If you are reading this article then you likely know the great benefits of the VA home loan such as the low interest rates, no mortgage insurance and no down payment requirement. Property tax exemptions also exist for eligible veterans.
If you’re planning to buy a new home and you have already utilized your VA loan on a previous home purchase you might be glad to know that it can be done again without selling the home that is currently owned.
How is that possible? There is something called bonus entitlement also known as second tier entitlement. This is when the total amount of entitlement was not used on the first purchase. The remaining entitlement is what is used to buy another home with the VA loan as a primary residence.
So what is VA loan entitlement?
It refers to how much of your loan the VA will guarantee in the event that the home owner defaults on the mortgage loan. The VA guarantees 25% of the loan and that is the entitlement.
If you have never used the VA loan before then you have full entitlement or if you have used the VA loan and sold the home that it was used on then you also have full entitlement. For loans less than $144,000, the VA will guarantee up to $36,000. This is sometimes referred to as your basic entitlement. Of course, it’s hard to find homes at this price point in many areas of the country, so the VA also guarantees up to 25% of the loan amount for loans that exceed $144,000. You may see this amount referred to as bonus entitlement or tier 2 entitlement.
Reduced entitlement scenario
If you already have some of the entitlement tied up in a home you are currently paying off or had a foreclosure or short sale happen then the entitlement is reduced by the amount used on that purchase. The COE below shows the entitlement charged.
Because the VA guarantees 25% of the loan this means that in most areas of the country the loan limit is now $726,200 in 2023 minus the entitlement you’ve already used. This means that the maximum entitlement would be $181,550. However, we have to subtract the entitlement that’s being used for her current VA loan from that number. So in this example $726,200 minus the $81,720 of entitlement charged. $181,500 – $81,720 = $99,830 of remaining entitlement multiplied by 4 to represent the 25% VA guarantee leaves a maximum use of entitlement of $399,320 for a second VA loan.
To further illustrate that means that with zero down payment a loan of $399,320 loan can be approved.
What if you want to go over that amount?
Let’s say a home for $500,000 is available and that is what you want to do. No problem, a down payment in this scenario would be needed. The 25% portion that is not guaranteed by the VA would need to be covered. The difference between the home’s cost and the maximum loan amount her entitlement will cover is $100,800. If you wanted to buy this home, you would need to put down $25,200 of your own money – 25% of $100,800.
What is unique about using bonus entitlement is that it is based on the loan limits of the respective county you are buying in. Here in Maryland there are 5 high loan limit counties which are Frederick, Montgomery, Prince Georges, Calvert, and Charles counties. These counties have a 2023 loan limit of $1,089,300 which is substantially higher and thus can greatly improve the loan amount that a VA home buyer can qualify for in these respective areas.
For example, using the same amount of previous entitlement the VA guarantee in these areas is $272,325. Subtract the $81,720 already used and we have $190,605 available for the VA 25% guarantee. $190,605 x 4 = $762,420 with zero down payment.
Restoring your full entitlement
If you’ve previously had a VA loan that has been paid off you typically have to sell the home that was previously owned but the VA allows for a one time restoration of full entitlement for homeowners who have paid off their VA loan and still own the property.
This can be used in circumstances where you’ve either finished paying off your VA loan and now own your home outright or you’ve refinanced your VA loan into a different loan type, such as a conventional loan. You’ll have to apply for entitlement restoration through the VA. You can only use this type of restoration once; in the future, you’ll have to follow the standard rule of selling the property before you can have your entitlement restored.
The most important thing to remember is that the loan can be used more than once and there is no limit on the amount of times it can be used as well. The benefit never expires. The only limitations is someone’s qualifications such as the income available to support the mortgage approval. If you’re thinking of applying for a VA loan you can get started by obtaining your certificate of eligibility. That can be done at va.gov I can also help you get the COE with an application or call me directly at #410-474-7153.