If you’re planning to use a loan backed by the U.S. Department of Veterans Affairs (VA) to purchase a home, then you’ll want to spend a little time familiarizing yourself with the ins and outs of VA housing entitlements and how they impact your ability to borrow money. Why are these entitlements so important?
Exploring VA Housing Entitlements
As Military.com explains, a VA housing entitlement is not the maximum loan amount, a payment made to the borrower, a payment made to the lender on the borrower’s behalf, or a guarantee that a borrower will qualify for a loan. Instead, the entitlement refers to the maximum guarantee the VA will offer a lender in the event that a qualifying home loan is extended to a particular borrower. The loan, property, and the borrower’s credit history and income must all meet the standards set by the VA in order for the entitlement to be accessed.
Types of Entitlements
Because the VA’s backing reduces the risk to lenders, VA loans offer a fantastic opportunity for borrowers to buy a home with perks like favorable loan terms and no down payment. However, these loans aren’t available to everyone. Only people who have earned housing entitlements through qualifying service are eligible. Before extending a VA loan, lenders need proof that a borrower qualifies. This comes in the form of a Certificate of Eligibility, which is issued by the VA. The document confirms a veteran’s eligibility and provides several relevant facts, including how much entitlement the borrower has available. While people tend to talk about entitlement when discussing VA loans, there are actually two types of VA housing entitlements:
All eligible veterans receive $36,000 of basic entitlement. This entitlement is utilized to guarantee 25 percent of a mortgage, so it can be used for purchases or cash-out refinances of up to $144,000.
Also called additional, tier two, or second tier entitlement, bonus entitlement increases a veteran’s potential buying power, enabling him or her to purchase homes in markets where housing is more expensive. It is used for loans greater than $144,000. How much does this bonus entitlement amount to? A little math is necessary. To determine the current bonus entitlement, borrowers generally need to multiply the annual Freddie Mac conforming loan limit by 25 percent and subtract $36,000 (source).
Entitlements and VA Loans
When a veteran secures a VA loan, some or all of their VA entitlement is used to guarantee the loan. Typically, the VA guaranty is equal to 25 percent of the purchase price, so a first-time borrower who receives a loan for less than $144,000 would have some of their basic entitlement and their bonus entitlement remaining. If their credit and income are suitable, they could potentially use the remaining entitlements to secure a second VA loan.
What if a veteran who already has some of their entitlements tied up in a VA loan wishes to secure a second VA loan for a property with a value that is more than four times their remaining entitlement? If their credit and income are sufficient, but their remaining entitlement isn’t enough, they must either make a down payment or apply for restoration of the previously used entitlement.
VA housing entitlements are not unlimited, but they can be reused. Entitlements can be restored under certain circumstances. Veterans who have already used all or part of their entitlements to purchase a property can have their full entitlements restored if any of the following is true:
- They sell the house and transfer the title.
- The loan is assumed by a veteran willing to substitute his or her own entitlement.
- The veteran repays the loan in full and retains the property it was used to purchase. In this situation, the entitlements can only be restored once.
Entitlements and Down Payments
It’s often said that VA loans don’t require down payments, but that actually depends on the amount of entitlements available and the loan’s total. While veterans with full entitlements can generally finance up to 100 percent of the Federal Housing Financing Agency’s conforming loan limits, they can secure loans that exceed that limit if they have the appropriate credit and income. Likewise, borrowers who have already used part of their entitlements can purchase homes that are valued beyond what their remaining entitlements cover. They simply need to make an appropriate down payment.
In order to approve a loan, most lenders require that the sum of the entitlement and any down payment equal at least 25 percent of the lesser of the purchase price or the appraised market value. If a borrower’s entitlements will cover the 25 percent, then no down payment should be required. However, if the borrower lacks sufficient entitlements to reach the 25 percent mark, they will need to add a down payment to the pot to secure the loan.
Do you want to know how to make the best use of your VA housing entitlements? Our experienced team is ready to assist you. Contact PrimeLending: Manhattan, Kansas today to arrange a consultation. Every year, we help thousands of veterans and active-duty members of the military buy or refinance their homes through the VA home loan program. With our assistance, you can take advantage of the many benefits of a VA loan while saving money due to our lack of lender fees. We offer 100% financing with competitive interest rates – no down payment or PMI required! To learn more, please give us a call at 785-560-3011 or contact us online. We would be happy to help you explore the types of VA loans available. It’s our turn to serve you!