The U.S. Department of Veterans Affairs has backed mortgages called VA loans for the military since 1944, helping families purchase single family homes through private lenders. The VA usually backs 25% of the loan amount.
An individual who either sells his VA loan property or transfers his VA loan to another borrower can usually qualify to have his entire VA eligibility restored in order to purchase a new home by following the same process that helped procure his first VA loan. This is often the case when a service member receives orders, but does not want to sell their current property.
Obtaining a second VA loan while still holding the first is referred to as either second tier eligibility or bonus entitlement.
Obtaining a VA loan following a default typically follows the same bonus entitlement process. If a borrower qualifies for a second VA loan, there’s a strong possibility that the borrower will receive the loan without having to bring any money to the closing table as a down payment.
MilitaryByOwner’s trusted partner, Veterans United, expertly explains entitlements and second tier eligibility in detail.
How Do I Qualify for a Second VA Loan?
Current active duty, reservists, retired service members, and eligible spouses qualify for VA loans, though to determine eligibility for a second VA loan, a prospective borrower must speak with a second VA loan specialist. The loan servicer will look at several questions to consider eligibility:
- Is the initial VA loan in good standing?
- Is the initial VA loan for a rented property that can cover its own mortgage?
- Is the family seeking a home as a result of a PCS or because more square footage is needed? (new baby, caring for elder family members, etc.)
- What is the debt-to-income ratio and credit score?
- What is the size of the loan requested?
Second VA loans are available to service members with foreclosures or short sales in their history, but certain rules apply to encourage you to either rent and wait or pursue an alternative loan product.
Brad Baker of Equity Now, a New York based financial institution that specializes in helping prospective homeowners with complicated financial situations, explained to MilitaryByOwner that, yes, those who have undergone a foreclosure, short sale, or even a bankruptcy can qualify for a second VA loan, but a waiting period exists.
The VA requires only a two-year waiting period for those who defaulted on their original eligibility through either a foreclosure or a short sale. The same waiting period exists for those who underwent a Chapter 7 bankruptcy—a bankruptcy involving liquidation of assets--though in some cases they may only require a one-year waiting period.
For a Chapter 13 bankruptcy—a bankruptcy involving the readjustment of debt amounts for an individual debtor—only a one year wait period exists. This is great news for those who experienced financial difficulties as a result of depreciated house prices or unemployment, as it provides an opportunity for those individuals to re-enter the housing market after they have had a chance to work to restore their credit and financial situation.
What Are the Advantages of a Second VA Loan?
The greatest advantages of the second VA loan include a small or no down payment, limited loan fees, a non-existent property mortgage insurance, and lower credit score requirements than conventional loans. With the latter, servicers can generally assist prospective borrowers with a credit score of 620, whereas conventional loan products typically require a 680 or above.
Further, in the event that a borrower uses a VA loan to build a new house, the VA requires the builder to provide a full one-year warranty that initiates on the date of closing on the property, which can help bring great peace of mind to a buyer.
What Are the Disadvantages?
Finding a loan servicer who both understands the second VA loan and the process for procuring this loan product remains the overwhelmingly biggest disadvantage, as the loan is not used with nearly the same frequency as a first VA loan.
While the first VA loan serves as a core product for many lenders, the second VA loan remains much more of an enigma. Many servicers, including those belonging to large banks and credit unions that remain popular with military families, simply do not have the experience or resources available to discuss the option of a second VA loan.
- A borrower may only qualify for a second VA loan for a primary residence; the loan may not be used for either a second home or an investment property.
- The home must be a single family home, though condominiums regularly qualify.
- The VA funding fee serves as another disadvantage of a second VA loan. In 2017, regular duty service members with zero down payment incur a 3.3% funding fee. This fee could change if there is a documented service related disability.
Given that the VA loan has served as such a popular loan product for military families for decades, a huge lending industry has built around them to administer these loan products--from loan servicers to VA loan marketing gurus to name brand financing houses.
Taking on a second VA loan requires an in-depth process and the right professional to guide the transaction, but service members have a unique opportunity to use their entitlements to the full capacity for future investments in real estate.
Original article by Karina Gafford, updated 2018 by Dawn M. Smith.