VA loan homeowners affected by COVID-19 now have mortgage relief options including payment reductions of 20% or more.
Following an announcement from the White House, the United States Department of Veterans Affairs (VA) released its COVID-19 Home Retention Waterfall which includes term extension, payment reduction, and refund modification for borrowers struggling to keep up with mortgage payments.
The VA plan is part of a wave of new mortgage relief options for government-backed mortgages introduced before the national foreclosure moratorium lifted on July 31.
The VA COVID-19 Home Retention Waterfall is an expanded hierarchy of mortgage relief options to help borrowers affected by COVID-19 stay in their homes.
The expanded COVID-19 options are available to homeowners that occupy their home as a primary residence, were no less than 120 days past due as of March 1, 2020, and missed at least one payment covered by COVID-19 forbearance.
If all of these conditions are met, the waterfall begins at one of three starting points:
Starting Point I is for borrowers that can resume their monthly mortgage payments and catch up on payments missed during forbearance through a repayment plan. If a repayment plan can’t be agreed upon, the borrower drops into Starting Point II.
Starting Point II is for borrowers that can resume monthly mortgage payments, but cannot catch up on payments missed during forbearance. From this starting point, borrowers have the following options:
- VA Disaster Extend Modification – extends the life of the original loan by up to 18 months
- Loan deferment – delays payments until the end of the original loan term
- VA Partial Claim Program (VAPCP) – the VA purchases missed payments (up to 30% of unpaid principal balance) and creates an interest-free second loan to be repaid when the home is sold or refinanced
Starting Point III is for borrowers that cannot resume monthly mortgage payments or missed payments. From here, mortgage lenders evaluate the loan for existing modification options and the new COVID-19 Refund Modification measure.
The COVID-19 Refund Modification plan is similar to the VAPCP in that the VA purchases missed payments (arrearages) up to 30% of the unpaid principal balance on the loan.
However, unlike the VAPCP, the COVID-19 Refund Modification also allows mortgage lenders to modify the original loan by extending the terms and applying a new interest rate.
This plan allows the VA to purchase arrearages and part of the principal balance to reduce monthly principal and interest payments by up to 25%.
If the borrower can’t afford payments, even after a 25% reduction, the lender conducts a financial evaluation to calculate a total monthly payment of 31% of the borrower’s gross monthly household income. If this payment can be reached without the VA buying more than 30% of the unpaid principal balance, it becomes the new payment amount on the modified loan.
The modified loans include a new fixed interest rate based on the current Freddie Mac Primary Mortgage Market Survey Rate. The new loan terms are either 360 months (30 years) from the first payment on the modified loan or a 120 month (10 year) extension on the original loan term.
With the addition of the COVID-19 Refund Modification, VA loan homeowners now have expanded options for mortgage relief. This update provides several new paths to sustainable homeownership and could prevent unnecessary foreclosures.