VA loans aren’t a one time benefit, that’s one of the biggest misconceptions about the program. Once you earn this benefit it’s yours for life. When it comes to reusing the VA loan, there are a few different paths that most buyers face.
One is that you get a home with a VA loan, and, at some point down the road, you decide you want to sell that home and buy again. As long as you sell the home and pay off the loan in full, you can have your full VA entitlement restored and ready to go for another purchase.
“Restoration of entitlement” as you’ll hear it called involves a little bit of paperwork, but it’s really a simple process that can be done pretty quickly.
You can also look to hold onto your current VA backed mortgage and buy again using the VA Loan program. In other words, it’s possible to have more than one VA loan at the same time.
One of the most common ways this is done is when an active duty service member has to PCS to a new duty station. Sometimes it’s tough for them to sell their home in that current market. Other borrowers like the idea of holding onto that property and using it for rental income. And while you can’t purchase a home with that as your intent, it is possible to buy a home with a VA loan, live in the property for a little while, and then look to rent it out.
There are a few major considerations when we look at situations like this and talk about reusing your benefit. Entitlement is a big one.
Background on VA Loan Entitlement
So first, here’s a little background on VA loan entitlement. Your amount of entitlement determines how much you could potentially borrow before you need to factor in a down payment. You have two layers: there is a basic level of entitlement valued at $36,000 for borrowers in most parts of the country (this changes every year); and there is an additional bonus layer, you’ll hear it called your second tier of entitlement, that’s valued at $68,250. Add these two together, and you get $104,250. This is the maximum entitlement for VA buyers in most parts of the country (again, this changes every year).
The VA backs or basically insures a quarter of the loan amount, and that’s important and it means a couple of different things. One is that buyers in most parts of the country can borrow up to $417,000 before they’d have to factor in a down payment.
That’s $417,000, your full entitlement times four, because the VA backs a quarter. The VA’s guarantee also means that the entitlement that you use on a home is usually equal to a quarter of the loan amount, and that’s the short story (the very short story) on VA loan entitlement.
Buying Another Home While Keeping Your Existing One
So let’s get back to this idea of keeping the home you currently have and buying another one using your VA benefits. Because you’re holding on to this home, the entitlement you used to get it is not accessible to you. You cannot touch it. Consider it tied up in that property. But you may have enough left over to purchase again without the need for a down payment.
Here’s a quick example of how that could work. Let’s say that you bought your current house for $200,000. Since the VA backs a quarter of the loan amount, that typically means that you would have $50,000 of your entitlement tied up in that home ($50,000 is a quarter of $200,000).
But remember that in most parts of the country, the full entitlement for buyers is $104,250. So you do a little bit of math and subtract the $50,000 of entitlement that you’re using on your current home from your full max entitlement, and that leaves you with $54,250 in VA loan entitlement that’s left over. That you have access to.
Now you multiply that times four because again the VA guarantees a quarter of the loan amount, and you’re left with $217,000. That’s how much, in this example, you could borrow before needing to worry about factoring in a down payment.
Your Entitlement Is Not The Maximum Purchase Price For A Home
It’s really important to mention that your VA Loan entitlement is not a cap on the purchase price of your home. This doesn’t represent the max. You could look for a loan that’s bigger than this. You could buy a bigger house. But you’d need to start worrying about a down payment at that point.
You typically need to look at putting down 25% of the difference between whatever you ultimately purchase your home at, the final purchase price, and your personal entitlement cap.
So let’s look at another example. Say you want to buy again at your new duty station, or in the community where you’re currently living, and you find a house that you fall in love with at $250,000. You would need to put down 25% of the difference. You know that your entitlement caps out at $217,000, so the difference between these two Is $33,000. A quarter of that gives you your down payment amount, a little over $8,000.
This could still wind up being a great deal when you start to compare terms and rates with conventional and FHA financing. This down payment, a little over $8000 on a $250,000 loan, it comes out to be 3.3% of the loan amount. Most conventional lenders are looking for at least 5%, so more than $12,000 in this example. On top of that conventional buyers would be paying Private Mortgage Insurance costs each month as well.
It’s important to know that if you’re buying in one of the VAs high-cost counties, you’ll have even more VA loan entitlement available.
Now, that’s a quick look at how you could have two, or even more VA loans at the same time. It’s important to understand these examples and scenarios and the way that we’ve run through the calculations. You would do the same thing if you lost a VA loan to foreclosure.
Can You Use The VA Loan Benefit if You Default On A VA Loan?
You may face credit hurdles. You may face required waiting periods before you can look to buy again. But if you’ve defaulted on a VA loan, you can absolutely look to use this benefit again.
Note that the entitlement you used on that foreclosed property is gone. But, as we’ve talked about above, you might have enough left over to purchase again using your hard-earned VA loan benefits.
Buying Again Using Your Remaining Entitlement
Buying again using your remaining or second-tier entitlement also comes with a unique and sometimes quite honestly frustrating requirement: your loan amount has to be greater than $144,000.
And keep in mind that you might have to factor a down payment into the equation, but you can count the financing of your VA funding fee toward meeting this minimum loan amount. So no matter what, you’ll need to borrow at least this amount in order to make a second tier purchase work.
Can You Afford Two Mortgages?
One of the other potential challenges of having two VA loans at the same time is being able to afford two mortgage payments. Borrowers who plan to rent out their own home might be able to basically cancel out their old mortgage payment.
It’s important to understand that lenders typically treat this as an offset, as it’s known, and not as effective income. And different lenders can have different policies. Being able to offset your old mortgage payment basically means the lender ignores it. So that monthly obligation, that old mortgage payment, won’t count against your debt to income calculation and other calculations that lenders will make. But you also don’t get to count that rental income as true effective income that you could use to qualify for a new loan.
So if your mortgage payment on your old house is, let’s say, $1,000 a month, and you’re planning to charge your renters $1,500 a month, you wouldn’t be able to count that extra $500 that’s coming in as true income.
To make an offset work, you’ll typically need to have a renter locked into a lease, and have a security deposit, and the renter usually cannot be a member of your family. If you wanted to count rental income as true effective income that you were hoping to use to qualify for a new loan, lenders will often want to see that income reported on at least two years worth of tax returns.
It’s also important to remember that VA loans are focused on helping veterans and service members purchase primary residences. VA loans have occupancy requirements, and you’ll still need to satisfy those on a second tier purchase.
Generally, that means living in the new home as your primary residence within 60 days of closing, although there are exceptions out there. So if you think it’s very unlikely you’d be able to fulfill that 60-day window, talk with lenders in more detail.
One-Time Restoration Entitlement
The last thing that we’ll talk about in reusing your benefits is the one-time restoration of entitlement. The VA gives borrowers one shot, a one time opportunity to fully restore their VA loan entitlement without selling or otherwise getting rid of the property.
This benefit basically allows you to hold on to an investment property, a second home, a vacation home, and buy again with your full VA loan entitlement. The catch is that the original VA loan property has to be paid off in full. You can’t use a one-time restoration if you’re still making mortgage payments on that home.
Second tier entitlement is a subject that confuses people even in the mortgage industry. Talk with a lender that specializes in VA loans if you have questions about reusing your VA loan benefits.