The loss of a loved one is a difficult and emotional time, and dealing with financial matters can add unnecessary further stress. Many military families are left wondering: What happens to a VA loan after the Veteran borrower passes away?
VA loans, while known for their unique benefits, come with specific rules and regulations in terms of handling the loan after the death of the Veteran.
One common misconception surrounding VA loans is that the Department of Veterans Affairs (VA) will pay off the remaining balance of the loan in the event of the Veteran borrower's death. However, this is not the case.
The VA's guaranty only takes effect when borrowers default on their VA loan. It does not apply to situations where the Veteran borrower passes away. Therefore, the remaining loan balance remains the responsibility of the borrower's estate.
The responsibility for a VA loan after the death of the Veteran borrower depends on several factors. In many cases, the deceased Veteran's spouse, co-borrower or designated beneficiary will inherit the Veteran’s home after their passing. If there is no designated beneficiary, the property may be sold to repay the VA loan.
When a co-borrower or co-signer inherits the home, the individual will also inherit the VA mortgage. As a result, they are required to continue making regular mortgage payments on the property.
However, if an individual not on the VA loan inherits the Veteran’s property, they do not also inherit the VA mortgage. Those in this situation will have the option to assume the VA loan by contacting the loan servicer or consider taking out a new mortgage on the inherited property.
After the passing of a Veteran borrower, there are several available options to consider when it comes to managing the VA loan:
|Assume the VA loan
|In some cases, civilians who would not typically qualify for a VA loan may be eligible to assume, or take over, a deceased Veteran’s VA mortgage.
|Refinance the VA loan
|If assuming the VA loan is too expensive on its own, consider refinancing the mortgage to reduce monthly payments.
|Repay the VA loan with life insurance
|When applicable, beneficiaries may opt to use the Veteran’s life insurance policy to cover the remaining balance of the VA loan.
|Sell the VA-backed property
|For those who aren’t financially capable of taking on the mortgage or have no interest in keeping the inherited property, selling the home may be the best course of action.
The VA provides the opportunity for civilians to take over the deceased Veteran's VA loan through a process called loan assumption. Many individuals in these situations opt to assume their loved one's VA loan due to its potential financial benefits, including the possibility of retaining the Veteran’s original interest rate regardless of the current market rates.
However, it is crucial to note that VA loan assumption is not automatic. A borrower must meet specific requirements to be eligible to assume a VA loan, though these requirements may not be as stringent as those to independently qualify for a VA loan.
If the new borrower is concerned about the affordability of the current monthly payments for the VA mortgage, refinancing the loan may be a viable option. After assuming the VA loan, the new borrower may choose to refinance using a VA Interest Rate Reduction Loan (IRRRL). This refinancing option could potentially lead to lower monthly mortgage payments and offer the borrower more favorable interest rates or better mortgage terms.
In certain circumstances, it may be possible to use life insurance funds to cover the deceased Veteran's VA home loan. If the Veteran had a life insurance policy at the time of their passing that exceeds the remaining mortgage balance, the individual inheriting the Veteran's property may choose to use these funds to pay off the VA loan balance. This grants the individual full ownership of the property without the burden of future mortgage payments.
For those who prefer not to assume the financial responsibilities that come with inheriting a loved one's home, selling the property may be the best option.
In an ideal scenario, the home would sell for an amount equal to or greater than the remaining balance on the VA loan. This would allow the loan balance to be paid in full following the sale of the home. However, if the property sells for less than the remaining loan amount, it will result in a short sale.
Dealing with the aftermath of a Veteran's passing can be overwhelming, especially when it comes to managing their VA loan. However, there are several options available to navigate this challenging situation, whether it's assuming the VA loan, refinancing, repaying with life insurance or selling the VA-backed property.
During these difficult times, VAloans.com is here to offer guidance and support to families seeking assistance with their VA loans. Remember that understanding the available options can help you make informed decisions to best honor the legacy of the departed Veteran.