Does Having a VA Loan Affect a Strategic Default

By Kerry Zias

As home prices decrease while unemployment and underemployment rise, foreclosures will also increase. In most cases, the homeowner simply can not afford to pay the mortgage anymore. However, there are some cases where the owner still can afford the payments, but chooses to walk away via a strategic default.

Most people do not plan for nor desire to have their home foreclosed. However, in a market where real estate values have dropped significantly, many homeowners find themselves in a situation of negative equity. This means they owe more on their mortgage balance than their home is currently worth, also known as being "underwater." The more underwater they are, the more tempted they may be to walk away from the mortgage by simply stopping the payments. This decision to allow a foreclosure by choice is known as a strategic mortgage default.

Being able to truly walk away from a mortgage is based on one major factor: the possibility of being sued for a deficiency judgment. Once the mortgage lender has sold the home in foreclosure, the proceeds of that sale are applied to the defaulted mortgage balance. If the proceeds are less than the mortgage balance, there is a deficiency. This is usually always the situation in an underwater home and market. A homeowner with a VA loan is always subject to such a deficiency judgment as per federal law, even if the state the property is in has anti-deficiency judgment laws.

There are also other consequences to a strategic default besides the deficiency judgment issue. Any kind of default or foreclosure will harm the homeowners credit rating and history. Furthermore, if the strategic default is identified as such rather than a true hardship foreclosure, the negative credit impact can be even worse. This negative credit impact can cause difficulty in securing another home, even on a lease. The availability and cost of any future credit will be negatively affected. Also, future insurance premiums often increase because of this.

The federal law of allowing a deficiency judgment for VA mortgages applies directly to the veteran borrower. However, there is also a legal possibility of the veteran's spouse or widow being held liable through a deficiency judgment. Such a deficiency judgment allows the lender to seize other property or money of the veteran borrower or spouse. One way the defaulting homeowner can preclude such a deficiency judgment is to file for bankruptcy protection. However, the negative credit consequences of this action can be even deeper and longer lasting.

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