VA borrowers have the opportunity to use second tier entitlement if the need arises. This could mean a few things. They could purchase a second home with approval from the VA. They could also buy a home after experiencing a foreclosure on a VA loan. We discuss the parameters of each situation below.
What is Entitlement?
First, let’s look at entitlement and how it works. Entitlement is the money the VA will guarantee for you on a home loan. Eligible veterans start with $36,000. Because the VA guarantees 25% of the loan amount, you can multiply that $36,000 by 4. This gives you a $144,000 loan amount. However, most veterans also get secondary entitlement or bonus entitlement. This amount equals $70,025. Multiplying that number by 4 gives you a $280,100 loan amount. Adding the two amounts together, you get $424,100. This is also the national conforming loan limit.
Using Your Second Tier Entitlement
Now let’s look at what happens when you use your entitlement. Let’s say you buy a home for $150,000. You don’t put any money down. Your total loan equals the full $150,000. This means you used $37,500 of your entitlement. You still have $68,525 left.
Now let’s say you are still active in the military and you received a new assignment. The location is more than 50 miles away from your current home. But you don’t want to sell your current home. The VA may allow you to use your second tier entitlement of $68,525. This means you can buy a home for up to $274,100 without needing a down payment.
Now just because you are eligible to use it doesn’t mean you qualify to use it. You must prove you can afford the new loan alongside your current loan. Just like you qualified for your original VA loan, you’ll go through the process again. This time, though, you’ll have 2 mortgage payments that must fit within your debt ratio. The VA doesn’t focus solely on the debt ratio, but in this case, the lender likely will. They must make sure you can comfortably afford all aspects of home ownership for 2 homes.
You must also satisfy the residual income requirements. The VA has standards based on where you live and your family size. You must have at least that much money left after paying both mortgages and your other monthly bills. If you don’t have enough residual income, you can’t use the VA loan a second time.
Buying a Home After a Foreclosure
Second tier entitlement also comes in handy if you lose your home in foreclosure. Because you defaulted on a federal loan, you won’t get that initial entitlement back. However, if you have unused entitlement, you may be able to use it.
Here’s an example.
John bought a home for $150,000 with a VA loan. He used $37,500 of his entitlement. John lost the home due to losing his job and not being able to pay his loan. It has now been 3 years. John still has $68,525 left. This means he can secure a loan amount of $274,100. Of course, he must qualify for the loan. Lenders will likely scrutinize his financial situation to make sure it’s secure.
If John has a good reason for losing his job and not being able to pay his mortgage, it will pave an easier path for him. Each lender has their own threshold for what they will accept for reasons of default. Illness, injury, or company closings are often well-accepted reasons. Of course, you must talk to your lender before determining if you have a valid excuse.
Higher Funding Fees
Something to keep in mind is the size of the funding fee. When you first used your entitlement, you likely paid 2.15% of your loan amount. This is the standard funding fee for first time use. The second time around, though, the fee increases. The VA created the program to help veterans purchase a primary place of residence. If you need to buy a second home for one reason or another, you’ll pay the price. This helps the VA continue to offer the program to veterans who need a primary home still.
Right now the funding fee for subsequent use equals 3.3% if you don’t put any money down. If you were to make a down payment, you could lower the subsequent funding fee to 1.5%, but you must put down between 5 and 10% on the home.
The second tier entitlement has helped many veteran families. It is normal for military personnel to be relocated. Rather than forcing you to deal with a long commute or sell your home, you have other options. Keeping your home and renting it out may even help you qualify for the second VA loan. You’ll need an official lease, but the income can then help you secure the second VA loan.
While it’s not the norm to have 2 VA loans, it is a possibility. Not every lender will offer the second VA loan, though. Talk with a few lenders to see what options you have. You may find differing rates and costs for the loan just because it’s the second time around. Luckily, the VA offers many options and stands behind lenders who offer this program to its borrowers.