The VA One-Time Refinance Entitlement Restoration Rule – Misunderstood and HUGELY Important

By A. I. Lendberg, Edited by Douglas Katz – 04/25/23

As a mortgage lender and VA loan expert, I see every day how important to understand the ins and outs of the VA loan system.  It is very similar to any loan, in overall process, but there are some key differences. One of the most confusing is the VA loan entitlement.  It impacts everything from the size of the loan to the required down payment and there is a lot of misunderstanding and outright disinformation about how it works.  One aspect of this system that is the most misunderstood is the concept of a one-time restoration of entitlement.

Under certain circumstances, veterans and active-duty service members who have previously used their VA loan entitlement to purchase a home can have that entitlement restored without having to sell the property. This is known as a one-time restoration of entitlement, and it is provided for under section 38 U.S.C. 3702(b)(4) of the Veterans Benefits Act.  The VA even refers to the disposition of the property as “DISPOSAL.”  This should pretty clearly articulate their guidance and intent regarding the property and what needs to occur to regain entitlement.

The key factor in determining whether a borrower is eligible for a one-time restoration of entitlement is whether they have paid off their previous VA loan in full and no longer own the property. If both of these conditions are met, then the borrower may be eligible for a one-time restoration of entitlement.  Both means that only under these circumstances does the veteran regain their entitlement.  In short, it’s important to note that a one-time restoration of entitlement is exactly that – a one-time opportunity. If the borrower uses this restored entitlement to purchase another property with a VA loan, and then later wants to have their entitlement restored again, they will need to sell all properties purchased with VA loans in order to be eligible for another restoration of the entitlement associated with each of the properties, including situations where they own several.

This provision is in place to ensure that the VA loan program is used as intended – to help veterans and active-duty service members purchase homes for their own personal use. It also helps prevent fraud and abuse of the program by preventing borrowers from using their VA entitlement to acquire multiple investment properties.

As a lender, it’s important to educate borrowers on the specifics of the one-time restoration of entitlement. They need to understand that it is a one-time opportunity and that any future restorations will require them to sell all properties obtained with VA loans. By helping borrowers understand these requirements, we can ensure that the VA loan program continues to serve those who have served our country.

For the masochists reading this, I have provided the an extract with the exact verbiage clarifying the rule at the bottom of the article with the specific rules regarding one-time restoration depicted in bold.  More important than that, however, is what havoc not understanding this rule can cause,  This is not trivial and it can have profound impact on the veteran.  Here are some examples where things can go very wrong.

  1. Borrower doesn’t sell property obtained with VA loan: If a borrower wants to obtain another restoration of entitlement, they must sell all properties obtained with VA loans. If the borrower fails to do so, they may not be eligible for another restoration in the future.  This is the basic scenario and it does require one bit of clarification.  If a veteran does not sell but has some remaining entitlement, they can use that remaining amount but the loan structure will be netted down to account for the remaining as opposed to the full entitlement.  In short, the rule does not preclude a new loan just the use of entitlement that is tied up in a home.  Think of it like a stranded runner in baseball.  It is important to remember that until the rules change, this will impact these subsequent properties and accessing the entitlement for future use.  I address this consideration in the last bullet.
  2. Borrower misunderstands the one-time restoration of entitlement: If a borrower thinks that the one-time restoration of entitlement means they can obtain another VA loan without selling their previous property, they may be in for a surprise. This could lead to a situation where they’ve purchased another property with their restored entitlement but are unable to obtain another restoration in the future because they haven’t sold all their properties obtained with VA loans.  If there are no other options at the needed loan-to-value and loan amount, they may not get the home.  It is important, therefore, to get pre-approved with a lender that understands this rule and makes the right recommendations.
  3. Borrower doesn’t disclose prior VA loan: In some cases, a borrower may not disclose a previous VA loan they’ve used to purchase a property, and the lender may not be aware of it. If the borrower has already used their entitlement to purchase a property, they may not be eligible for the one-time restoration of entitlement.  This can be from omission or commission and, in the end, it really does not matter with respect to the end result. Your lender can only act on what they know.  Be sure that this will come out later in the process, but disclosing up front reduces the chances of being caught off guard.
  4. Borrower uses restored entitlement for investment property: If a borrower uses their restored entitlement to purchase an investment property rather than a primary residence, they may not be eligible for future entitlement restorations. This can be a problem if the borrower planned on using their entitlement to purchase a primary residence later on.  This is the biggest one that I see based on my operating in both the residential and commercial use residential space.  Many a veteran investor has come to me tell me that I am completely wrong when I mention this rule only to come back later looking for options.
  5. Borrower has multiple properties and uses the refinance inadvertently on a small property: This is a subset of the above scenario with some distinction.  Because it is entirely allowable to have multiple VA loans out at one time, some veterans could find themselves in a situation where there need to decide how to disposition the home.  If they do not consider this rule, they run the risk of using the one-time option on a small property and they get stuck on larger ones.

It’s important for borrowers to understand the rules and regulations around the one-time restoration of entitlement and work closely with their lender to ensure they are in compliance with VA loan requirements. By doing so, they can avoid potential pitfalls and continue to take advantage of the benefits of the VA loan program.

VA GUIDELINE EXTRACT – 38 U.S.C. 3702 (b)(4) – BASIC ENTITLEMENT

 

Disclaimer: This article was created with the assistance of multiple ChatGPT AI language models and has been edited and refined by Douglas Katz. The information provided in this article is intended for general informational purposes only and should not be considered as professional or expert advice. The views expressed in this article are solely those of the author and do not necessarily represent the views of ChatGPT or OpenAI. Readers are advised to do their own research and consult with relevant experts before making any decisions based on the information provided in this article.