A Quick Guide to Understanding the Second VA Loan
by Karina Gafford
What is It?
The U.S. Department of Veterans Affairs has backed mortgages called VA loans for military families since 1944, helping families purchase single-family homes through private lenders. The VA backs 25-percent of the loan amount, which MilitaryByOwnerarticle "Comparing Loan Products after the Recession
" discusses in greater detail. 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.
The process to acquiring a second VA loan while still holding a first VA loan, however, remains a less known entity in the loan product market, both for borrowers and loan servicers alike. The process to acquiring a second VA loan after defaulting on a first VA loan as a result of a foreclosure or short sale remains murkier still. The former, a second VA loan while still holding a first VA loan, is referred to as either second tier eligibility or bonus entitlement; the latter, a VA loan following a default would typically follow the same bonus entitlement process, but with some disclaimers which we will discuss in the course of this article. If a borrower does qualify for a second VA loan, though, then a strong possibility exists that the borrower will receive the loan without having to bring any money to the closing table as a down payment.
How Do I Qualify for the Loan?
Current Active Duty, Reservists, Retired servicemembers, 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 factors to consider eligibility: If the initial VA loan remains in good standing; if the initial VA loan is on a rented property that can cover its own mortgage; if the family is seeking a home as a result of a PCS or change in the size of home needed as a result of a shift in family circumstances (new baby, caring for elder family members, and etcetera); debt to income ratio; credit score; and, the size of the loan requested. Given the complications in determining whether a borrower will qualify for this loan, MilitaryByOwner partners who specialize in military loan products
can help provide answers.
Before calling regarding VA bonus entitlement in the event of a foreclosure or short sale, a couple of special rules apply that may 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 and less-than-perfect credit scores, 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 an opportunity to work to restore their credit and financial situation.
Can I Have More than One of These Loans?
Though common understanding suggests that military families may only have one VA loan, or that they may only have one VA loan at a time, many families can actually qualify for a second VA loan even while still repaying the first mortgage. Known as second tier eligibility, this loan serves as a great boon for families who are seeking either a loan product that offers a zero down payment or lower credit score requirement. Just as with the first VA loan, a second VA loan comes with its own set of requirements, but unfortunately, a second VA loan comes with substantially more finicky requirements than the original; not all applicants who qualified for a first VA loan will qualify for a second VA loan, depending on factors including the loan eligibility remaining for the individual borrower as well as the borrower’s debt to income ratio. If a borrower is eligible, the VA will guaranty 25-percent of the amount for a VA
What are the Advantages?
The greatest advantages of the second VA loan include a lower or no down payment, limited loan fees, a non-existent property mortgage insurance—an amount that appears on other low down payment loans, such as the FHA, and can quickly add up to $1,000s per year—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 in the current economy. 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?
Just as with the first 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. Further, the home must be a single family home, though condominiums regularly qualify. During the depths of the Great Recession, many condominium properties did not meet the eligibility requirements, as the VA ruled out many properties in the market, including much of the areas surrounding Patrick AFB, Eglin AFB, and MacDill AFB, citing bad investments as their reason.
The VA funding fee serves as another disadvantage of a second VA loan. For those with a down payment of less than five-percent, the funding fee is currently 3.3-percent through September 30, 2016. For those with a down payment between five and ten-percent, the funding fee is 1.5-percent for veterans and 1.75-percent for reservists and National Guard members. Those with a down payment of ten-percent or more have the lowest funding fees of 1.25-percent for veterans and 1.5-percent for reservists and National Guard members.
According to MilitaryByOwner partner Veterans United
, finding a loan servicer who both understands the second VA loan and the process for procuring this loan product remains the overwhelmingly biggest disadvantage of the loan, as the loan is not used with nearly the same frequency as a first VA loan. Given that the VA loan has served as such a popular loan product for military families for almost 70 years, a huge lending industry has built up around servicing these loan products from loan servicers to VA loan marketing gurus to financing houses. 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.
First, loan servicers find it challenging to help determine the prospective borrower’s eligibility for a second VA loan. While the eligibility for the first VA loan is pretty cut and dry—the applicant must submit a VA Form 26-1880
to prove eligibility for the $36,000 entitlement. Once confirmed, the loan limit is traditionally capped at $417,000, though the actual cap on the loan limit is set by individual counties on an annual basis, which a servicer can easily access and explain. Calculating eligibility for the second VA loan involves just that—calculations. Math is hard, so when a borrower requests to know of his eligibility for a second VA loan, the servicer must prepare for some multi-step calculations, as shown below.
What Would My Numbers Look Like on this Loan?
Denise Maroldy, a military mortgage specialist with Fairway Independent Mortgage in Winston Salem, NC, recently explained to MilitaryByOwnersome of the many ways in which a loan servicer would calculate second VA eligibility. The key part of the calculations, she showed, involve first determining if any eligibility remains from the initial $36,000, and second, whether the house price is over the VA set minimum of $144,000 and below the capped limits set by individual counties, as discussed above. For the purpose of the following examples, please keep in mind that the VA provides backing for 25-percent of the loan. All of the calculations used in the example scenarios below are courtesy of Maroldy.
For one example, if Bob plans to purchase a home for $120,000, the bonus entitlement will not apply. This means that the VA will not provide any backing for the mortgage, so no second VA loan can occur. The house price must exceed $144,000. Bob either needs to look for a different loan product to meet his need, or a more expensive house.
For another example, if Sally only used $27,500 of her previous entitlement, then she has remaining eligibility from her first VA loan to help her produce a second VA loan. Make sure to follow along carefully, as Sally’s loan is rather complicated. First, Sally plans to buy a home for $320,000 where the loan limit is $417,000; therefore, the maximum guaranty that the VA will provide is $104,250 ($417,000 x 25-percent). Sally’s servicer will then subtract her previously used eligibility of $27,500 from the maximum amount that the VA will guaranty for this loan of $104,250, leaving Sally with $76,750 in entitlement available. As the VA will only back 25-percent of the loan, the servicer would then calculate $76,750 x 4, giving Sally a maximum guaranteed loan limit of $307,000. Unfortunately for Sally, this amount is less than the home price of $320,000, so she would have to produce a down payment to cover the remaining guaranteed amount. Fortunately, this does not mean that Sally would need to produce the difference between $320,000 and $307,000; instead, Sally only needs to produce the 25-percent difference between the two amounts, which is $3,250, in order to close her second VA loan successfully.
For another example, Harry also plans to purchase a home for $320,000 (hopefully not the same home that Sally is trying to buy!), and the loan limit in his county is $625,000. Just as with Sally’s loan, the VA uses the county limit to determine their maximum guaranty of 25-percent of the loan, which is $156,250. Harry had previously used $48,000 of VA eligibility for his first VA loan, so the VA uses the maximum that they will guaranty and subtracts his previous usage, leaving $108,250 of entitlement available. The $108,250 represents 25-percent of the maximum guaranteed loan limit, so Harry’s loan servicer will then multiply that number by four to get the maximum loan amount, which comes to $433,000. Since the house Harry wishes to buy is less than this amount, Harry will likely receive a zero down payment second VA loan.
Where Can I Get More Information?
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