VA loan entitlement can be a tricky subject. Here we breakdown second-tier entitlement and what to expect when reusing your VA loan benefits.
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 VA pledges to guarantee in the event of borrower default. So let's get this out of the way at the outset:
The VA allows veterans to have two VA loans at the same time in some situations, and eligible veterans can qualify for a VA loan even if they've defaulted on one in previous years.
Don't let anyone in the mortgage or real estate industries tell you differently. The key is something called second-tier entitlement. The time to act on your VA loan benefits again is now.
Second-tier entitlement allows qualified VA borrowers to purchase again despite default and even have two VA loans at the same time. Eligible veterans in most parts of the country have a primary entitlement of $36,000 and an additional, secondary entitlement of $85,087. Add those together and you get $121,087. For borrowers in most parts of the country, that's the maximum amount of VA loan entitlement they have at their disposal (buyers in high-cost counties actually have more). And it allows qualified buyers to purchase up to $484,350 before needing to bring a down payment to the table.
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 guarantees 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, you're typically using $50,000 of entitlement.
Do some simple math ($121,087 - 50,000) and buyers in most parts of the country would have about $70,000 left over in remaining entitlement. Veterans and military members purchasing in more expensive housing markets would have even more VA loan entitlement available. VA loan limits are linked to the maximum entitlement amount and rise to $726,525 in costlier markets in the continental U.S.
The remaining entitlement amount makes it possible for VA buyers to have more than one VA loan at the same time or purchase after experiencing a foreclosure or short sale.
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It's not an everyday occurrence. But there are circumstances that allow veterans to have two or more VA loans at the same time. A common 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 using your remaining entitlement.
Here's how the math works, assuming you're buying in another county with the standard VA loan limit ($484,350):
$484,350 x 25% = $121,087 Maximum Guaranty
$121,087 - $50,000 = $71,087 Entitlement Available
$71,087 x 4 = $284,348 Maximum Loan Amount With No Down Payment
So, in this example, you could look to borrow up to $284,348 before needing to factor in a down payment. Anything above that amount would require a down payment of 25 percent of the excess.
VA loan entitlement can be a confusing topic, in part because the Certificate of Eligibility doesn't clearly indicate how second-tier entitlement works. Talk with a Veterans United loan specialist about your specific situation and what might be possible. 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.
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 $484,350 loan limit.
The math in this case would be exactly the same as the situation above.
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.