As with many things in life, the VA loans program is pretty straightforward on the surface, but once you get into the particular details, some aspects can start to get confusing. But that’s why Fortress VA Loans is here – to help you make sense of all facets of the lending options available to veterans and active-duty military members. One thing that tends to confuse a lot of VA borrowers is the concept of second-tier entitlement, so we’ll discuss it here.
First, it’s necessary to understand VA entitlement in general. “Entitlement” refers to the amount of potential money granted by the VA to each eligible military member for the purpose of home loans. In most parts of the country, a service member has a maximum entitlement of $36,000 and a secondary entitlement of $70,025, for a total of $106,025. (In certain counties where home costs are higher, these amounts of money are also higher.) When you take out a VA loan, the Department of Veterans Affairs typically makes a guaranty for a quarter of the loan. That guaranty amount becomes the amount of entitlement that you actually use on that loan, so if you take out a loan valued at $250,000, both the guaranty and the amount of entitlement you are using will most likely be $62,500.
If you subtract that $62,500 of used entitlement from the total amount of $106,025, you end up with $43,525 that are not currently being used. That’s how much entitlement you have left over, and it may be possible to use that remaining (“second-tier”) entitlement in a couple of different ways.
If you meet the right requirements for debt-to-income ratio and residual income, you may be able to take out a VA loan for a second property with the remaining $43,525 of your entitlement. The most common case for this is if you intially purchase a home with a VA loan and then receive PCS orders to transfer to another area of the country, where you also want to purchase a home, but you want to keep and rent out your original home while you’re away. Because you have $43,525 remaining in your VA entitlement, that is the maximum amount the VA will guarantee on a loan for a home at your new location. Remember that the VA guaranty is usually a quarter of the total loan amount: $43,525 x 4 = $174,100. If all the various elements line up correctly, you could receive a loan of up to $174,100 to purchase a home at your new location and make no down payment. If you’re able to make a down payment on the home at your PCS location, you could receive an even larger loan.
But what if your initial loan for $250,000 went into foreclosure, or you had to sell that property in a short sale? Well, after a “seasoning period,” which will usually last about two years, although it may be longer or shorter than that, you may be able to receive another VA loan with the amount of entitlement you have left. As we described above, in this hypothetical scenario, you’d have $43,525 of VA entitlement left after your initial loan. If all the circumstances work in your favor, the VA will be able to guarantee $43,525 on a loan for you to purchase a new home after the seasoning period has passed. Multiply that amount by four, and you’ll be able to secure a new VA loan of up to $174,100 without having to make a down payment.
One particular peculiarity of second-tier entitlements is that their loan amounts cannot be less than $144,001, so if you have very little entitlement left over after your first VA loan, you may not be able to secure a second one. But no matter what you think your entitlement situation is, our family of VA loan specialists and lenders is experienced with all the quirks related to second-tier entitlements, so contact us today and let us see if there’s anything you missed. Whatever your circumstances, you can count on Fortress VA Loans to help you navigate this sometimes-confusing process so you can work toward achieving your financial goals.