Veterans, active military and reservists looking at getting a VA mortgage should understand their home loan guaranty benefit and know how to use their available “entitlement” to the fullest.
The entitlement in basic terms is the guaranty amount that the U.S. Department of Veterans Affairs will repay a lender if the borrower defaults on their mortgage. In most cases, the lender requires 25 percent guaranty of the loan amount for loans of $144,000 to $424,100, or higher in certain high-cost areas of the country. Each qualifying veteran can access all or a portion of their entitlement when applying for a loan.
A significant benefit of this guaranty is that the borrower does not have to pay each month for private mortgage insurance to protect the lender, even when the borrower does not give any down payment. That lowers the monthly payment and overall housing cost to the borrower. The guaranty also helps a borrower to refinance into a VA loan even if they have no equity in their home.
Some important points to know:
- A veteran buying a home on his or her own can use the full loan guaranty entitlement.
- A veteran buying a home with his or her non-veteran spouse can also use the full entitlement.
- A veteran buying a home with a non-spouse companion such as a relative or friend can only use half of their entitlement. This often happens when two incomes, FICO scores, etc., are needed in order to qualify for a loan but only one of the unmarried borrowers is a veteran. In this case, the borrowers may need to put down an unexpected or higher-than-expected down payment to compensate for the difference.
- If two veterans who are married are buying a home together, each can use half of their entitlement instead of one of them using their full entitlement. Or one veteran can use their full entitlement and the other veteran can save their entitlement.
- A veteran who has used a portion of their entitlement can use remaining entitlement to purchase another primary home. The remaining entitlement must be sufficient to guaranty the new loan.
- After paying back a loan, a veteran can use their entitlement again to buy another property (the veteran must apply for restoration of entitlement with the VA).
Technicalities of the entitlement:
The basic, or primary, entitlement is $36,000 and would cover 25 percent of a $144,000 mortgage in case of default. However, because homes in many parts of the country cost more than $144,000 the VA also links pledge amounts to conforming loan limits on conventional loans. That limit is $424,100 per home or higher in certain counties. The guaranty would be 25 percent of $424,100, or $106,025.
In order to meet that mark, the VA essentially created a secondary entitlement amount. That additional layer of entitlement comes into play anytime a veteran purchases a home for more than $144,000 and up to $424,100 in most areas of the country and higher in certain counties. For reference, the highest VA loan mortgage limit in 2017 is in the mid-$600,000s.
For more information, speak with a Licensed Lending Officer at (888) 983-3240 for more information.
Update published Nov. 8, 2017