So what is VA entitlement, and how does it work?
Simply put, VA entitlement is the amount of your loan the VA will guaranty on your behalf. This guaranty is what enables lenders to issue 0% down payment loans to veterans. Standby and I’m going to explain in detail how VA entitlement works.
Assuming you have full entitlement the VA will guarantee 25% of the loan you are taking out to purchase a home. By guaranteeing 25% of the loan, it has the same impact of you putting 25% down. This is why lenders are willing to give veterans 100% of what they need to buy the home when making the loan.
Every veteran that is eligible for VA financing has $36,000 in entitlement. Know that whatever amount of money you want to borrow to purchase a home, you must have 25% of that amount in VA entitlement in order to purchase that home with zero dollars down. Years ago the maximum purchase price for a veteran using VA financing was $144,000; hence the entitlement amount of $36,000.
However, that amount is no longer a sufficient maximum purchase for veterans in various parts of the country. So today all veterans that are eligible to use the VA program have what is referred to as bonus entitlement. Bonus entitlement is currently unlimited, but only if you have full entitlement.
This means that a veteran with full entitlement can purchase any property they can qualify for given their income level without having to put anything down. So that begs the question, who has full entitlement?
There’s three ways that a veteran can have full entitlement. They are as follows:
1. The veteran has never used the VA home loan program before
2. The veteran has paid off their previous VA loan, and sold the property that they secured with said VA loan.
3. The veteran lost the home they purchased with a VA loan to foreclosure or short sale, but they have since repaid the VA for the entitlement amount the VA paid out to the lender.
But what if that’s not you. For example what if you have a property you purchased with a VA loan that you want to keep? Well in that case your entitlement will be 25% of the conforming loan limit in your area minus the amount of entitlement you are currently using. Confused yet? Don’t panic…stick with me. I promise this is easy stuff.
Let’s say for example the home you currently have cost you $150,000. 25% of $150,000 is $37,500. So you would have used $37,500 of your entitlement at that time. For most parts of the country the conforming loan limit in 2021 is $548,250 (this typically increases each year). That means your maximum entitlement would be $137,062.50 as that number is 25% of $548,250.
So if you’re already using $37,500 of your $137,062.50 that means your remaining entitlement would be $99,562.50. That means you could purchase a new home for as much as $398,250. So what if the home you want to buy costs more than that?
Easy you have to guaranty what the VA won’t. How do you do that? Easy....by making a down payment. Keeping with the above example if the home you wanted to buy was listed for $425,000 it would be $26,750 more than what you could purchase with zero dollars down. So in this instance your down payment would be $6,687.50 because that amount is 25% of the $26,750 that exceeds your maximum zero dollars down price.
There is one exception to this. The VA provides an additional way to restore all of your entitlement that wasn't mentioned above. It's called a "One-Time Restore".
If you still have the property but you have paid off the loan, you can apply for a one-time restore of your entitlement. But know that you can only do this once in your lifetime. It’s really that simple. However, this is aspect of the VA loan is still a mystery to many loan officers selling the product.
If you want to ensure you have a loan officer that knows the ins and outs of the VA loan program, ask them how entitlement works. Use your newfound knowledge to quiz your loan officer, and determine if they have the VA loan expertise you need.
Now that you know how VA entitlement works you may be asking how do I know if I’m eligible for a VA loan. To find out more about VA eligibility be sure to watch my video “who can get a VA loan” where I’ll be breaking down exactly who is eligible for a VA loan, including those who aren’t veterans.
