Editor's note: The whiteboard video above reflects the VA's 2016 loan limits. We will update the video soon. The article below reflects the VA's 2017 loan limits and related VA loan entitlement calculations.
VA borrowers can look to retain their current home and purchase another using their remaining entitlement.
One of the most common circumstances is when an active military member has to PCS to a new duty station. Sometimes it’s tough to sell their current home. Other borrowers like the idea of using the home as a rental property – while you can’t purchase a home with this as your intent, it’s possible to buy with a VA loan, live in the property for a while and then rent it out to others upon relocating.
There are a few major considerations in situations like this. Entitlement is a big one.
The VA backs a portion of every loan. That backing, known as a guaranty, is reflected in a dollar amount called “entitlement.” Your amount of entitlement in part determines how much you could potentially borrow before having to factor in a down payment. And your Certificate of Eligibility gives lenders a clear look at your overall entitlement picture.
There are two layers of entitlement, a basic and a bonus, or secondary, level. The basic entitlement is $36,000. For borrowers in most parts of the country, there’s an additional, second tier of $70,025. Add those together and you get $106,025. That’s the maximum entitlement for VA buyers in all but the country’s most expensive housing markets.
Because the VA typically guarantees a quarter of the loan, a borrower with full entitlement can borrow up to $424,100 ($106,025 x 4) before having to factor in a down payment.
Because you’re keeping your home, the entitlement used to secure that VA loan isn’t accessible for another purchase.
Let’s look at an example. We’ll say you purchased a home a few years ago for $200,000, utilizing $50,000 of entitlement in the process. Now, you’re moving to take a new job. You want to hold onto and rent out your current home and buy a $250,000 home in a regular cost county. As a refresher, the loan limit in a regular cost county is currently $424,100, which means the full entitlement would be $106,025 ($424,100 x 25 percent).
Here’s how the math breaks down:
$106,025 - $50,000 in current entitlement = $56,025 remaining entitlement
$56,025 remaining entitlement x 4 = $224,100
That $224,100 figure represents how much you could look to borrow before having to factor in a down payment. You could certainly aim for a bigger loan, but buyers who purchase above where their entitlement caps out must put down 25 percent of the difference between their cap and the purchase price.
For this example $250,000 purchase, you would need to come up with about $6,500 for a down payment because of your incomplete VA loan entitlement.
Here’s what the math looks like:
$250,000 purchase price – $224,100 entitlement cap = $25,900 difference
$25,900 x 25 percent = $6,475
That could still wind up being a great deal compared to conventional and FHA financing, which require minimum 5 percent and 3.5 percent down payments, respectively. Our example $6,475 down payment on a $250,000 loan represents a 2.6 percent down payment. You’d also wind up paying for mortgage insurance with FHA and conventional loans.
If you’re purchasing in one of the VA’s high-cost counties, you’ll have more entitlement at your disposal. Here’s where things can start to get a little complicated.
Remember, the $106,025 in total entitlement reflects a loan limit of $424,100, which is standard for most of the country. But high-cost counties can have loan limits well in excess of that. That means more $0 down buying power.
VA loan limits can range above $424,100 depending on the county, but they cannot currently exceed $636,150 in the continental United States.
For example, let’s say the limit where you want to buy again is $636,150. The full entitlement for a qualified borrower in this county would be $159,037 (636,150 x 25 percent).
Continuing our example, let's say you have $50,000 in entitlement tied up in an existing property. That leaves you with $109,037 in remaining entitlement ($159,037 – 50,000). And that means qualified buyers could borrow up to $436,148 ($109,037 x 4) in this high-cost county before having to worry about a down payment.
Remember, the additional entitlement only applies when you’re buying in a high-cost county. If you’re moving from a high-cost county to a regular cost county, you would be using the $106,025 entitlement maximum as your starting point.
Purchasing again using your second-tier entitlement also comes with a unique caveat: You can’t have a loan amount below $144,001.
VA borrowers can count their VA Funding Fee toward that total, but not any qualified energy efficiency improvements. Keep in mind you may need to factor in your down payment, too, which will affect how much you're borrowing. At the end of the day, you'll need to borrow at least $144,001 in order to purchase again using your remaining VA Loan entitlement.
Buyers who have some of their basic entitlement remaining may be able to utilize that and avoid the minimum loan amount. You can ask a loan officer to go over your Certificate of Eligibility with you in more detail.
One of the 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 old home may be able to use that pending income to basically cancel out the old mortgage payment.
It’s important to understand that lenders typically treat this as an “offset” and not as effective income. If the mortgage payment on your old house is $1,000 per month and you’re charging $1,500 per month in rent, lenders might only consider that initial $1,000 to offset the obligation.
Veterans United will typically allow a 100 percent offset as long as:
Lenders won’t typically count rental income as effective income until you can document it on two years’ worth of tax returns. Different lenders can have different policies on this.
It’s important to remember this program is focused on helping veterans and service members purchase primary residences.
You’ll need to satisfy the VA’s occupancy requirements and buy a home you’ll live in as your primary residence. Generally, that means living in the new home within 60 days of closing.
Talk with a loan officer if you may have problems fulfilling the occupancy requirement. There are exceptions in some cases.
The VA gives borrowers a one-time opportunity to fully restore their entitlement without selling or otherwise disposing of their home. This benefit essentially allows veterans to retain an investment property or a second home and purchase again using the full reach of their entitlement.
The original VA loan would need to be paid in full in order to pursue the one-time restoration. You can’t take advantage of this if you’re still making mortgage payments on the property.
For example, let's say you buy a home with a VA loan and then later refinance into a conventional mortgage. Refinancing pays off the original loan in full. At that point, if you're planning to hold onto the home rather then sell it, you could look to apply for the one-time restoration of entitlement to purchase again using your full VA loan entitlement.
There's a big caveat here worth noting: If you obtain the one-time restoration and then later want to seek another VA loan, you'll have to sell every property you obtained with a VA loan in order to restore your entitlement.