VA Loan Recasting and Reamortization: What You Should Know
Many Veterans may not be familiar with the recasting, refinancing and reamortization options available for VA loans. For those with a VA loan who may require assistance with payments or wish to restructure their debt, it's important to have a basic understanding of these concepts.
A mortgage recast is a financial tool that homeowners can use to manage their home loans more effectively. When you recast your mortgage, you make a significant lump-sum payment towards the principal balance of your loan. After making this payment, the loan is reamortized.
Reamortization is a process that establishes a new, revised schedule of monthly payments of principal and interest over the remaining term of a mortgage loan. Amortized loans often have the same monthly payment for the whole repayment term. However, certain situations require lenders to recalculate payments in order to meet the loan’s specific end date.
There are four situations that typically lead to reamortization:
Unfortunately, VA loans usually do not qualify for recasting. They are government-backed loans, alongside USDA and FHA loans, which are specifically designed to provide affordable homeownership opportunities to eligible borrowers. These loans come with various benefits, such as competitive interest rates, no down payment requirements and no private mortgage insurance (PMI).
Although recasting is not an option for VA loans, some borrowers may be eligible to use reamortization as a means of avoiding foreclosure. In this case, reamortization involves totaling the number of delinquent payments and adding them back to the loan balance, effectively bringing the borrower up to date.
It's important to note that this process is not a forgiveness of the delinquent loan amount. Instead, it increases the loan balance by the amount that was delinquent, which may lead to an increase in the borrower's monthly VA loan payments.
When it comes to managing VA loans, borrowers may be unsure about the best approach to take. As previously mentioned, reamortization revises the schedule of monthly payments of principal and interest over the remaining term of a mortgage loan.
However, the VA also has two types of refinance loans for borrowers: Streamline and Cash-Out. Refinancing involves applying for a new loan to replace a mortgage you already have. Your new lender pays off the loan with your old lender, and you make payments to the new lender going forward.
Based on your financial situation, it may be more beneficial to utilize one option over the other. Below we break down the major components of a reamortization and a refinance.
| Factor | Reamortization | Refinance |
|---|---|---|
| Loan | Existing loan | New loan |
| Loan Balance | Typically decreases | Typically decreases |
| Monthly Payment | Typically increases due to delinquent payments | Depends on interest rate and terms of new loan, but typically decreases for lender to go through with the process |
| Interest Rate | Stays the same | Changes to current VA interest rate |
| Loan Term | Stays the same | Varies |
| Cost | Typically lower than refinancing. Processing fee usually ranging from $150 to $500 or more, depending on lender policies | Typically 2% to 5% of loan amount, including origination fees, appraisal fees, credit report fees, title insurance, and other closing costs |
Aside from reamortization or refinancing into a new loan, the VA offers several other options to help borrowers with financial situations and avoid foreclosure.
VA forbearance is an option provided by the servicer to help borrowers facing temporary financial hardships. The servicer may reduce or eliminate the VA mortgage payment for a set time period, giving borrowers time to repay what they owe. This option provides short-term relief and helps borrowers avoid foreclosure while they work towards improving their financial situation.
A VA short sale is another alternative to foreclosure. In this case, the servicer allows the homeowner to sell the home for less than the outstanding mortgage balance. This option can help borrowers who owe more on their mortgage than the current market value of the home. It enables them to avoid foreclosure and the negative impact it has on their credit score.
A deed-in-lieu of foreclosure is an option where the servicer allows the homeowner to formally return the property rather than following through with the foreclosure process. This option is typically considered when other foreclosure prevention alternatives have been exhausted. By choosing a deed-in-lieu, VA borrowers can avoid the lengthy and costly foreclosure process and minimize the negative impact on their credit.
The VA also allows homeowners to sell their property through a private sale. In this scenario, homeowners can sell the property to either a private buyer who obtains their own home loan to purchase the property or to a buyer willing to assume the VA home loan. This option helps borrowers avoid foreclosure while still enabling them to recover some of their investment in the property.
