In some situations, service members and veterans may need to purchase a second primary home while retaining their current primary residence. Under certain circumstances, it is possible to use a VA loan to finance a second primary home by using additional entitlement.
What Is A VA Loan?
A VA loan is a type of mortgage that helps U.S. veterans and active duty service members, along with widowed military spouses, to purchase a home. The VA does not lend money directly to borrowers. Instead, they guarantee up to one fourth of the loan amount to approved lenders that finance up to 100 percent of the home’s value.
Benefits Of A VA Loan
One of the greatest benefits of a VA loan is the fact that a down payment is not required. This can be useful for those being moved by the military who have little money left over after covering the moving expenses the military does not cover.
In addition, there is no minimum credit score requirement, although individual lenders may have certain preferences. The income tests are also more lenient as the VA uses a measure known as residual income to qualify borrowers for mortgages. This considers how much money a borrower has left over every month after making their housing payment.
Another benefit is that a VA loan does not require mortgage insurance, even when no down payment is made. Instead, a small funding fee is charged depending on the borrower’s status and branch in the military, length of service, and previous eligibility use.
How VA Loan Entitlement Works
VA loan entitlement can be a bit complicated to calculate. A borrower who currently owns a home that used a certain amount of entitlement must look at their certificate of eligibility, or COE, to determine how much bonus entitlement they have left, and, by extension, the maximum amount they can borrow to buy another home using their VA home loan benefits.
After multiplying the county loan limit in the new city by 25 percent to calculate the maximum VA guaranty, the amount of entitlement they have already used is subtracted from that figure to determine how much they have left.
This new number should be multiplied by four to determine the amount of available entitlement for a new loan. The resulting figure indicates the maximum loan amount the borrower can obtain without a down payment; homes costing less than this amount can be purchased without making a down payment.
How To Restore Your Eligibility After Selling Your Home
After selling a home, those with a VA loan must restore their eligibility so they can purchase a second home with a VA loan. This does not happen automatically upon paying off the first VA loan. Instead, the veteran must initiate the process by filling out the relevant paperwork online or sending a completed Form 26-1880 Request for Certificate of Eligibility to a regional VA processing center.
VA loans are assumable, which means a person who buys a veteran’s home can take over the rate. However, the original borrower’s entitlement will not be restored unless the person buying the home is an eligible veteran who is willing to substitute their own eligibility for the seller’s. If a non-military buyer purchases the home, however, some of the original VA entitlement will remain tied up in the property until the loan has been fully paid.
Buying A Second Home With A VA Loan
When considering purchasing a second home with a VA loan,, it is important to first understand what is meant by a second home. A vacation home that is only used part of the year, such as a home in the south used as a reprieve from cold winters, cannot be purchased using VA benefits. A VA loan can only be used for a home that the borrower intends to live in as their primary residence.
However, it is possible to purchase a second primary residence using VA benefits. As long as the borrower has enough entitlement and income to qualify for the two homes, it may be possible to buy a second primary residence with VA benefits without a down payment in some situations. This may be the case if, for example, a service member is in the process of relocating and wishes to purchase a new home in the new duty station before their old home has sold.
Using Bonus Entitlement
VA bonus entitlement allows eligible service members and veterans to borrow above the basic entitlement limit. Known as second-tier entitlement, this can enable people to purchase more expensive homes with VA loans without making any type of down payment or having to sell their current home in certain circumstances.
Work With An Experienced VA Loan Provider
If you are interested in purchasing a first or second primary home using a VA loan, get in touch with the experienced VA loan providers at My Lending Pal for help determining your bonus entitlement and the home loan amount you can qualify for in your specific financial circumstances.