Breaking Down VA Loan Entitlement

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Your VA entitlement plays an important role in determining your eligibility for a no-down-payment VA loan. VA entitlement can be a tricky concept to understand.

Your Certificate of Eligibility (COE) states the VA loan entitlement amount you’ve earned—but what does this mean? Does it limit the amount you can borrow?

When you take out a VA loan, the VA agrees to repay the lender a certain amount in the event you default and the lender has to foreclose.

Your VA entitlement is the maximum amount the VA will guarantee should this happen. This also impacts the amount you’re able to borrow without needing a down payment.

Types of VA Entitlement

There are two types of VA entitlement: basic and secondary (bonus). Here’s a closer look at how each part works and how they impact your VA loan limits. 

Basic Entitlement

Your VA basic entitlement is $36,000 or 25% of your VA loan amount. If you have full entitlement, your COE will list a basic entitlement amount of $36,000.

Lenders typically allow qualifying Veterans to borrow up to four times this amount, or $144,000, without requiring a down payment.

However, in most parts of the country, $144,000 isn’t enough to purchase a home, so the VA has created a second layer of entitlement to ensure Veterans have access to homeownership.

Bonus Entitlement

Your bonus entitlement kicks in when your loan amount is over $144,000. In this case, as long as you have full entitlement, the VA will guarantee up to 25% of your total loan amount. 

While the maximum amount you could borrow used to be restricted by VA loan limits, this restriction no longer applies as of 2020. Today, you can borrow beyond the loan limit in your county without having to make a down payment.

However, if you have reduced entitlement, then the VA will only guarantee a maximum of the loan limit in the county where the property is located. 

There are several situations that may cause your entitlement to be reduced. This can occur if you’ve previously purchased a home with a VA loan and you are still paying it back, or if you have paid your loan in full but still own the home you purchased with the loan.

If you’ve defaulted on a previous VA loan, this will also reduce your VA entitlement.

How to Calculate Entitlement

If you have full entitlement, you can borrow as much as you need without having to make a down payment. This is true even if your loan amount exceeds your county’s conforming loan limits.

For example, assume that you want to purchase a home for $1.2 million. The VA will cover 25% of the total loan amount, meaning they guarantee they will pay the lender up to $300,000 if you default.

If you have reduced VA entitlement, this calculation gets a bit more complex. Let’s assume that you used $70,000 of your entitlement on a prior home purchase with a VA loan and this amount has not been restored.

Also assume that the county conforming loan limit is $600,000 and you wish to purchase another home with a loan amount of $200,000.

To calculate your remaining entitlement, start by multiplying $600,000 by 25% ($150,000) and subtracting the $70,000 of entitlement you’ve already used. This gives you a remaining entitlement of $80,000.

However, the guaranteed amount is the lesser of this calculation, or 25% of the loan amount. Since 25% of $200,000 is only $50,000, the maximum guaranty is $50,000.

Restoring Your VA Entitlement

If you’ve taken out a VA loan in the past, the following scenarios that may allow you to restore your entitlement eligibility. In each of these cases, you’ll need to complete and submit VA Form 26-1880: Request for a Certificate of Eligibility.

1. You’ve Sold Your Home and Repaid Your VA Loan

If your VA loan has been repaid but you did not apply for restoration, your COE may show “PIF No Restoration.” Once you’ve submitted your form and it’s been processed, your entitlement will be restored in full. 

2. You’re Taking Advantage of a VA Cash-Out Refinance

When you tap into your home’s equity, you’ll need to apply for restoration of entitlement for the purpose of the cash-out refinance only. Once your entitlement is restored, the VA will apply it to the new mortgage.

3. You Paid Off Your VA Loan on a Home You Still Own

VA entitlements are tied to both the loan and the property. So, if you pay off a loan but still own the home, you’ll need to request a one-time restoration. This will reestablish your full entitlement so you can use it to purchase another home.

Confirm Your VA Entitlement

As you can see, there are many intricacies involved in VA entitlement. If you’re not quite sure how this impacts you, your best bet is to consult with a professional.

A qualified VA lender can take a look at your COE and your current financials to help you determine how much of a loan you can take out without needing a down payment.

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