A Simple Explanation of Second-Tier Entitlement on VA Mortgages

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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.

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.

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

Here’s a bit more explanation:

Understanding Entitlement

Eligible veterans in most parts of the country have a primary entitlement of $36,000 and an additional, secondary entitlement of $70,025. Add those together and you get $106,025. That’s the maximum amount of VA loan entitlement for borrowers in most of the country (buyers in high-cost counties actually have more).

When you purchase a home with a VA loan, some or all of your entitlement is tied up in the mortgage. Because the VA usually guaranties a quarter of the loan amount, the amount of entitlement you utilize is typically equal to 25 percent of the loan amount. For example, on a typical $200,000 loan in a non-high-cost county, you’re using $50,000 of entitlement.

Do some simple math ($106,025 – 50,000) and you find there’s still VA loan entitlement left over ($56,025).

The remaining entitlement is how VA buyers can look to have more than one VA loan at the same time or purchase after experiencing a foreclosure or a short sale.

Two VA Loans at Once

It’s not an everyday occurrence. But there are circumstances that allow VA borrowers to have two or more 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. But veteran homebuyers can look to do this, too.

For example, let’s say you bought a $200,000 home at your current duty station and get PCS orders a couple years later. Rather than sell the home, you want to rent it out and buy again at the new duty station.

Here’s how the math works, assuming you’re buying in another county with the standard VA loan limit ($424,100):

$424,100 x 25% = $106,025 Maximum Guaranty
$106,025 – $50,000 = $56,025 Entitlement Available
$56,025 x 4 = $224,100 Maximum Loan Amount With No Down Payment

So, in this example, you could look to borrow up to $224,100 before needing to factor in a down payment. Anything above that amount would require a down payment of 25 percent of the excess.

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

It’s also important to understand that having a VA loan foreclosed on doesn’t mean you can’t get another VA loan. In fact, you may be able to secure financing after just two years (and some lenders, like Veterans United, may have no required waiting period after most short sales). Following a foreclosure or short sale, it’s often more a question of how much house can you buy before needing to factor in a down payment (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 $424,100 loan limit.

The math in this case would be exactly the same as the situation above:

$424,100 x 25% = $106,025 Maximum Guaranty
$106,025 – $50,000 = $56,025 Entitlement Available
$56,025 x 4 = $224,100 Maximum Loan Amount With No Down Payment

In this example, the borrower can secure a loan of up to $224,100 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.

Take One Simple Step: Check your VA Loan eligibility here.

Photo courtesy of InAweofGod’sCreation