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How a VA Loan Second-Tier Entitlement Works

How does a VA Loan second-tier entitlement work?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

Most eligible military personnel and veterans are aware of the multiple benefits afforded by the VA home loan program including the ability to buy a home with no down payment, lower mortgage rates and no monthly mortgage insurance. What you may not realize is that you may be able to use your second-tier VA entitlement to own more than one home simultaneously or to qualify for another mortgage even after you defaulted on your original VA loan.

For example, if you already own a home with a VA loan and you are transferred to a different city, you may be able to use the VA program to buy a new home in your new city while maintaining ownership of your current home. You could decide to rent out your current home to offset your housing costs including your mortgage payment, property tax and insurance.

To understand how to use the VA program to buy multiple homes, you need to know how the VA entitlement works. In short, all eligible applicants receive an entitlement that equals how much of your mortgage the VA insures in the event you cannot repay your mortgage.

Calculating your entitlement is a little tricky because it is made up of two parts. The primary, also known as basic, entitlement is $36,000, and the secondary entitlement varies by location and the number of units in the property. The secondary entitlement may also change on an annual basis if property values change.

If your loan amount is greater than $144,000 A simple way to determine your total VA entitlement is to multiply the conforming loan limit for the county where the property is located by 25%. For example, for 2019 the standard conforming loan limit for a single unit property in most counties is $484,350.

This means that the total VA entitlement for most borrowers in 2019 is $121,087. The conforming loan limit ranges as high as $726,525 in higher cost counties, which means your entitlement may be higher, depending on where you live. We recommend that you contact the VA or go online to review your certificate of eligibility to learn your entitlement.

The table below shows top-rated VA lenders in your area. We recommend that you contact multiple lenders to confirm how the second-tier entitlement process works and to find the best loan terms including the lowest rate and fees.

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Current VA Mortgage Rates as of April 5, 2020
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

As referenced above, your entitlement represents the portion of your mortgage that is insured by the VA. So if you default on your loan, the VA is responsible for paying back the lender that amount of the mortgage.

The important point to understand from your perspective is that as long as 25% of your loan amount is less than your entitlement, you are not required to make a down payment to be eligible for a VA loan. If 25% of your mortgage is greater than your entitlement you can still qualify for a VA loan but you need to make a down payment.

Another way to think about it is if your mortgage amount is greater than the conforming loan limit for your county, you are usually required to make a down payment equal to 25% of the difference between your loan and the loan limit. For example, if the conforming loan limit is $500,000 and your loan amount is $520,000, you would be required to make a $5,000 down payment to qualify for a VA loan ($520,000 - $500,000 = $20,000 * 25% = $5,000 down payment).

Review our comprehensive VA Loan Guide

Now that you have a general idea how your entitlement works we can explain how it is possible to have more than one VA loan outstanding. While your entitlement never expires, in order to use it multiple times you are usually required to sell your home and pay off your existing VA loan, which in turn replenishes the entitlement.

There are some circumstances, however, when you can qualify for a second VA loan even if you do not sell your home and repay your current mortgage. To be eligible for multiple VA loans at the same time you must be transferred to a new city for work and you must also have a portion of your entitlement remaining, which is also known as a second-tier entitlement.

For example, if you bought your current home for $240,000, you used $60,000 of your entitlement ($240,000 * 25% = $60,000). If you have the standard $121,087 entitlement, that means you have approximately $60,000 in entitlement remaining which you could use to qualify for a new $244,000 VA loan, without making a down payment.

In short, multiple your remaining second-tier entitlement by four to determine the VA mortgage you are eligible for. If the property you are buying is located in a higher cost area with a higher conforming loan limit then your second-tier entitlement should be higher.

Returning to the example above, if the conforming loan limit for the county where the property is located is $650,000, your total entitlement is $162,500 and your available entitlement is $102,500, because you used $60,000 for the purchase of your current home.  An available second-tier entitlement of $102,500 means you are eligible for a new $410,000 VA loan.

One point to keep in mind if you want to use your second-tier entitlement to buy another home is that you need to demonstrate that you can afford the total monthly housing expense -- including the mortgage payment, property tax and homeowners insurance -- for both properties, which can be challenging.

Lenders review your debt-to-income ratio and residual income to confirm that you qualify for the mortgage based on VA guidelines. For this reason, including rental income from the property you intend to move out of can boost your application.

Use ourVA MORTGAGE QUALIFICATION CALCULATORto determine the VA loan you can afford

You can also use your second-tier entitlement if you previously defaulted on a VA loan. Some people think that if you defaulted on a VA loan in the past and did not repay your mortgage in full then you cannot qualify for another VA loan but that is not the case.

For example, if you used $45,000 of your VA entitlement on a $180,000 loan you defaulted on, you can use your remaining entitlement for a new VA loan, assuming you meet other program eligibility requirements and satisfy the applicable waiting period, which typically one-to-two years following a default. In this case, if you had approximately $76,000 in entitlement remaining, you are eligible for a $304,000 VA loan which requires no down payment.

The final point to keep in mind is that when you use your second-tier entitlement, VA program rules require a minimum mortgage amount of $144,001. Based on our conversations with the VA, there are no exceptions to this minimum loan requirement.

Sources

"Chapter 2. Veteran’s Eligibility and Entitlement Overview."  Lenders Handbook - VA Pamphlet 26-7.  U.S. Department of Veterans Affairs, 2020.  Web.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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