If you’re one of the fortunate who have access to the VA home loan program, first, thank you for your service. Second, the VA loan program is without a doubt the most competitive home financing option in today’s marketplace for those seeking to purchase a home with as little cash to close as possible. When applying for a VA loan, there is a section that asks which type of loan you’re applying for. One of the boxes to check clearly states “VA.” It’s this section that needs to be checked which tells the lender the direction you want to go. However, the lender needs a bit more validation of your eligibility for the program before moving too much further.
The lender will need to review a copy of your Certificate of Eligibility, sometimes referred to as the COE. Completing this form also means you’ll need to pull out a copy of your DD214 if you’re a veteran. But it’s not only veterans that are eligible for a VA loan. Active duty personnel may also qualify as long as there are at least 181 days of service verified, National Guard and Armed Forces Reserve members can be eligible with at least six years of service and unremarried surviving spouses of those who died while serving or as a result of a service-related injury can access the program.
When the request for the COE is made, the retrieved document will state the amount of eligibility available. For first time users, the amount is $36,000. That doesn’t seem like enough to buy much of anything, does it? But because the VA guarantees 25 percent of the mortgage made, the maximum VA loan in this scenario is four times that amount, or $144,000. Still though, that’s not enough to finance a home in most places, especially with no down payment. This is where the “bonus” or “second tier” entitlement comes in to play. For purchases greater than $144,000, the VA will still guarantee a loan amount up to 25 percent up to the prevailing conforming loan limit. For most parts of the country, the maximum VA loan limit can be as high as $510,400 and even higher in areas deemed as “high cost,” up to $726,525.
The lender obtains the COE and begins processing the loan. It’s important to note here that the Certificate of Eligibility and the loan guarantee does not mean the applicant is guaranteed a loan approval. The loan package must still be approved based upon credit history, income and employment, sufficient cash to close and other approval factors.
Let’s say someone bought and financed a home with the VA program and put zero down. A few years later, that person decides to move to another area. What happens to the existing VA mortgage? There are a couple of choices here. One is to keep the initial property and rent it out for monthly income. The second is to sell the property outright. If it’s decided to keep the property, unless the individual has at least two years of being a landlord and owning and maintaining a rental, that rental income coming from the existing property may not be used to help qualify for the next home.
Next let’s look at “partial” entitlement. Partial entitlement is relatively rare but it does happen. Partial entitlement occurs when a borrower only uses a portion of available entitlement. Instead of $36,000 entitlement, the applicant buys a home at $100,000 which means 25 percent or $25,000 was used to finance the zero down purchase. That leaves $11,000 still remaining. With a little math, a subsequent purchase can be made at four times $11,000, or $44,000. Now you can see why this situation is relatively rare.
Let’s circle back and look at selling the property financed with a VA loan. The VA entitlement can be used again to finance the next owner-occupied property without the need for a down payment. Once the property has been sold and the VA loan paid off, the buyer can use the benefit once again because the entitlement was restored upon loan payoff. It will take some time for the VA to be notified that existing note was retired via a sale. In this instance, the sellers would need to keep a copy of their settlement statement showing the previous mortgage was paid off in full.
If this scenario sounds like it’s you or someone you know, let’s talk to see what we can do to get you into your next home with as little money to the closing table as possible. It can be a bit tricky when working with the VA directly as a consumer. I know VA loan programs inside and out and if your goal is a zero down loan with competitive terms, the VA program is most likely going to be your best choice.