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.
Simply put, VA loan entitlement is the dollar amount that the VA guarantees on your loan. VA entitlement is generally 25 percent of the loan amount and can help determine how much a Veteran can borrow. There are two layers of VA loan entitlement, a basic level and a second-tier of entitlement. When those two are fully in place, Veterans can borrow as much as a lender is willing to lend without the need for a down payment.
Eligible Veterans in most parts of the country have a primary entitlement of $36,000 and an additional, secondary entitlement of $101,062. Add those together and you get $137,062.
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 ($137,062 - 50,000) and buyers in most parts of the country would have about $87,000 leftover in their 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 currently rise to $822,375 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 foreclosure or short sale.
Wondering what situations would constitute a second VA mortgage? Here are a few scenarios where using your second-tier entitlement would come into play.
Qualified Veterans may be able to hold onto their current home and buy a new primary residence with their remaining VA loan entitlement. This typically requires the use of second-tier entitlement. Buyers might also need to put money down, but that depends in part on how much entitlement is left.
Veterans might be able to get a new VA loan after experiencing foreclosure or short sale on a previous VA-backed mortgage.
VA loans are assumable, but the Veteran’s entitlement stays with the property. The only way to safeguard your entitlement with an assumption is to have a Veteran substitute their VA loan entitlement for your own.
Permanent Change of Station orders provide an opportunity to have two VA mortgages at once.
Yes, you can have two VA loans at once, however, VA loans must be used for primary residences, and come with specific occupancy requirements. It is possible to have two VA loans at one time for two separate primary residences.
For example, let's say you buy a $200,000 home at your current duty station and then get PCS orders a couple of years later. Typically, you’ve used about $50,000 of your VA loan entitlement on that first property.
Rather than sell the home, you could look to rent it out and buy again at the new duty station using your remaining VA loan entitlement.
Here's how the math works, assuming you're buying in another county with the standard VA loan limit:
$548,250 x 25% = $137,062 Maximum Guaranty
$137,062 - $50,000 = $87,062 Entitlement Available
$87,062 x 4 = $348,248 Maximum Loan Amount With No Down Payment
So, in this example, you could look to borrow up to $348,248 before needing to factor in a down payment. Anything above that amount would require a down payment of 25 percent of the excess. That means buying at $448,248 would require a $25,000 down payment in this example.
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 your old monthly mortgage payment 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’ve lost the ability to get another VA loan. In fact, you may be able to secure a new VA loan after just two years. Following a foreclosure or short sale, it's often more a question of how much house you can buy before needing to factor in a down payment Learn more about how 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 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 to secure financing in the wake of a VA foreclosure. One of the quirks of second-tier entitlement is the 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.
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