A Simple Explanation of Second-Tier Entitlement on VA Mortgages

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Second-Tier Entitlement

Second-tier entitlement allows qualified VA borrowers to purchase again despite default and even have two VA loans at the same time.

There are a lot of myths and misconceptions out there about the VA loan program. Two of the most common are rooted in the concept of VA entitlement, which is basically the amount of money the agency pledges to guarantee in the event of borrower default.

So let’s get this out of the way at the outset: It is possible in some situations to have two VA home loans at the same time. And you can definitely qualify for a VA loan even if you defaulted on one in previous years. Don’t let anyone in the mortgage or real estate industry tell you differently. The key is something called second-tier entitlement.

The time to act on your VA loan benefits again is now.

Here’s a bit more explanation:

Understanding Entitlement

Eligible veterans have a primary entitlement of $36,000 and an additional, secondary entitlement of $68,250. That second-tier entitlement helps veterans purchase in more expensive housing markets and is tied to the VA county loan limits for most of the country.

When you purchase a home with a VA loan, some or all of your entitlement is tied up in the mortgage. But veterans with remaining entitlement can capitalize on the excess in certain situations.

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Two VA Loans at Once

It’s not an everyday occurrence. But there are circumstances that allow VA borrowers to have two VA loans in play at the same time. Typically, the scenario involves a VA homeowner who has to relocate to a new duty station but wants to keep and rent out his or her primary residence.

Veterans with enough remaining entitlement may be able to secure a second VA loan to purchase a home in their new locale. One of the challenges with this situation is meeting the debt-to-income ratio and residual income requirements, since you’re basically on the hook for two mortgage payments each month. It’s important to fully understand the VA loan requirements in order to determine if you can juggle two loans at once.

Having a renter locked into a lease who will cover those old monthly payments can go a long way toward making this work.

VA Loan After VA Foreclosure

Having a VA loan foreclosed on doesn’t mean you can’t get another VA loan later in life. In fact, you may be able to secure financing after just two years. It’s often more a question of how much house can you buy (Learn more in “How a Bankruptcy or Foreclosure Affects VA Loan Applications”).

Veterans who suffer a foreclosure may see some, most or all of their entitlement caught up in the mess. VA lenders first have to determine how much entitlement you have left, if any.

For example, let’s say you had $50,000 of entitlement tied to your foreclosure and you want to purchase a home for $200,000 in a county with a standard $417,000 loan limit. Here’s how lenders will evaluate the situation:

$417,000 x 25% = $104,250 Maximum Guaranty
$104,250 – $50,000 = $54,250 Entitlement Available
$54,250 x 4 = $217,000 Maximum Loan Amount With No Down Payment

In this example, the borrower can secure a loan of up to $217,000 without putting money down.

We’ve helped many borrowers use their second-tier entitlement, as it’s called, to secure financing in the wake of a VA foreclosure. One of the weird little quirks of second-tier entitlement is there’s a minimum loan amount of $144,001. This can include financing of the VA Funding Fee, but not any qualified energy efficiency improvements as part of an Energy Efficient Mortgage.

You can contact a loan specialist anytime at 888-212-1958.

Photo courtesy of InAweofGod’sCreation