VA Debt Relief & Veteran Consolidation Loans (Active Military Too)

Benefits of a VA Debt Consolidation Loan

• Easier and less rigorous process
• Longer repayment terms
• Zero monthly mortgage insurance premiums
• No prepayment penalties
• High loan-to-value ratio

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.

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?

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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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.

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.