holders who have struggled financially due to COVID-19. Its goal is to help them transition smoothly out of forbearance and back into regular mortgage payments.

To achieve this, the VA plans to cover missed payments on up to 60,000 VA mortgages that were put on hold due to COVID.

If that applies to you, here’s what you should know about the VA’s proposal.

Check today's VA loan rates (Dec 15th, 2020)

The VA plans to help homeowners in forbearance

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 gone into loan forbearance.

VA loan forbearance

As a reminder, forbearance is when a homeowner agrees with their mortgage servicer to stop making home loan payments — or reduce them — as a result of COVID-19-related hardship.

Under the CARES Act, those with VA loans are able to request home loan forbearance until at least December 31.

But forbearance doesn’t stop money from being owed. It just delays payments.

When the forbearance period ends, the missed amount still has to be repaid.

Loan repayment after forbearance

Since the missed mortgage payments have to be made up, borrowers who have taken advantage of VA loan forbearance will face extra debt once they’re back on their feet.

Missed payments during forbearance can typically be repaid in a variety of ways.

The homeowner might have higher mortgage payments after forbearance until the missed sum is repaid
The missed amount might be added onto the mortgage loan, extending the repayment term (with interest)
The borrower might opt to ‘defer’ repayment until the loan is paid off, or the home is sold or refinanced

Many homeowners will not be in a position to repay additional debt, on top of regular mortgage payments, when forbearance ends.

That’s where VA assistance comes in.

The VA wants to provide homeowners with a highly affordable way to get back on track with their mortgage payments after COVID.

How veteran mortgage relief would work

The idea is that the VA will repay debt accrued on VA loans while in forbearance, through the December 31 deadline.

But the money offered by the VA is not a gift or grant.

Homeowners will still owe the money. But they’ll repay the VA instead of the mortgage lender. And the VA plans to offer very lenient terms for repayment.

Homeowners would have up to 60 days to defer repayment to the VA
The debt could be repaid over a period of up to 10 years
Interest rates on VA debt would be fixed at 1%

Thanks to the VA’s low-interest-rate offer, this would be a more affordable way to repay mortgage debt than paying it back to a lender at standard mortgage rates.

Homeowners would also have the option to defer their debt to the VA — meaning they don’t have to start making payments — for up to 5 years.

But be aware that if you choose to defer repayment, your payments will be higher once you start paying because the loan from the VA 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 acting as collateral.

But don’t think of this particular second mortgage as a way to access cash. Because it’s not a traditional home equity loan or home equity line of credit (HELOC).

The most you can borrow is the sum that you owe as a result of forbearance. And that will go straight into your mortgage account.

If a borrower were to fall seriously behind on their repayment to the VA, they could risk foreclosure.

However, the VA says, “One of the primary goals of VA’s Home Loan Guaranty Service is to help veterans who use their guaranteed loan benefit retain their homes and avoid foreclosure.”

In many cases, the VA will do all it can to help borrowers make payments and stay in their homes.

Who might be eligible for assistance?

Under the VA proposal, the new program is seen as a last resort. So, if there are existing assistance options open to you, you may have to take them.

But, if you owe money due to forbearance, and you and your mortgage servicer agree the VA’s proposal is the best way forward, you’re likely to be in — subject to a few conditions.

These conditions include:

You skipped at least one monthly payment as a result of an agreed CARES Act forbearance plan, and you’re still be at least one payment behind
You have sufficient income to make payments on your first and second mortgages post-forbearance
You have an adequate debt-to-income ratio — you have enough income to cover the mortgages plus make payments on your other debts
You must occupy the home on which the mortgage is secured (Unless you’re a recognized exception, such as someone on active service)
There can be only one claim per eligible borrower
The amount that can be borrowed under the proposal is capped at 15% of the balance remaining on your main VA loan

In addition, you must have been in good standing with your VA loan prior to the COVID pandemic.

Borrowers must have been less than 30 days late (preferably on time) with their mortgage payments as of March 1, 2020.

These conditions should all be low bars for most applicants.

How to apply for the new VA mortgage relief plan

Remember, the VA’s new relief plan is not available yet. It’s still in the proposal stage. But keep an eye on the VA to see when it will be passed.

Once it’s available, veteran homeowners will apply for VA loan relief through their mortgage servicers. The servicer should get everything set up.

Unlike with a new mortgage or refinance, there’s no point in shopping around for the best deal. That 1% interest rate is set by the VA and is invariable.

The documentation process should be easier than when you got your existing VA loan. But you will have to provide documents to show you meet the loan’s conditions (see below). And there’ll be some signing to do.

After you’re approved and the new loan is in place, you simply pay your mortgage servicer each month for both your first and second mortgages. The servicer would collect and distribute payments to the VA.

What if you still need forbearance?

When legislators passed the CARES Act back in March, most assumed the pandemic would effectively be over by December 31, 2020.

But at the time this was written (in mid-December), it was worse than ever.

Some borrowers will just now be starting to need forbearance. And others will only be only partway through requiring it.

Mortgage servicers are still highly likely to provide VA loan forbearance after December 31.

But any forbearance obligations after that date won’t be covered by the VA’s current relief proposal. So work with your servicer to agree on a realistic repayment schedule.

Still, there’s a real chance the VA will later update its policies to help those who acquire forbearance debts in 2021.