When you are looking into getting a VA loan to buy a home, one term that will come up is VA loan entitlement. Based on the length of your military service and other factors, it may be able to help you become a homeowner without making a down payment.
What Is A VA Loan?
A VA loan is a type of loan backed by the U.S. Department of Veterans Affairs that helps veterans, service members and some eligible surviving spouses become homeowners. Although these loans are generally provided by private lenders like mortgage companies and banks, the VA guarantees a portion of the loan so that lenders can offer those who are eligible more favorable terms.
What Is VA Entitlement?
Veterans who are eligible for VA loans will have VA loan entitlement. This is a dollar amount that the VA has agreed to pay back to the lender should the borrower default on the mortgage. Although it is simple in theory, the concept of VA entitlement can be rather complex.
For those who meet the minimum loan requirements, most lenders will provide a loan of up to four times the amount of the basic entitlement before requiring a down payment.
VA entitlement is linked to the VA guaranty. This works like mortgage insurance on other types of loans and sees the lender repaid for a portion of the loan in the event that they need to foreclose on the property. However, the VA guaranty is not charged to the borrower as a lump sum or monthly payment. Instead, it is covered by the VA based on the borrower’s available VA entitlement and the amount of the loan.
To be eligible for VA entitlement, you must have served at least 90 consecutive days during wartime, 181 days during peacetime, or have more than six years of service in the Reserve or National Guard. In addition, the spouses of veterans who died in the line of duty or due to a service-connected disability may also be eligible.
Two Types Of VA Loan Entitlement
There are two main types of VA loan entitlement: basic entitlement and bonus entitlement.
Basic entitlement guarantees that the VA will pay the lender $36,000 or 25% of the VA loan if the borrower defaults, whichever amount is less. This does not mean that you may only borrow up to $36,000, however. Most lenders will allow people with VA loans to borrow up to four times that amount, or $144,000, without a down payment.
Bonus entitlement, or second-tier entitlement, gives people taking out VA loans the power to borrow amounts exceeding the basic entitlement limit of $144,000. This can allow people to buy a more expensive home, but only up to the conforming limit. This is generally $417,000 but may be higher in some high-cost counties.
If you currently have a VA loan, you will need to pay it to have your full VA entitlement restored.
How Is VA Loan Entitlement Calculated?
Before you attempt to calculate your VA loan entitlement, it is important to check if there have been any recent changes to VA loan limits. A VA loan officer can help eligible veterans calculate the maximum mortgage loan amount they can expect based on their entitlement.
For loans that closed on or after January 1st, 2020, veterans with full entitlement saw the maximum guaranty amount set at 25% of any loan amount higher than $144,000, regardless of the loan limit in their county. For those with partial entitlement, the maximum guaranty for a loan greater than $144,000 cannot exceed 25% of the amount of the loan or 25% of the county’s loan limit minus any entitlement that they previously used and did not restore.
The VA’s website provides the example of a loan amount of $1.2 million(1). For a borrower with full entitlement, this amount is simply multiplied by 25% to reach the maximum guaranty, which in this case would be $300,000.
In an example of partial entitlement, consider a veteran who is seeking to purchase a home with a loan of $350,000 and has already used $70,000 of entitlement on a previous home loan that has not been restored. The loan limit in their county is set at $300,000. In this case, you begin by determining 25% of the $300,000 limit, which is $75,000. The entitlement used of $70,000 is subtracted from this figure to determine the remaining entitlement available. In this case, the maximum guaranty is $5,000.
Keep in mind that entitlement alone does not qualify military members for VA loans. It merely indicates to the lender how much money the government is willing to guarantee for that borrower if they do qualify for the loan. It is up to the borrower to prove that they are a reasonable risk based on their income and credit qualifying standards.
Work With Someone Who Knows VA Loan Entitlement
VA loan entitlement can be complex, so get in touch with the experts at My Lending Pal for help with the calculations in your particular financial circumstances.