The VA offers benefits to veterans to help them buy a home with little money out of their pocket. The VA provides veterans with a basic benefit. However, that basic benefit isn’t always enough to buy a home in their county. This is when the bonus entitlement comes into play. It makes up the difference between the basic entitlement and the purchase price, up to a limit. That limit is the county maximum.
What is Basic Entitlement?
Veterans that meet the eligibility requirements receive a basic entitlement of $36,000. The VA guarantees 25% of a loan, so that $36,000 guarantee translates into a $144,000 loan. If you are able to find a home for $144,000, you’d use your basic entitlement and not make a down payment.
Veterans that serve enough time and have an honorable discharge are able to use this benefit. The service times required are:
- 181 days during peacetime
- 90 days during wartime
- 6 years in the Reserves or National Guard
What if you can’t find a home for as little as $144,000? You must then use your bonus entitlement.
What is Bonus Entitlement?
Bonus entitlement is the guarantee that makes up the difference between the purchase price and the basic entitlement. The VA allows bonus benefits up to the national conforming limit. The national conforming limit for 2018 is $453,100. However, more than 30 counties have a higher limit – they are the high-cost areas. The maximum high-cost limit is $679,650, but each high-cost county differs.
Again, the VA provides a 25% guarantee. Looking at a home in a non-high cost area, the maximum bonus entitlement is $77,275. Here’s how it looks:
- Basic entitlement $36,000 x 4 = $144,000
- Bonus entitlement $77,275 x 4 = $309,100
- $144,000 + $309,100 = $453,100 or the national conforming limit
You are not automatically entitled to this extra benefit, though. It only comes into play if you need it for the purchase price of your home and if you can afford it. This makes you ‘eligible’ for a loan. You still have to qualify for it.
Using Your Entitlement
Generally speaking, VA loans are for primary residences or owner-occupied properties. However, there is a loophole. You have to show good faith in your efforts to live in the home. In other words, you must move in after closing and live there for a while. However, the VA understands that life changes and you may need to move. Whether it’s due to relocation or another reason, you may want to keep your existing home.
This leaves your entitlement in use. You cannot reuse the entitlement that is tied up. However, if you did not use the full amount, you may be able to use what is left. Again, this is where the bonus entitlement may come into play.
Here’s an example:
Joe bought a home for $175,000 in 2008. He moved into the home and lived there as his primary residence. He’s since been relocated. He wants to buy a home in the new state he must move to, but wants to keep his existing home. He figures he will retire in his original home eventually.
Joe used up some of his entitlement, but not all of it. Let’s look at what he has left to buy a home in his new hometown.
- $453,100 (conforming limit) x .25 = $113,275 (total entitlement available)
- $113,275 – $43,750 (entitlement already used) = $69,525 (entitlement available for use)
- $69,525 x 4 = $278,100
Joe can buy a home up to $278,100 with no down payment. If he were to find a more expensive home, he could still use his benefits. The difference is he would have to put down 25% of the difference between the purchase price and the $278,100 maximum benefit he has available.
Let’s say he found a home for $300,000. He would have to put down $5,475 as that is 25% of the difference between $300,000 and $278,100.
Once a veteran uses up all of their entitlement, the only way to reuse it is to pay off the loan and sell the home. You then have to ask for the benefits to be reinstated. The VA will generally do this as long as your account was in good standing. This allows you to purchase another home with your benefits, basically as if you are starting from scratch.
If you are a veteran eligible for VA benefits, you have basic and bonus entitlement. Keep track of what you use so you know what is available should you need it in the future. Of course, you must qualify for any loan you request, meaning you must prove you can afford it. The VA is very careful about the loans they guarantee so that they minimize the money they must pay out in the face of default.