VA Home Loan Program
Second-Tier Entitlements on VA Mortgages
There is a great deal of misconceptions outlining the VA home loan program, leaving many veterans confused about the available and applicable options. The most common cause of misinformation amongst borrowers is typically VA entitlement, or the amount of money the VA pledges to guarantee in the event of borrower default.
The VA home loan program allows veterans to have two loans at the same time (sometimes more than two at once) through the concept of VA entitlement. Many qualifying applicants are unaware of the fact that even if you defaulted on a loan in previous years, you can still qualify for a VA loan.
An understanding of second-tier entitlement is the crucial component in ensuring you get a home loan that meets all of your specific needs.
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No down payment required
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Meant for Veterans or Active Duty Military Members
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15-, 20-, 30-year terms
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Interest rate reduction refinance loan (IRRRL) available
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Available in high-cost areas
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Stone Lake Mortgage offers VA loans with credit scores as low at 580
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Available in high-cost areas
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VA Funding fee waived for veterans receiving disability at a rating of 10% or more
Entitlement Explained
Most eligible veterans across the country have a principal entitlement of $36,000, with an additional entitlement of $70,025, for a total entitlement of $106,025. In most parts of the country, that is a borrower’s maximum amount of VA loan entitlement, allowing qualified buyers to purchase up to $424,100 before even needing to consider a down payment; though in some high-cost areas, the entitlement total may be even greater.
Purchasing a home with a VA loan will result in some or all of your entitlement being tied up in the mortgage. And because the VA usually guarantees a quarter of the loan cost, the amount of entitlement you utilize is typically equal to 25 percent of your total loan. This means that on a typical $200,000 loan, you’re using about $50,000 of your entitlement.
Hypothetically, considering the typical combined entitlement of $106,025 minus 25 percent of a $250,000 loan (62,500), most buyers would be left with $43,525 in remaining entitlement. Buyers purchasing in more expensive housing markets would have even more VA loan entitlement available.
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.
Two VA Loans at Once
While it isn’t common, there are circumstances that allow veterans to have two or more loans at the same time, such as VA homeowners relocating to a new duty station who want to keep or rent out their initial residence. Though this scenario is somewhat atypical, this is an option for mortgage loans for veterans as well.
For example, let’s say you bought a $250,000 home at your current duty station and get PCS orders a couple of 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.
This is 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 – $62,500 = $43,525 Entitlement Available
$43,525 x 4 = $174,100 Maximum Loan Amount With No Down Payment
According to this example, you could borrow up to $174,100 before needing to factor in a down payment. However, anything above that amount would require a down payment of 25 percent of the excess.
Because the Certificate of Eligibility doesn’t clearly specify how second-tier entitlement works, VA loan entitlement remains an item of confusion. One of the challenges with this particular situation is meeting the debt-to-income ratio and residual income requirements, as you’re balancing two mortgage payments each month. It is also important to understand these VA loan requirements in order to make an informed decision as to whether two loans at once are a viable option for you. It is noteworthy that having a renter to make the monthly payments on your previous property can help make such a scenario work.
VA Loans and Foreclosures
Just because you have had a VA home loan foreclosed on does not mean you are ineligible for another VA loan. You could actually secure financing after just two years, though some lenders may even have no required waiting period after most short sales. Often after a foreclosure or short sale, the biggest question may be how much you are able to spend on a home before factoring in a down payment versus whether you can qualify for a loan altogether. Because of the varying amount of entitlement involved in the foreclosure, the first step is to determine how much entitlement, if any, is left.
For example, assume you had $32,000 of entitlement tied to your foreclosure, and you want to purchase another 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 – $32,000 = $74,025 Entitlement Available
$74,025 x 4 = $296,100 Maximum Loan Amount With No Down Payment
In this example, without putting any money down, the borrower can secure a loan of up to $296,100. Many borrowers use their second-tier entitlement after experiencing a foreclosure, and successfully secure financing on a new home with a VA home loan program. Stone Lake Mortgage helps make mortgage loans for veterans attainable, and we can work together to find the perfect option.