VA home loans are different in that in most cases, you’re not going to be required to come up with a down payment. However, it’s also a government loan program with its bill paid by the American taxpayer. If a client defaults, a minimum of 25% of the loan amount is guaranteed by the federal government, assuming that the client had full entitlement.
One of the cost mitigations is the funding fee required of most clients, which is either paid at closing or over the life of the loan. The other mechanism is the entitlement limit. The VA doesn’t have traditional loan limits for people who are using their VA loan on one house, so with the first house, the guarantee is just 25% of the loan amount.
If a veteran wants to use a VA loan to purchase a second primary property with no down payment, you typically have to have enough entitlement left over to cover 25% of the overall loan amount because that’s what the VA would guarantee on the first loan.
However, since the VA will only give whatever remaining entitlement you have left, the lender may require you to have a down payment that covers the difference between the amount of entitlement you have left and 25% of the loan amount.
Calculating the maximum amount guaranteed by the VA can be complicated because it’s based not only on the amount that has been used previously, but also local conforming loan limits. However, it’s also important because it affects any potential down payment you might have. When a client has partial entitlement left, the VA guarantees the lower of 25% of the loan amount or 25% of the county loan limits minus the client’s used entitlement.
As an example, let’s say Joan wants to buy a $300,000 house in an area with $647,200 conforming loan limits. She’s used $100,000 worth of VA entitlement in the past that hasn’t been restored. Here’s what the math looks like.
For the first equation, let’s take a look at 25% of the local loan limit minus the remaining entitlement:
647,200 × 0.25 - 100,000 = 61,800
Now let’s take a look at the other option, which is strictly 25% of the loan amount.
300,000 × 0.25 = 75,000
The VA takes the lower number from these two equations, so they’ll guarantee $61,800. Because most lenders including Rocket Mortgage require a down payment and guarantee combination that’s at least 25% of the loan amount, Joan will have to bring at least $13,200 to the closing table of the down payment (75,000 - 61,800).
Because of this rule, it’s extremely important that you make sure your entitlement is restored if you sell your previous property. However, you should know that the process isn’t automatic. You have to apply for restoration after selling your property.
The easiest way to know for sure if you have full entitlement is if the basic entitlement on your certificate of eligibility says you have $36,000 available. If you have anything less than that, the above equations come into play and you might need to plan for a down payment.
Loan Limits
As mentioned above, loan limits don’t come into play with VA loans unless you’re trying to buy a second property on a VA loan. In the case of the highest-cost counties, loan limits are set at the county level. They can go as high as $970,800 for a 1-unit property.
Let’s take a look at what something like that might look like for Joan if she wants to buy a $600,000 home in an area with $970,800 loan limits and $100,000 in previously used entitlement.
Remember, the first equation is 25% of the county loan limit minus any existing used entitlement:
970,800 × 0.25 - 100,000 = 142,700
The second equation is the loan amount times 25%:
600,000 × 0.25 = 150,000
Because the VA covers the lower amount of the two equations, she would have to come up with a $8,000 down payment under the policies of most lenders.
Loan limits don’t have any impact on a VA loan for someone who’s just trying to buy one house from meet VA policy standpoint. However, lenders can set their own policies and most have some special requirements if the loan amounts get high enough. Rocket Mortgage will do VA jumbo loans up to $1.5 million without a down payment if you have a median FICO® Score of at least 640. You can get a VA jumbo loan as high as $2 million with a 680 credit scoe and 10% down payment or equity amount.
Restoring Your Entitlement
One of the really cool things about VA loans is that if you fully paid off your previous VA loan, you can get a one-time restoration of your VA entitlement in order to buy another primary residence with a VA home loan.
In order to do this, you just have to fill out a Form 26-1880 with the VA, which is a request for a VA Certificate of Eligibility. Your lender should also be able to help you with this.
The only real downside here is that you can only do it once, so you can’t continually pay off VA loans and use that as a vehicle to convert them to investment properties when you want to move.