VA Home Loan Entitlement Restoration
Posted on: March 3, 2020
One persistent myth about VA loans is these mortgages are only for first-time buyers. It’s just not true. VA entitlement restoration is easy.
In other words, you can get all the outstanding benefits of a VA loan as many times as you want — not just when you buy your first home. So you can still enjoy all those privileges (incuding a minimum down payment of zero and some of the lowest mortgage rates around) for every home you buy for the rest of your life. No wonder the VA backed 624,544 loans in fiscal year 2019.
Can I get a second VA loan?
Yes, but there are some rules. Most importantly, you must intend to live in the home you buy with any VA loan. So you can’t use your entitlement to build a rental property empire or even buy a vacation home.
In simplest terms, you can only use your entitlement once at any given time. In other words, you have to clear any existing VA loan that’s eaten up your entitlement before you can receive another VA loan. But, of course, it’s fine if you’re closing on a sale immediately before you close on a purchase.
How to qualify for a second VA loan
Your entitlement is finite. It’s a dollar sum, which you can discover from your certificate of eligibility (COE). And it’s not the amount of any mortgage you get.
The VA guarantees only a part of the mortgage you borrow from a private lender. If your mortgage goes greasy side up — perhaps because you’ve defaulted — your lender will get a check from the VA to cover its losses, up to the amount of your entitlement. But, because that lender will own your home after foreclosure, they probably won’t lose much. Because the lender is exposed to such limited risk the mortgage company can offer you a sweet deal.
Routes to VA entitlement restoration
To fully restore your VA entitlement you can move forward in any of three ways:
- Sell your home and “redeem” your mortgage (zero its balance) out of the proceeds.
- Refinance your mortgage into a standard loan that isn’t backed by the VA.
- Pay off your VA loan.
Each of those results in VA entitlement restoration. And we’ll dig further into the first two in a minute.
But first, we need to note one other point: unused entitlement. If your existing home is relatively inexpensive by nationwide standards, you may not have used all your entitlement when you purchased it.
And, if the one you want to buy is also inexpensive, you may have enough of your entitlement leftover to purchase it without selling your existing place or refinancing. More details on this option below.
Restore VA entitlement by selling
When you sell a home, any mortgages secured on it are automatically redeemed. Money to clear balances and pay due fees is sent directly to your lender on closing.
Of course, you may be one of the many who want to buy another home with a VA loan at the same time they sell their existing one. And such simultaneous transactions are common.
Practicalities of simultaneous closings
Have your new lender get a fresh certificate of eligibility from the VA. It will probably say your entitlement is used up with your existing loan. Still, that COE is enough for you to apply for a new mortgage.
On closing your sale, pass the HUD-1 closing statement you’ll be given to your new lender who will tell the VA. This should instantly restore your entitlement. You can then get the funds to buy your next home.
Sounds cumbersome? Not really. Nowadays, it can all be done with document uploads and online access to the VA’s IT systems. Typically, it all takes a matter of minutes.
VA entitlement restoration through refinancing
You can restore VA entitlement by refinancing the existing VA loan into a new non-VA loan. There is a one-time entitlement restoration available for veterans who pay off their VA loan in full, but retain ownership of the property.
Keep in mind that the entitlement restoration can only be completed once. This is VA’s way to make sure that VA home loan financing is not used to acquire many properties.
Use your remaining entitlement
The VA loan entitlement amount shown on your COE probably says $36,000, because that’s the standard. But, in fact, it’s 25% of the loan limit (set annually by the federal government) for the county in which you’re buying. In most places, that limit was $510,400 in 2020, though it can be way more in counties where the median home price is significantly higher than average.
How much entitlement?
So, rather than the nominal $36,000, your actual entitlement is likely to be $127,600 ($510,400 x 25%) or higher. Now, suppose you were lucky enough to buy a home for $100,000 a few years ago. The entitlement you used was 25% of the home’s price. So you’ve used only $25,000 of your $127,600 entitlement.
And, if you now want to buy another home, you can use your $102,600 (that $127,600 full entitlement, less the $25,000 you’ve already used, equals $102,600) remaining entitlement to do so. The question of VA entitlement restoration doesn’t arise.
But, of course, you must live in the home you’re going to buy. And it looks better if you’ve lived for a respectable period in the one you’re going to keep.
Increased VA funding fee when reusing a VA home loan
The VA funding fee is a one-time payment you make when closing. It allows the VA loan program to be self-sustaining and continue to offer low- or no-down payment loans without mortgage insurance.
If you’re buying your first home and have no down payment, you’ll typically pay a funding fee of 2.3% of the purchase price.
However, when you take out subsequent VA loans, your rate may increase. If you buy another home with zero down, it will go up to 3.6% of the price. Note that rate goes down the more you put down.
FAQs about VA entitlement restoration
How do I request restoration from the VA?
By completing VA form 26-1880, you can request restoration direct from the VA. Or, your lender is usually able to quickly contact VA and request entitlement restoration for you. Contact one of our VA home loan professionals for assistance.
Does my credit score affect how much I can borrow?
No. Maximum loan amounts are determined by the amount of unused entitlement. Your credit score may affect whether you qualify for a VA home loan, however.
Can I use my entitlement to help a family member buy a home?
No, unless you intend to occupy the property along with your relative as your primary residence. VA loans are only issued to the eligible veteran for their owner-occupied property.
I have a service-connected disability. Does that have any effect on my entitlement?
No, your amount is the same as any other qualified veteran or service member. However, you may be exempt from paying the funding fee if the VA has declared your disability to be service-related.
Can I transfer my entitlement to someone else?
No, you may not. The only time entitlements can be transferred from one person to another is to the surviving spouse of a veteran who died as a result of service-related injuries.
How does my entitlement affect my loan approval?
It doesn’t. Your loan is approved based upon a set of lending guidelines established by the VA, based on your income, assets, credit profile, and other factors. Your entitlement is only used to determine eligibility and maximum loan amount.
Apply for a VA home loan
Whether you’re buying your first home or are already a homeowner, your VA loan comes from a private lender. All the VA does is guarantee part of your loan.
And private lenders vary enormously. Some offer way lower rates on VA loans than others. And the range of customer service on offer is wide, too. So you need to pick a lender with care. And that means shopping around for the lowest rates from the most reputable companies.
It doesn’t matter what you’re doing — buying your first home with a VA loan, purchasing a subsequent one or refinancing — you owe it to yourself to get the best possible deal. Because you stand to lose thousands if you don’t bother.