Getting a VA Debt Consolidation Loan

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Claire Matthews

Financial Advisor, DCL

Getting a VA Debt Consolidation Loan

Military veterans who are struggling with debt may be looking for a debt consolidation loan backed by the Veterans Administration. There are significant benefits to obtaining a Military Debt Consolidation Loan, but it’s important to understand how they work to determine if this type of loan is right for you.

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What Is A Debt Consolidation Loan?

If you owe a number of different creditors and/or have outstanding loans with high interest rates, a debt consolidation loan allows you to pay off all of what you owe to your current lenders. Then, you’re only obligated to pay back one creditor, which is the bank or institution that provided your consolidation loan.

This allows you to only worry about one monthly payment instead of several, which can help you avoid late fees if you occasionally forget to pay one of your creditors. Additionally, debt consolidation loans may allow you to take advantage of a lower interest rate. Over time, interest on debts owed can add hundreds or thousands of dollars to what you have to pay, so a loan with a low interest rate can help you reduce the time and money it takes to eliminate your debt.

How Do Military Debt Consolidation Loans Work?

Getting a VA Debt Consolidation Loan

The first thing that you should note is that MDCLs are backed by the government, but they are not provided by the Veterans Administration. The VA puts limits on lenders, such as caps on closing costs, interest rates and fees, but you’ll still be obtaining your loan from a standard financial institution.

Along with the fact that loans are only backed by the government, you should also be aware that MDCLs are home equity loans, so they are secured loans. Unsecured loans do not require that you put down collateral, and credit cards are an example of unsecured loans. The downside of a secured loan is that if you’re not able to pay it back, whatever you’ve put down as collateral may be taken by the bank. In this case, it would be your home.

By taking out a home equity loan, you are borrowing against the value you have built up in your home. If you do not own a home or have a lot of equity in it, this type of loan is probably not going to be available to you.

When Do You Need a Military Debt Consolidation Loan?

Members of the military are just like everybody else, they encounter financial difficulties too. Financial emergencies can be difficult to overcome without assistance, especially if there’s already a Veterans Affair’s loan that you’re already paying for.

Getting a VA loan means you can also get a MDCL, which is also called a VA consolidation loan. It is basically the same as other debt consolidation loans. Credit card bills, payday loans and other forms of unsecured debt are all paid off in a single payment. This makes it easier and more practical – you pay only one creditor and only bear one interest for the amount you are paying.

Essentially, MDCLs are also cash out loans because borrowers are able to refinance existing loans for a higher amount than what you actually owe. The closing costs get deducted from the final amount that the borrower will receive. To illustrate, a $100,000 MDCL gives you $80,000 to pay off your home loan and $20,000 minus the amount for the closing costs, will be left for you to pay other debts you may have.

The Veterans Affairs serves as the guarantor for the refinanced loan. However, take note that the amount borrowed cannot exceed how much your home is valued at. What makes an MDCL better than a typical debt consolidation loan is that there’s a lower interest rate and closing costs. It would cost you more if you were a civilian trying to pay the bill using your credit card.  The beauty of refinancing loans like this is the loan can be extended over 10, 15, or even 30 years. This offers the borrower a wide array of repayment choices, depending on the lending company you choose.

Are There Any Disadvantages?

Even military debt consolidation loans have their disadvantages. One of the downsides of an MDCL is that the borrower loses the equity on his home because he is taking on another loan.  It would be good to ask questions which are relevant to the loan. For example, if there will be closing costs and if there will be pre-payment penalties.

Additionally, before a debt consolidation loan is given, the borrower must first meet specific qualifications. This ensures the lenders that the person can really repay the loan. Among the factors that they consider are the borrower’s income and his credit score. Another important thing that a borrower must remember is that this kind of loan turns credit card debts and payday loans, which were formerly unsecured debts, into secured ones. The home or condo becomes the collateral against the loan and the lender has the right to take this from him in the event that he defaults on his scheduled repayments.

Some Other Avenues for Help

Military members should get all the help they need when they fall short of cash. Apart from a VA debt consolidation loan, there are several options to explore. In case of credit card debt, there are credit card companies which offer credit card balance transfers from another card. What’s interesting about them is that some banks offer zero interest for as long as 18 months. What the card owner needs to pay for is the transfer fee, which can run anywhere from 3 to 5%.  If the borrower is able to repay the money in 18 months, this will still be considerably cheaper than paying for extra interest.

Some people choose to go into a debt management program wherein borrowers who qualify can negotiate for reduced interest rates and monthly payments. Those who can get into this program may not need to take out another loan and there’s also no need to put their homes down as collateral.

There’s also such a thing as a special forbearance wherein the bank temporarily suspends payments on a borrower’s mortgage so he can prevent foreclosure. Lenders often allow this for military personnel who are expecting to receive a large amount within a short period of time. Examples of this are money from tax returns, cash awards, or increased pay for being on combat duty.

If you’re really not so far behind on your payments, you can also try to negotiate with your bank or creditors and come up with a repayment plan.  The new scheme will slightly increase the amount of your remaining payments so you can catch up on the payments you have missed. This will get you back on track on your payment schedule and will keep you from defaulting on your loan.

Another option, albeit on the extreme side, is the short sale where the lender sells the home so the borrower can pay off the loan.  The VA extends some form of assistance to the lender in these cases. Similarly, the borrower can also execute a Deed in Lieu of Foreclosure wherein the turns over the property to the lender without the home actually getting foreclosed.

The last two are examples of extreme solutions in case the borrower is unable to secure a debt consolidation loan. However, it is highly encouraged that they take advantage of a VA military debt consolidation to get themselves out of their financial problems.

The Advantages of a VA Military Debt Consolidation

Being a veteran or an active service member offers some advantages if you’re seriously considering a debt consolidation loan. There are qualifying standards for an MDCL loan, and they are easier and less rigorous compared to traditional consolidation loans.  Among them are: longer repayment terms, zero monthly mortgage insurance premiums as well as no prepayment penalties, high loan-to-value ratio – sometimes up to 100%.

Closing costs, however, should always be considered. This cost adds a significant difference to the total amount that a borrower should repay. Banks and other creditors who deal with VA loans have a cap on how much closing fees they can impose.

Things to Remember

Experts suggest taking a look at origination fee costs as well as the VA funding fee before signing a VA loan.

The VA typically covers 25% of the home’s purchase price to the lender in the event that the borrower defaults on the money he borrowed. This is called the VA Loan Entitlement. Let’s say the serviceman or veteran spends $100,000 for his home and defaults on the loan, the VA will shoulder $25,000 to the lender or bank to cover the remaining balance of the borrower’s loan.

The money used for this comes from the VA funding fee, which is charged to every loan or refinancing loan. The rates start at 1.25% and can reach as high as 3.3% depending on the circumstances. The rates are lower if, for example, the borrower makes a down payment. It can go higher if the borrower has an existing VA loan.

The regular military enjoys slightly lower VA funding fees compared to those who are in the reserve forces. Military men who have sustained injuries while in active duty are often exempted from paying these fees.

Origination fees on the other hand, are charged by the lender to cover the expenses incurred while processing the loan.  The authorities have set a limit for this kind of fees to no more than 1% and must be paid separately from the loan.

In short, this is an out-of-pocket expense that borrowers must be ready to pay for when they apply for a VA loan. Take note too that once the lender has already charged you for origination fees, you should no longer be billed for other processing fees such as underwriting fees, escrow, mortgage broker’s fees and more.

Taking the Next Steps

Debt settlement can be done by ordinary individuals since no special skillset is required. However, a lot of people have chosen to go through the process with an attorney. If you do decide to work with a lawyer, make sure that you’ve hired a reputable firm with the right skills and experience to help you. The settlement firm should be able to explain every step of the debt consolidation process to you, as well as help you renegotiate for lower interest rates.

Before you begin, you need to talk to the firm’s credit counsellor. He will ask you about your financial standing and credit history. From there, you will be advised to set aside a specific sum every month to ensure that you are able to make your repayments on schedule.  Once you’ve proven yourself capable of producing the money required for repayments, the firm will get in touch with your creditors and begin negotiations.

The banks or lenders often pay off the money owed in full and you will end up owing only them.

The process of debt consolidation differs only slightly for military people since they are backed up by the VA. This is part of the privileges they receive for having served their country.

Obtaining A Military Debt Consolidation Loan

To qualify for an MDCL, you have to meet a few basic criteria, and most are the same as for a standard loan. Qualifications include owning a home with equity in it, having the ability to repay the loan and meeting credit requirements. You will also need to provide a certificate of eligibility, which proves to a lender that you qualify for a VA-backed loan.

You can apply for an MDCL through any lender that participates in the VA program. The VA does not put a cap on loan amounts, so it’s up to the lender to determine the size of the loan they will provide. These loans do not generally require down payments, and there is usually not a requirement to pay a mortgage insurance premium. Closing costs may be reduced or even covered by the lender, but even if you are responsible for closing costs, the VA has capped what you’ll have to pay.

If you are interested in consolidating your debt, you may be able to obtain better loan terms by getting a VA backed MDCL. However, before applying, you should take into account that these are secured loans based on the equity in your home.

FAQ

Introduction to VA Loan and Consolidation

Have you taken out a VA loan or are considering a VA debt consolidation loan? This section provides information about the most common questions asked by those who take out this type of loan.

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How do I check my VA Debt?

To avoid overpaying your debt, always check your balance first. You can do so by getting in touch with the Debt Management Center at 800 827-0648. Ask for your balance before making your payment.

Do I owe the VA money?

If you are unsure if you owe the VA money, the best thing to do is contact them directly. For any outstanding debts, you can dial the Billing Call Center at (866) 400-1238.

What is VA debt relief?

This is a method of negotiating your existing debts in order to significantly reduce the total amount of debt you owe. You can use it for debts that you owe to the VA, which includes credit card debt or other privately-held loans.

What is VA Form 5655?

The VA Form 5655 is issued by the Department of Veterans Affairs in the US, which is also known as Financial Status Report. This form is requested to determine an individual’s eligibility to various benefits provided by the VA.

Can I use a VA loan to pay off debt?

Yes. Not only does it enable you to buy a home without down payment, you can also use it to pay off any existing loans.

Does the VA offer debt consolidation loans?

Yes, you can also get a debt consolidation loan through VA. It works the same way as other types of debt consolidation loans in the market, which rolls multiple debts into one account for easier payments.

How do I pay off my VA Debt?

If you want to pay off your VA debt balance in full, you must confirm the balance that you owe first. Call the Debt Management Center to confirm that amount before making your payment.

Can you default on a VA loan?

Yes, but your credit score will suffer significantly. This is true not just for VA loans but  any type of mortgage loan foreclosures.

How do I know if I qualify for a VA loan?

The following conditions should be met before you can qualify for a VA loan: you must have provided active service for 90 consecutive days during war time, or 180 days during peace time. You must also meet the credit score minimum imposed on VA loans, which is 620.

How to calculate debt to income ratio for VA loan?

Your debt-to-income ratio is a crucial number that is used to assess if you qualify for a VA loan. It refers to the percentage of your gross monthly income that is spent on debts. To qualify, you should have a debt-to-income ratio of no more than 41%.

Can the VA help with debt?

Yes. You can apply for a VA refinance to consolidate your existing debts. You can use the VA cash out to pay down on your debts.

Is the VA debt questionnaire form required?

No. The VA has made certain changes to this and the form is no longer required, although there are still some lenders who use it.

What is debt to income ratio for VA loan?

The debt-to-income ratio is used to determine your eligibility for a VA loan. The ideal percentage to qualify for this type of loan should not exceed 41%.

Does the VA loan use debt to income ratio?

Yes. This is one of the basic requirements for eligibility for a VA loan.

Does the VA offer personal debt consolidation loans?

Yes. Debt consolidation loans are available through VA for those who want an easier way to manage payments for their existing debts.

What happens when you had existing VA loan debt?

When you have an existing VA loan debt, you can take out another VA loan as long as you have not used up your loan entitlement. If the loan is paid, you can fully restore your VA loan entitlement when you need to use them.

What is a good debt to income ratio VA loan?

The general guideline is that your debt to income ratio should be 41% or better. This will enable you to get qualified for a VA loan.

VA Debt Consolidation Loan and Credit Score

Any type of VA loan will have a direct impact on credit score. Use this guide to stay informed on what you can do about your credit score, if you need to take out VA loan.

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Does debt relief ruin your credit?

Yes. All options available through a debt relief can significantly impact your credit score, especially if you choose to file for bankruptcy. The other option is debt settlement.

How can I get a VA loan with bad credit?

In most cases, you need a FICO score of at least 620 to qualify for a VA loan. But you can still get a loan even when you are below 620 in credit score.

Does VA debt affect credit score?

Getting a VA loan, just like any other type of loan, can affect your credit score. But its overall impact can also be determined based on how diligent you are in paying your loans and what you use the loan for.

Does VA have a debt to ratio guideline?

Yes. Currently, only those with a debt to income ratio of 41% or better are qualified to obtain a VA loan.

How likely is the VA to grant debt waiver?

The VA will grant debt waiver in order to negotiate a compromise on your debt. However, you will not be granted the debt waiver if there are financial mistakes or misrepresentation, or any attempt at fraud, on your end.

VA Debt Consolidation Loan Specifics

Do you have any questions about VA loans and debt consolidation loans from the Department of Veterans Affairs? In this section, you will find the information you need to know or the answers to questions that you might have.

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How do I pay my VA Debt Online?

Go to www.pay.gov and set up your own online account. Once your account is setup, go to Common Payments and you can enable direct deposit on your bank account or use your credit or debit card to make the payment online.

Can the VA take money from my bank account?

The federal government protects your VA wages and benefits from bank garnishment. But any amount that is excess of two months of VA deposits or any amount in your bank account would be fair to be garnished from your account.

Can I use my GI Bill to pay off debt?

No. The law does not allow the use of GI Bill benefits to be used to pay for any kind of debt.

How does the VA collect overpayment?

An overpayment means that the VA provided more money to veterans than they owe. If an overpayment is determined, debt is created as a form of overpayment. It can result in a deduction of the monthly benefits that you get until the debt is fully repaid.

What does VA indebtedness mean?

VA Indebtedness refers to the amount in dollars that include the principal, interest and other costs that had accumulated to date, as a result of the participation in the VA benefits program.

Can my VA check be garnished?

No. Your VA benefits are protected from being garnished but there are certain circumstances when this is allowed.

Can the VA help with bills?

Yes, but you must meet the basic eligibility requirements. If you meet the requirements, you are qualified to get assistance for your rental or utility bills. Call 800-482-2565 to request assistance.

How do I repay my VA overpayment?

To repay any overpayment made by the VA, it is mostly deducted from your VA account until you have repaid the amount that you owe (or any overpayment to your benefits).

What is a VA hardship?

This is one of the programs available through VA that provides assistance to veterans who might be suffering from financial distress, or those who are under special circumstances like job loss or sudden loss of income.

Are VA benefits based on income?

The gross household income and deductible expenses from the previous year are taken into account when calculating a veteran’s benefits. This means that VA health care benefits are more affordable to veterans who have low income.

Does the VA cover emergency room visits?

Yes. The VA can cover your ER visit if the medical care that you received is due to a service-connected condition. But the VA can cover for non-service related conditions provided that they meet the eligibility requirements set by the VA.

Can the VA help with foreclosure?

Yes. If you are in danger of losing your home due to inability to meet your mortgage payments, speak to a VA loan servicer to help out your case and for you to know what the next steps are.

Can the VA help me sell my house?

Yes. The VA home loan centers are available to provide assistance for the sale of your home at no additional cost.

What happens if I default on my VA home loan?

If you default on your VA home loan, a foreclosure happens. If you cannot avoid to default on your loan, it will impact your VA loan entitlement because the government has suffered loss due to your delinquent account.

How do I restore my VA loan eligibility?

You can apply for a restoration of your VA home loan benefits. You need to fill out the VA Form 26-1880 and provide proof that the loan has been paid in full. You must also secure your VA Certificate of Eligibility.

Am I responsible for my spouse's VA medical debt?

If you, the spouse, signed a contract stating your agreement to pay for the medical treatment of your spouse, then you are responsible for paying the medical bills that are incurred during the treatment.

Can federal government debt take VA payments?

No. VA payments are protected by law so they cannot be garnished even to cover for federal government debt. They can only be garnished for taxes owed to the IRS or debt that you owe to VA itself.

Can social security be garnished for a VA debt?

Under the law, your social security benefits are exempt from garnishment for your VA debt. But this protection is not automatic unless you receive your social security benefits as direct deposit to your bank account.

Can you file bankruptcy for debt to VA?

No. The only downside is that your credit score might be affected, along with your VA loan entitlement, if you default on a VA loan. There is no need to file for bankruptcy as this can have a bigger impact on your score.

How long can the VA stretch out debt payments?

You have the option to stretch out your debt payments on a VA loan, if you are struggling to make payments. It can typically be extended from 3-5 years.

Is forgiven VA mortgage debt taxable?

In the event that your mortgage debt is forgiven, this should be reported as income for tax purposes. This will also be reported by your lender to the Federal Government.

What debts are included in VA residual income?

All of your debts such as your mortgage and personal loan payments must be considered in the VA residual income. This will enable you to determine if you meet the residual income requirements to qualify for a VA loan.

What happens when a VA debt goes to collections?

When your VA debt goes to collections, there is nothing you can do to improve the situation since the collection will appear on your credit report for up to 7 years. Make sure to get informed about the Statue of Limitations for collecting debts, and be informed about the Fair Debt Collection Practices Act so you are protected from harassment.

When does VA turn over debt for collection?

During the first 180 days from the time your account becomes delinquent, you will be notified about the need to update payments. If after that time there is no attempt to pay your debt, it will be turned over for collection.

Will VA debt be taken out of army paycheck?

No. Your army paycheck is protected by law from VA loan payments.

Claire Matthews

Claire Matthews

Financial Advisor, DCL

Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.

Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.

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