Everyone deals with challenges from time to time and sometimes those challenges include significant financial events such as the loss of a home through foreclosure or the need to sell a home for less than the amount owed on the mortgage. Most mortgage programs require a waiting period of several years before you can be approved for a mortgage. Depending on the situation, a VA loan might have similar waiting period requirements, but there will likely be another consideration as well.
In addition to the typical income, asset, employment, and credit qualifying that accompany the mortgage approval process, VA loans are based on the servicemembers eligibility and amount of entitlement. Every eligible servicemember starts out with the maximum amount of entitlement. When you use a VA loan on a home, however, you use some of your available entitlement to provide a guaranty to your lender that you will pay off the loan. So, if you do not pay off the loan in its entirety, you essentially forfeit the portion of your entitlement that was used.
If you wish to purchase or refinance another home with a VA loan, the amount that you can borrow with no down payment (or equity in the case of a refinance) will be limited based on the amount of entitlement you have remaining. Here are some key points to understand about your VA entitlement:
- 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
o 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
So, if you were to purchase a $200,000 home using your VA loan benefit, $50,000 of your available entitlement would be tied to that home. If that loan was eventually paid off as agreed, that used entitlement would be restored, thus allowing the veteran to reuse it in the future; however, if the home becomes the subject of a foreclosure or short sale, the used entitlement is forfeit, leaving the veteran with only whatever entitlement is remaining.
In the scenario above, assuming the veteran wished to purchase a home over $144,000 in sales price in a non-high-cost area, the veteran would have $56,025 in remaining entitlement ($106,025 – $50,000). This means that veteran could purchase a home up to $224,100 (provided they qualify for the loan) with no money down.
So, what happens if the veteran wants to purchase a home for more than $224,100, you might ask? Does he or she have to use a different loan program? No, the VA loan program still offers the veteran a significant advantage over other programs. The veteran can purchase the more expensive home, provided he or she is willing to put down 25% of the difference between the actual sales price and the full amount that their entitlement would cover.
Again, to use the scenario above as an example, let’s say the veterans remaining entitlement allows a maximum no-money down loan of $224,100. But the home the veteran wishes to purchase is $250,000. The veteran can still purchase the home with a VA loan, but will have to pay 25% of the difference between the $250,000 sales price and the $224,100 $0-down maximum, or $6,475 ($250,000 – $224,100 = $25,900; $25,900 x 25% = $6,475.) That is considerably lower than most other loan programs and any program that might allow a lower down payment is going to have a considerably higher monthly payment than a VA loan provides.
The ins and outs of VA entitlement can be very complicated in certain situations. If you have any questions about your entitlement or eligibility for a VA home loan, do not hesitate to contact me at your convenience. It is my honor to serve those who have served all of us.