The VA offers lenders a guaranty for the VA loans that they write and fund. This guaranty promises the lender 25% of the loan amount should the borrower default. That’s a promising guaranty for lenders, as the average homebuyer doesn’t put 25% down on a home.
If the VA guarantees the loans, though, just how much will they guarantee? Is there a max entitlement?
The VA does have a maximum entitlement. It may vary slightly by year, as it is dependent on the maximum conforming loan limit. But, there are two types of entitlement you should know about – basic and bonus entitlement.
The Basic Entitlement Limits
Every qualifying veteran receives basic entitlement. This provides veterans with a guaranty of $36,000 or a $144,000 loan amount, since the VA guarantees ¼ of the loan amount. This basic guarantee often isn’t enough for borrowers, though. Since the VA loan doesn’t require a down payment, it means that veterans would have to find a home for $144,000. That’s not an easy task.
Luckily, the VA makes up for this low amount with bonus entitlement. So if you find a home that will cost you more than $144,000, you can turn to your bonus entitlement.
The Bonus Entitlement Limits
The bonus entitlement makes up the difference between the national conforming loan limit and the VA’s basic entitlement. Today, the national conforming loan limit is $453,100. This makes this year’s bonus entitlement equal to $309,100. This means a guaranty from the VA of $77,275.
You don’t have to use this entire amount, but if you find a home that costs more than $453,100, you can rest assured that you’ll be able to buy it with the VA guaranty as long as you qualify for the loan. Entitlement doesn’t’ mean you automatically get the loan – you still have to qualify for it based on your credentials. In other words, you must be able to prove that you can afford the loan.
Going Above and Beyond the Max Entitlement Limits
What happens if you find a home that is worth more than $453,100? Are you unable to buy it with VA financing?
Luckily, you are able to buy it still; you will just have to put some money down on it The VA will guarantee 25% of the loan amount up to $453,100. For this portion of the loan, you will not have to make a down payment. Any amount that exceeds $453,100, though, will cost you money in the form of a down payment.
The VA allows veterans to purchase a home for as much as they want. The VA just won’t guarantee the entire amount. Any amount that exceeds $453,100 is not a part of the VA guaranty. Here’s how that works.
The VA provides their 25% guaranty on the first $453,100. Any amount above $453,100 will require a 25% down payment. In other words, you must make a 25% down payment on the difference between the purchase price and $453,100.
Here’s an example:
Joe is a veteran with full entitlement. He wants to buy a home for $550,000. The VA will provide him with the guaranty on the first $453,100. This leaves Joe with $96,900 without a guaranty. This means Joe has to put down 25% of that amount on the home or $24,225.
The max entitlement may change from year to year with the VA, as it depends on the national conforming limit for the year. Typically, the max VA entitlement is plenty for veterans to purchase a home with no down payment. In those rare cases that you find a home that costs more and that you want to buy, you’ll have to put some of your own money into it in order to get the loan.