VA Loan Entitlement
There are amazing benefits to be had from the VA loan system, but calculating what you’re entitled to can be very confusing.
The US government operates as a financial guarantor for every loan that is issued under the VA provisions. This means that should someone with a loan on the VA arrangement default, the government promises to pay off part of the loan (usually 25%). The amount the government guarantees represents your “entitlement.” How much you are entitled to dictates the amount you may be able to borrow without having to make any down payment on a property. The Certificate of Eligibility shows what your entitlement is.
There are two levels to this element: The basic entitlement and the bonus/secondary entitlement. For all borrowers, there is a basic entitlement of $36,000. In most areas, there is a second level of entitlement, which is $77,275. When you combine these, they add up to an entitlement of $113,275. This represents the highest level of entitlement available for veterans, except those in the parts of the country that are recognized as having the very highest housing costs.
These entitlements offer a guarantee for 25% of your loan. As such, if you have a full entitlement, you can borrow as much as four times the amount of that entitlement ($113,275 x 4 = $453,100) before you have to think about down payments. The entitlement limits may change every year.
You should remember that these limits don’t mean that you can’t borrow more; if you can afford it, you can ask for “jumbo” VA finance. The limits simply dictate the highest amount you can borrow without having to make a down payment. The down payment has to be a minimum of 25% of the gap between the purchase price and the entitlement limit.
Let’s take a closer look at just how the VA loan entitlement works in practice:
Imagine you’re purchasing a property in a county where the VA loan limit is the standard $453,100; the property you want to buy is $200,000, and you don’t want to put a deposit down. The VA guarantees 25% of your loan, which for $200,000 equals $50,000. As above, in the majority of districts, your loan entitlement will be $113,275, so having subtracted the $50,000, you will have $63,275 of your entitlement left.
The entitlement you have left can be very important as, if you qualify, you can use that to take out a second loan on another property. You can also potentially use it to buy another home if you have lost your original property due to foreclosure.
So, let’s imagine that you buy the $200,000 property, and later you receive orders for a Permanent Change of Station. You might not want to sell your property, preferring to keep it to rent out and purchase a new property in your new posting in a non-high-cost county (if you are moved to a high-cost county, your entitlement would be higher).
From your previous purchase, you still have an entitlement of $63,275 left, which means that you could potentially receive an additional VA loan of $253,100 ($63,275 x 4) without having to consider making any down payments.
As with your original purchase, you could buy a more expensive property that costs more than your limit ($253,100) but, again, you must be able to make a down payment of 25% of the differential between the purchase price and the limit. Thus, if you wanted to purchase a home for $275,000, you need to be able to find a $5475 down payment: $275,000 – $253,100 = $21,900 x 25% = $5475.
Standard financing normally demands a minimum of 5% down payment, while FHA financing normally requires 3.5%, so you could still be much better off under the VA program. In the example provided above, a down payment of $5475 represents around 2% of the total cost of the property. You should also remember that when buying through the VA system, you don’t have to pay any mortgage fees, unlike with standard or FHA financing.
Benefit for Life
You must remember that your remaining entitlement after an original purchase will not be clearly shown on your Certificate of Eligibility. Even if your CoE appears to show that you have no remaining entitlement, you may still be able to get another property loan under the VA system. Remember, the VA loan system isn’t just a one-off: Once you’ve earned it, it’s there for the rest of your life. If you have enough entitlement remaining, you have every right to ask for another loan, either for a new purchase or refinancing the mortgage on your original purchase. Many purchasers, and indeed realtors and loan companies, don’t realize that you are permitted to take out more than one VA loan simultaneously and that even if you have foreclosed on the property purchased with a previous VA loan, you may still be able to take out a new loan.
Submit the form below and we can talk you through what you are entitled to and what you may be able to achieve.