VA Second Tier Entitlements
What are the Department of Veterans Affairs Second Tier Entitlements?
The VA's second-tier entitlement provides qualified borrowers the opportunity to possess both their current home and a new primary residence. This allows them not only the option of retaining ownership, potentially as an investment property, but also acquiring another primary residence home.
This is frequently used when a qualified borrower is transferred and may not be able to sell their current home.
How Do Qualified Borrowers Keep Their Current Home?
VA borrowers have options to retain their current home and purchase another using their remaining VA entitlement amount.
One of the typical scenarios is when an active military person must do a Permanent Change of Station (PCS) assignment to another duty station. Keeping one's home could be beneficial as selling at times can prove worrisome.
Purchasing a home with the intent to rent it out may not be possible, however having an alternative option is available. Utilizing a VA loan, a qualified borrower may have the ability to buy and reside in their new property for some time before relocating and then renting it out.
The VA offers a significant guarantee for every loan. This assurance is known as the guaranty, and it is represented in an amount called "entitlement."
With their full entitlement of a VA loan, qualified borrowers may have the capability to acquire any sum without having to put down money that private lenders are willing to provide.
Those with limited VA loan eligibility – either due to an existing active loan or default on a prior one – may need to consider making a down payment when the time comes to acquiring another VA loan.
Remaining Entitlement
Eligible veterans are given two layers of entitlement, the first being $36,000 and a bonus or secondary level applicable to most areas.
This second tier adds an extra $145,550 to the total entitlement amounting up to $181,550.
Unfortunately, when a qualified borrower retains their home from the original VA home loan process, they are no longer eligible to use that loan limit or same entitlement for a different purchase.
Minimum Loan Amount
When using an eligible borrower uses their second-tier entitlement to purchase again, they will not be able to secure a loan amount below $144,001.
The VA Funding Fee can factor into this total; however, energy efficiency improvements do not count towards it.
Keep in mind that down payment also impacts the borrowing sum - so when all is said and done, the eligible borrower will need at least 144K in order to take advantage of their remaining VA Loan eligibility.
Expensive, High-Cost Counties
Remember, the $181,550 in total entitlement reflects a maximum loan limit of $726,200, which is standard for most of the country. But high-cost counties or more expensive housing markets may have loan limits well over that. That means more $0 down buying power. VA loan limit is currently cap out at $1,089,300.
Rental Income
An eligible borrower who is securing two VA loans at the same time may be financially strained.
They will have to pay two mortgages at the same time. An eligible borrower who plans are to rent out their previous home, may be in a better situation as they may use the pending rent income to cover the original mortgage.
It's essential to remember that creditors often view this as an "offset" rather than a dependable form of income.
For instance, if the mortgage payment for the eligible borrower’s original house is $1,000 monthly and they are charging $1,500 in rent per month, lenders might only consider the first $1,000 when offsetting any liability.
Some Lenders will allow 100% as long as the eligible borrower has the following:
1. A renter locked into a 12-month lease.
2. They can show the security deposit in their bank account.
3. They are not leasing to a family member.
Most lenders will only count the rental income if the eligible borrower has two years’ worth of tax returns showing the rental income.
Each lender will have their own rules and policies in regard to rental income.
Credit Score:
There is no minimum credit score requirement for a VA loan, but most mortgage lenders want to see a FICO credit score of at least 620. Some lenders approve lower scores, but borrowers may meet additional scrutiny and requirements.
Debt to income ratio:
The debt-to-income ratio determines if and eligible borrower can qualify for VA loans. The acceptable DTI for a VA loan is 41%.
What are the Occupancy Requirements?
It’s important to remember this program is focused on helping active military service members, military veterans and surviving spouses of veterans to be able to purchase a home.
An eligible borrower will need to meet the requirements of the VA occupancy requirements and purchase a home where they will live as their main residence.
They will need to live in the new home within 60 days of closing.
What is the One Time Restoration of VA Entitlement?
The first VA loan gives eligible borrowers a one-time opportunity to fully restore their entitlement without selling their home. This benefit allows eligible borrowers to keep an investment property or second home, and purchase again keeping use of their full entitlement.
The original VA loan would need to be paid in full to be able to use the one-time restoration of entitlement.
For Example:
if an eligible borrower uses their VA loan to buy their home and then refinance with a conventional mortgage, the previous debt will be fully paid off.
If they wish to keep ownership of the property instead of selling it, they should take advantage of this one-time chance to restore their full entitlement for another purchase through a new VA loan amount.
An important point to remember: if an eligible borrower uses their VA loan entitlement once and then want a new loan, they must sell every property purchased with the original VA loan in order to regain eligibility.
Why the VA Offers 2nd Tier Entitlements?
The Department of Veterans Affairs is with the federal government. They have programs in which the VA guarantees part of a VA home loan.
When it comes to buying a home with a VA loan, veterans are often entitled to a certain amount of financing. This entitlement is known as the Basic Entitlement and it allows veterans to borrow up to $36,000 without having to make a down payment.
But what happens when a veteran wants to purchase a home that exceeds that amount? That's where the VA's 2nd tier entitlements come in.
The VA created 2nd tier entitlements to help veterans finance higher priced homes with no down payment. This means that veterans can purchase homes that are worth more than the Basic Entitlement without needing to put any money to make a down payment. In fact, the VA's 2nd tier entitlements can allow veterans to purchase homes for much higher amounts, ranging all the way up to the conforming loan limit.
So, why does the VA even offer 2nd tier entitlements? There are several reasons why, but one major factor is to help veterans achieve homeownership. Veterans have often sacrificed a lot for their country and the VA recognizes the importance of providing them with opportunities to establish long-term stability and wealth through homeownership.
Another reason why the VA offers 2nd tier entitlements is because it helps stimulate the economy. When veterans are able to purchase homes, it creates a ripple effect throughout the local housing market.
It's important to note that not all veterans are eligible for 2nd tier entitlements. Eligibility depends on a variety of factors such as location, loan amount, and previous VA loan usage. However, for those who are eligible, utilizing the 2nd tier entitlement can open up a world of possibilities.
The VA's 2nd tier entitlements exist to help veterans achieve the American Dream of homeownership. By providing access to financing for higher priced homes, the VA is helping veterans create stability and wealth for themselves and their families. And in doing so, the VA is also helping to stimulate the economy and support the growth of local communities.
Conclusion of Second Tier VA Entitlements
A veteran's primary entitlement may become a VA's second-tier entitlement provides eligible borrowers the opportunity to both keep their current property and purchase a new one. Especially if they have been assigned to a new duty station.
This enables active military service members, military veterans and surviving spouses of military veterans with homes of their own to not only retain ownership, but also capitalize on potential rental income by potentially turning it into an investment property while obtaining themselves a primary residence.
Nationwide, an eligible borrower may have a total veteran's entitlement of $181,550 to own two homes. However, if their second home is located in an area with high living costs then that amount jumps up to $272,325.
The VA will deduct the used sum from their total entitlement for acquiring the first property so that they are able to make use of what remains for purchasing another house.
If the loan amount on their new property exceeds their remaining entitlement, they will have to pay 25% of the difference out of their resources.
Even with a partial down payment, a VA loan is still likely to be more beneficial than other types such as conventional or FHA loans which require minimum deposits of 5% and 3.5%, respectively.
It is very important for the eligible veteran to VA loan Amount to secure their home loan with savings in the bank. This will ensure they have the reserves to pay the second VA mortgage, in the event their renter defaults.
If you have questions about your entitlement
Our expert mortgage officers are available to assist with any questions you may have.
Please call us at 1-866-713-9292, or
Call the VA at 877-827-3702 (TTY: 711) to talk to a VA home loan representative.
