By Doug Katz – 9/21/2022
VA Loans are unique in many ways. One that befuddles everyone outside of the lending industry and even some in the industry is entitlement and the rules regarding multiple loans and subsequent use. I hope that I can explain it to demystify the concepts, highlight some of the challenges that these rules/policies and the impact that this has on your strategy.
Everything about the VA Loan is based on the veteran’s entitlement or, in some cases, their remaining entitlement. Entitlement in the VA world refers to the amount of a loan that the VA will guaranty. A full guaranty generally means that a veteran can purchase a home with no money down. It used to be much more of a consideration before the loan cap was eliminated several years ago when there were limits on VA loan size. While less of a consideration now, it is still important in situations with subsequent VA loans.
Subsequent VA loans break down into several major categories. The first is a subsequent loan when the property encumbered by the VA loan will be sold. I specify sold as refinances are handled differently. The second, is that situation when a loan on a property encumbered by a VA loan is paid off but title remains with the homeowner. The third is when the VA loan on a property stays in place and the veteran seeks a new VA loan in addition. Finally, is when a veteran has a VA related foreclosure or short sale. All four are markedly different and you should understand the distinction
- SALE OF THE PROPERTY – When sold, the full entitlement will be restored once the VA loan is paid off and title is passed to the new owner. Because there is no other outstanding loans and the veteran is in good standing, the veteran can once again borrow up to 100% of a properties value. The restoration process is an active one and the veterans new lender can work with them to ensure the entitlement is restored. This usually requires documentation of the payoff and release of the previous loan.
- REFINANCE OF THE PROPERTY – This one is exceptionally important because so few individuals understand the rules or should I say rule. The restriction to which I refer states that a veteran has a ONE TIME opportunity to refinance a property encumbered by a VA loan whereby they can restore their guaranty. I have had many veterans try and tell me it is not the case. Trust me, it is. The reason is pretty obvious. The VA does NOT want to be an acquisition too for investors. There purpose is to enable veterans the ability to buy a home for primary residence in an affordable manner to which they may not otherwise have been able to. This is the one that I see bite a lot of veterans and their realtors when they do not know this rule or anticipate the impact. Spoiler alert, it can and does kill deals.
- SECOND OR OTHER SUBSEQUENT, SIMULTANEOUS VA LOANS – There is NO prohibition on a veteran having multiple VA loans. As long as their remaining guaranty can support the loan, a veteran can apply for and get additional VA funding when they need them. The guaranty, however, will be decreased as appropriate with every loan. If the first loan used a veteran’s full guaranty, they have none left. In short, there benefit is zero. If there is remaining guaranty, the lender will calculate how that guaranty applies to the deal and what, if any, down payment will be required. This process can continue for any number of VA loans until the guaranty is exhausted.
- FORECLOSURE OR SHORT SALE – When the VA guaranties a loan, they expect the loan to perform, i.e. be paid on time and eventually paid off. Anything short of that means that they guaranteed a loan that went bad. There guaranty was based on a commitment by the veteran that the loan would not go bad and bad loans have consequences for the veteran. In the eyes of the VA, you failed to pay back part or all of a loan so your entitlement should be impacted commensurate with that shortage. Until that shortage is remedied by restitution to the VA, the entitlement will be impacted accordingly. Again, this is exceptionally important. Not just when you are borrowing but before you make decisions that have impact beyond your original expected scope. I have seen veterans burnt when they are given bad advice by anyone from family to lenders to attorneys who have no VA experience. Everything is great until they go to buy their dream home and they find out the VA option is off of the table.
There are a couple of final things to remember with respect to entitlement. Any limitations and caps are related to the loan amount and not on the purchase price. If a veteran is faced with a cap and still wants to buy a property outside of that cap, there are no prohibitions. They can buy a home of any value, but they will need to make up the difference out of their own funds. I have buyers who regularly do this even when the down payment is close to the conventional options to take full advantage of the typically better VA rates. Also, your eligibility and entitlement are reflected on a document called the certificate of eligibility. Your lender obtains this from the VA and it will definitely lay out what the VA and, in turn, your lender has for your entitlement.
VA loans, like any highly specialized programs are complex and confusing. Everyone knows the no money down feature of these loans but not enough know the why and how of the veteran benefit and that it is in dependent on a lot of past and present specifics of the veteran’s situation. My advice is to ensure that you understand all of the factors impacted you before seeking out that home. Even if this is your first VA loan or even your first home, you should know how using VA for this purchase can affect your future options.