VA Loan Modification

By Steven Roberts Updated on 8/1/2017

 For veterans who have purchased a home with a VA loan, the VA offers loan modification as an option. It allows borrowers to alter the terms of the loan to make the payments more affordable and to facilitate consistent monthly payments better.

While not always the optimal solution, a VA loan modification can be tremendously advantageous as a method of avoiding foreclosure.

Benefits of VA Loan Modification

VA Mortgage modification allows borrowers to alter the terms of the loan contract to better suit the borrower’s financial needs. Typically, this can be achieved in the following ways:

• Reduction of interest rate.
• Change from adjustable to fixed interest.
• Reduction of the principal balance.
• Lessening late fees or other penalties.
• Increasing the loan term.
• Resetting monthly payment amounts.

One or a combination of these modifications will result in reduced mortgage payments which will provide considerable aid to veterans undergoing financial difficulties.

VA Mortgage Modification Requirements

VA loan modification can only be done under certain conditions. Specifically, the Department of Veteran Affairs requires that the following conditions be satisfied:

• Loan is in default
• Circumstances which created the default have been resolved or are not expected to reoccur
• Lender has assessed that the borrower presents an acceptable credit risk after examining the borrower’s credit history and financial credentials
• Borrower has made at minimum 12 monthly payments since the original mortgage closing date
• All current mortgage owners must repay the loan and agree to the loan modification terms
• The VA loan will be restored to its working status once the loan modification takes effect
• Loan has not received any modifications more than once within a three-year span and no more than three modifications within the entire loan term

When to Modify a VA Loan

In general, borrowers should consider a VA loan modification after a temporary hardship. Since loan modifications do not provide ongoing relief but only a restructuring or alteration of the loan, borrowers who experience an ongoing financial hardship should not consider a loan modification, as this will only result in deepening their debt. 

For instance, if a veteran lost his or her job and could not make mortgage payments for several months, he or she should not consider loan modification an option since the issue was not resolved. However, if the veteran found a new job with the same annual income, a modified loan could be optimal in getting back on track.

When to Consider Alternatives

   As previously indicated, loan modification is not always the right choice; in fact, loan circumstances can be detrimental under the wrong conditions, with negative repercussions for both the borrower and the lender. Essentially, if the VA borrower cannot afford the loan modification payments, lenders should not modify the loan, as this violates VA regulations and harms the veteran. 

Borrowers should consider alternatives under the following circumstances:

• Debt ratio. Borrowers who have a large amount of debt in addition to the mortgage balance should consider their budget to assess whether or not they can afford the reduced mortgage payments.

• Oversized loan. Regardless of the loan program, borrowers should always be cautious of borrowing beyond their means to repay. For instance, if a VA home buyer borrows additional funds beyond the appraised value to cover closing costs, the mortgage balance will increase, and the veteran will only be in more debt.

• Interest rate. In some cases, bad credit borrowers secure a VA mortgage by accepting a noticeably higher interest rate to cover the risk of lending. With the majority of loan modifications increasing a mortgage’s interest rate, this could pose serious financial problems for borrowers who are already behind.

While foreclosure may not be ideal, borrowers should not attempt to stall a foreclosure if circumstances have not improved since the hardship. Needlessly modifying a VA mortgage to avoid the inevitable will only be more costly and more detrimental in the long run. 

Contact your lender and your VA Regional Loan Service Center for more information.