Debt Consolidation For Veterans & The Military

In 2024, 45% of military households said debt was a problem for them. Sure, managing debt is easier than going into battle, but it’s a problem that can still keep you up at night.

Why are so many military households affected? On top of regular economic pressures, Mike Croxson, CEO of the NFCC, says you have to deal with special challenges. Everything from frequent moves and being deployed overseas, “can make it difficult to stay on top of bills and financial obligations,” he explains.

If you find yourself in this struggle, the good news is that there’s military-specific help available.

What Is a VA Debt Consolidation Loan?

The Department of Veterans Affairs (VA) is not a lender and doesn’t have a straightforward debt consolidation loan. What they do is guarantee a cash-back refinance loan that can be used to consolidate your debt.

If you’re an in-debt homeowner, you can potentially get help by refinancing your mortgage into a VA-backed cash-out refinance loan. These loans let you cash out the equity in your home, then you can use the money to pay off your debt.

Cash-out refinance loans are also helpful for changing your loan terms if you need a more affordable payment or lower interest rate, since they have some of the lowest rates on the market.

Of course, there are drawbacks. Not everyone qualifies for VA refinancing and you have to use your home as collateral, which means you risk losing your house if you miss loan payments. You’ll also need to avoid the aggressive scam agencies that offer these types of loans while looking for a reputable lender.

How Does VA Debt Consolidation Work?

First, you’ll need to find a lender because the VA does not issue loans. Banks, mortgage companies and credit unions will have VA loan programs, and it’s a good idea to get several offers to compare your options.

Once you decide on a lender, you’ll need to provide your Certificate of Eligibility (COE) and any other information the lender requires. Follow the closing process, and you’ll issued the cash-out funds, which can be used to pay off your debts.

We recommend prioritizing the elimination of debt with high interest rates such as credit cards. You’ll also need to remember to make payments on all of your debts if they come due while you’re waiting to receive the new funds.

Once you pay off the old debt, you’ll ideally have fewer accounts to manage. But you’ll have to ensure you pay the refinance loan on time, or risk losing your home.

Why Use a VA Cash-Out Refinance Loan to Consolidate Debt?

A cash-out refinance loan is an attractive option for servicemembers and veterans looking for financial relief. When you tap into your home equity, you can reduce the interest rates on your debt and make it more affordable to pay off. The downside is that you’ll owe more against your home. So this option isn’t worth pursuing unless you can clearly afford the new loan payments.

Advantages of VA Cash-Out Refinance Loans

• Down payment is optional.
• Borrow up to 100% of the home’s value.
• Easier to qualify for than for conventional refinance loans.
• No prepayment penalty.
• VA home loan benefits can be used multiple times.

Disadvantages of VA Cash-Out Refinance Loans

• Lose equity in your home.
• Risk foreclosure if you miss payments.
• Closing costs.
• VA funding fee.
• Appraisal fee.
• Extend the timeline to pay off your home.

Eligibility Criteria for VA Debt Consolidation Loans

In order to qualify for a VA cash-out refinance loan, you’ll need to meet the VA’s requirements and the lender’s requirements.

Each lender has their own process to determine if you qualify, but here’s what you generally need to be eligible:

• The home is worth more than you owe against it.
• You’re a servicemember, veteran or surviving spouse.
• You have a VA-backed home loan Certificate of Eligibility.
• Your credit scores meet the lender’s minimum requirement (usually 580).
• You earn sufficient income compared to your debt.
• You live in the home you’re refinancing.

How to Apply for a VA Debt Consolidation Loan

Each lender has their own application process for VA-backed loans, but here’s what the process is typically like to find the best loan available:

1. Pull your free credit reports from AnnualCreditReport.com and check to see what you can improve before applying.
2. Request your Certificate of Eligibility (COE) from the VA.
3. Compare terms from multiple banks and credit unions to find the best loans. To narrow down your options, get multiple preapproval offers that don’t hurt your credit scores.
4. Submit your application to the lender along with the requested documents. This usually includes paycheck stubs, W2s, tax returns and more.
5. If approved, pay the VA funding fee and closing costs.
6. Use the loan to pay off your mortgage and high-interest debt.
7. Make your new refinance loan payments as scheduled.

Other Military Debt Relief Options

As a service member, you have other avenues for debt relief, depending on the circumstances and amount you owe.

If the problem is specific to credit cards, for example, you might consider consolidating credit card debt with a balance transfer card.

Many creditors offer 0% interest on balance transfer credit cards during an introductory period of 12-18 months. Most have a transfer fee ranging from 3%-5%, but if you pay off your balance in the promotional period, you’ll likely save considerable money. If you don’t, you’ll get hit with exorbitant interest rates.

Another option is to speak with a nonprofit credit counseling agency to see if you qualify for a debt management program (DMP). With this option, you may be able to reduce your interest rates and monthly payments without taking out an additional loan.

Other debt-relief options include:

• Special forbearance: Under special circumstances, the bank could temporarily suspend payments on your mortgage to give you time to avoid foreclosure.
• Repayment plan: If you’ve missed debt payments, you could negotiate with the creditor to get up-to-date with an overpayment each month until the past-due debt is paid off.
• Loan modification: With a VA loan modification, the lender will change the terms of your mortgage to avoid foreclosure. The delinquent payments are rolled into a new balance and you begin a new payment schedule.
• Short sale: The homeowner works with the lender to sell their home for less than what’s owed. In a short sale, the lender typically receives money from the VA to offset the loss.
• Deed in lieu of foreclosure: The borrower avoids home foreclosure by voluntarily giving their home to the mortgage lender instead of going through the foreclosure process.
• Leave No Veteran Behind (LNVB): This nonprofit provides education employment services for vets, including retroactive scholarships that pay off certain student loans.
• Personal loans: An unsecured personal loan, which is a loan with no collateral, can be an attractive option for service members who don’t own homes or don’t want to borrow against the equity in their homes. Some lenders even offer special military debt consolidation loans.
• Interest Rate Reduction Refinance Loan (IRRRL): The Department of Veterans Affairs offers this mortgage refinancing loan that helps servicemembers get lower interest rates and avoid many out-of-pocket expenses.
• Servicemembers Civil Relief Act (SCRA): This federal law caps interest rates on credit cards and loans at 6% for active servicemembers and it prevents foreclosure. To benefit from the law, you need to inform your creditor of your active duty.
• Total and Permanent Disability (TPD) Discharge: Disabled veterans with certain federal student loans may qualify for TPD discharge to have their student debt forgiven.

Credit Counseling for Veterans and Military Members

The stress of managing military life and being in debt makes it hard to see your options clearly. If you’re still not sure which steps to take, reach out to a certified credit counselor for guidance.

Whether you want help consolidating debt or you just have a few questions, talking to a credit counselor can help. A counselor will analyze your financial situation and walk you through relief options for both service members and civilians. Some credit counselors even specialize in military finances.