There are several situations in which a veteran or active-duty servicemember may want to use a VA loan to buy a home while they have still own another home that currently has a VA loan in place. Unlike other loan programs, which can usually be used repeatedly with the only limitation being the ability to qualify, the VA loan program works a little differently.
Eligible veterans qualify for a certain amount of entitlement, which simply represents the amount of money that VA will guaranty the lender if the veteran defaults on the loan. If all the veteran’s entitlement is not already tied up in their current mortgage, the veteran may be able to use the remaining entitlement to purchase another home. Explaining how the entitlement works can get a little tricky, but here are some basic facts:
- Basic entitlement is $36,000
- Lenders will generally lend up to 4 times the amount of entitlement with no down payment, so the basic entitlement allows a mortgage of $144,000 ($36,000 x 4)
- VA stipulates that if the sales price is over $144,000, the veteran’s entitlement is increased to $106,025; allowing for a maximum loan of $424,100
- Specially-designated high-cost areas allow for a significantly higher amount of entitlement (the Washington, DC MSA, for example, provides enough entitlement to purchase a $636,150 home with no money down)
- The amount of entitlement used to purchase a home remains the same for the entire life of the loan, it does not decrease as the outstanding loan balance is paid down
With all of that said, the act of determining whether or not you can use a VA loan to purchase another home, and for how much, comes down to doing a little math. It may be easiest to demonstrate how the math works through an example. Let’s say you purchased your current home with a VA loan for $200,000 and you wish to purchase another home in the Washington, DC MSA using your VA home loan benefit. The simple math does not even require you to worry about entitlement amounts. Simply subtract $200,000 from $636,150 and that is how much home you can purchase in this area with no money down, $436,150; provided the sales price is more than $144,000.
If the remaining entitlement is not enough to cover the sales prices, it does not mean that you cannot use a VA loan for the purchase, it just means you will have to make a down payment. Again, let’s use an example building off the previous example. Let’s say the home you wish to buy in the Washington, DC MSA is $476,150; exactly $40,000 more than the purchase price we determined in the previous example was your no-money-down maximum. The lender is covered for 25% of the first $436,150 through your remaining entitlement. To make the loan, the lender is going to want you to cover 25% of the overage. So, in this example, your down payment would be 25% of the extra $40,000, or $10,000.
Considering what the normal down payment would be on a 5% down conventional loan ($23,808) or even a 3.5% down FHA loan ($16,666), $10,000 is quite good. Furthermore, both of those loans would have considerably higher payments due to the required monthly mortgage insurance payments.
If you have any questions about your VA entitlement or eligibility, do not hesitate to contact me at your convenience. It is my honor to serve those who have served all of us.