The loan program of the U.S. Department of Veterans Affairs (VA) is designed to help those who have served their country purchase a home, but figuring out the finer points of the program and determining how to get the optimal use of your benefits can be tricky. Understanding your VA loan entitlement helps you figure out how much you can borrow, which makes it easier to settle on a suitable budget for a successful home purchase.
Understanding Your VA Loan Entitlement
According to The Mortgage Reports, 2019’s Blue Water Navy Vietnam Veterans Act included a repeal of any loan limits on VA loans. However, that doesn’t mean that eligible service members and veterans can get a loan for any amount. There’s still the matter of qualifying for the loan, determining the impact of your VA loan entitlement, and understanding what it means for your need for a down payment.
Qualifying for a VA Loan
The VA doesn’t make VA loans. Private lenders do. In return for their efforts, these lenders receive government-backed guarantees that reduce their risk. To secure a VA loan, would-be borrowers must prove to participating lenders that they are eligible for a VA loan and have the financial resources to qualify for the loan amount that they are seeking. As NerdWallet explains, individuals need to meet the following requirements:
- Eligibility: VA loans are a benefit offered to service members and veterans who meet specific requirements for length and type of service. Obtaining a Certificate of Eligibility proves that you have the right to seek a VA loan. The document also offers other information that your lender will need, including information about your VA entitlement.
- Credit: The VA doesn’t require a minimum credit score, and it encourages flexibility when evaluating a prospective borrower’s credit score and credit history.
- Debt and Income: The VA prefers to see a debt-to-income ratio no greater than 41 percent, but borrowers who carry a heavier debt load may still secure a loan if their circumstances suggest they can handle the additional weight of the mortgage.
- Property: VA loans can only be used for the purchase of a primary residence. Any home purchased with a VA loan must go through the VA’s appraisal process and meet its Minimum Property Requirements.
Making Sense of VA Loan Entitlements
In the context of a VA loan, an entitlement isn’t a sum of cash handed over to a veteran or the total amount that they’re allowed to borrow (source). It’s actually the maximum guarantee that the VA will offer a lender. Most eligible vets who look closely at their Certificate of Eligibility will see a listing for a basic entitlement of $36,000. Since the guarantee is for 25 percent of the loan amount, that’s enough entitlement to allow for a loan up to $144,000 without a down payment. However, prospective borrowers also have access to a bonus or second-tier entitlement that paves the way for even larger loans. While it may be even higher in high-cost housing areas, the second-tier entitlement is normally up to an additional $68,250. As a result, a VA borrower with their full entitlement can potentially combine their basic and second-tier entitlement and secure a loan for up to $417,000.
Is a Down Payment Needed?
The promise of 100-percent financing is often cited as one of the best benefits of a VA loan. However, because the entitlement sets a limit on the amount of the guaranty that the VA will make without limiting the size of the home loan that a veteran can take out, there are cases where a down payment may be needed. As the VA indicates, most lenders insist that at least 25 percent of your loan amount be covered by the VA’s guaranty, a down payment, or some combination of the two. Therefore, borrowers who opt for a loan that is more than four times the amount of their available entitlement will likely need to chip in a down payment.
At PrimeLending: Manhattan, Kansas, we take great pride in helping service members and veterans become homeowners. Our loan experts are well-versed in the ins and outs of the VA loan program, and we’re ready to guide you through the process. Contact us today to learn more.