Sometimes, things can get a little confusing when someone is discussing VA loans, and the word entitlement pops up. Jimmy Vercellino teaches service members and veterans that it’s not that difficult to understand.
“Entitlement is just a fancy way of saying insurance on the loan,” he says.
Vercellino is a mortgage originator specializing in VA loans with First Choice Loan Services in Scottsdale, Ariz., and a United States Marine Corps veteran. Another thing he explains to his veteran clients is that the Department of Veterans Affairs does not lend the money.
“The VA is only insuring part of the loan in the event that the veteran forecloses for any reason. They cut the lender a check for 25 percent,” he says.
VA-guaranteed loans can be made by banks, savings and loan associations, credit unions or mortgage companies. The guaranty means the lender is protected against loss if the borrower or a later owner fails to repay the loan. That guaranty is where the whole entitlement thing comes in. The maximum basic entitlement is currently $36,000, Vercellino explains.
That means you could buy a house for $144,000 and a fourth of it — $36,000 – would be guaranteed in case you stop paying the mortgage for any reason. Well, $144,000 can buy a nice house in some areas of the country. In other parts, it wouldn’t buy you a garage.
So, the VA established a bonus entitlement of $77,275. When you add up both the basic and the bonus – you get $113,275. That is 25 percent of $647,200, which just happens to be the maximum VA loan amount in most counties that veterans can get without putting any money down.
And of course, there are exceptions to that rule, too. In some of the very high-cost areas to live such as northern California, New York City and Miami, the entitlements go up as the maximum loan amount goes up so veterans everywhere can have the chance to buy a home.
“But your overall loan limit will be determined based on the results of an assessment of your ability to repay the loan,” Vercellino says. “Your debt-to-income as well as your loan-to-value will be heavily weighted in assessing the amount you qualify for.”
Entitlement does not qualify a military person for a VA loan and having full entitlement won’t necessarily mean you will be able to get a loan up to the county loan limit.
If you already used your entitlement to buy a house, can you get your entitlement restored, and can you have two VA loans at once?
Yes and yes.
VA borrowers can use their entitlement multiple times as long as they go through the proper channels to get it restored. According to the VA, you can restore your entitlement by selling the property and paying the loan in full. Or your VA mortgage can be assumed by another VA borrower who substitutes his/her entitlement for yours.
In the case of having two or even three VA loans at once without paying any down payment, Vercellino explains in a scenario –
A veteran bought a house at $120,000 a couple of years ago where the county loan limit was $417,000 (pre-2017 limit). He now wants to buy a bigger house.
Here’s the math that makes it possible —
$417,000 x 25 percent = $104,250 maximum guaranty and entitlement available
$120,000 x 25 percent = $30,000 (guaranty for the current loan)
$104,250 – $30,000 = $74,250 entitlement available
$74,250 x 4 = $297,000 maximum loan amount for second loan with 25 percent guaranty
“You can definitely get a second VA loan and possibly three depending on how much entitlement you have,” he says. “And with a down payment, there are a thousand different ways.”
He adds that VA jumbo loans are also available as long the veterans come with the additional down payment to give the lender that 25 percent guaranty.
Although VA loans are guaranteed by 25 percent if someone defaults on them, they are still the loans with the lowest foreclosure rate the past five years, according to the Mortgage Bankers Association’s National Delinquency Survey. The survey bases its sample on about 41 million mortgage loans. VA loans have a foreclosure rate of only 1.98 percent.