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If you’ve used your VA loan benefit, you’re probably familiar with the initial application process, but you might not know that you can reuse your VA loan throughout your lifetime. This perpetuity is just another outstanding benefit of a VA loan. However, to use your VA loan multiple times, you need to know a few things, starting with your entitlement.
Your entitlement is the amount that the VA insures on your loan. Most of the time, your entitlement is 25% of your loan amount. Remember, the VA guarantees your mortgage lender 25% of your loan if you default. This guarantee factors into whether or not you can put $0 down on your VA loans. So, even if you have one VA loan, you can apply for another (or more) as long as you have remaining entitlement.
Basic Level and Second Tier Entitlement
Most veterans have access to a basic/primary entitlement of $36,000 and a secondary entitlement of $125,800, which added together equals $161,800. If you apply for a second VA loan and still pay for the first one, you are applying for second tier eligibility, also known as bonus entitlement.
When you received your first VA loan, you used part of your entitlement, probably about 25%, because that’s what the VA insures. So, your remaining entitlement depends on your final sale amount. For example, for a $500,000 loan, you’re using $125,000 of your entitlement. So, since you had a total of $161,800, you’d subtract $125,000 and see that you had $36,800 left in entitlement.
Don’t worry; if you live in a higher cost of living area, you’re probably eligible for more entitlement because VA loan limits can reach as high as $970,800.
Restoring Your Entitlement
If you either sell your VA loan property or another VA loan borrower assumes the loan, you can usually qualify to have your eligibility restored to purchase a new home by following the same process that helped you get your first VA loan.
Here’s a VA Loan Entitlement Calculator to help you out.
How Do I Qualify for a Second VA Loan?
Current active duty, reservists, retired service members, and eligible spouses all qualify for VA loans, but to find out your eligibility for a second VA loan, you'll have to talk with a loan officer specializing in additional VA loans, which could be challenging because not every VA loan officer has the expertise.
When you do find a specialist, they’ll look at several questions to consider your 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 due to a PCS or because more square footage is needed? (new baby, caring for elderly family members, etc.)
- What is your debt-to-income ratio and credit score?
- What is the size of the loan requested?
Read Home Financing Overview for Military Home Buyers for home loan alternatives.
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Foreclosures and Bankruptcy
Second VA loans are available to servicemembers 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, explains that, yes, those who have undergone 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 foreclosure or a short sale. The same waiting period exists for those who underwent a Chapter 7 bankruptcy—a bankruptcy involving the liquidation of assets. 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, 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.
If 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.
Related: Do You Know About These Options for Using Your VA Loan?
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What Are the Disadvantages of a Second VA Loan?
Finding a loan servicer who understands the second VA loan and the process for procuring this loan product remains the biggest disadvantage because 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 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.
- The Blue Water Navy Vietnam Veterans Act of 2019 increased the funding fee in 2020 to 2.3% for first-time borrowers and 3.6% for those using their benefit again. These rates run through 2022.
Given that the VA home 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 servicemembers have a unique opportunity to use their entitlements to the full capacity for future investments in real estate.
By Dawn M. Smith