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One mortgage loan available to qualified veterans, active-duty military members, and their families is a VA home loan. This is often an attractive option and comes with several perks, such as no down payment and reduced closing costs. But have you heard about VA entitlement? Let’s jump into what you need to know.
What Is a VA Loan Entitlement?
Your lender will need to know your VA loan entitlement amount to issue a VA loan. Your VA loan entitlement is the amount of money the Department of Veteran Affairs will pay your lender back if you default on your mortgage payments.
How Do VA Loan Entitlements Work?
Your VA loan entitlement serves as a safety net for your lender. Additionally, it tells you how much you can borrow without making a down payment. This amount will change depending on whether you receive full entitlement or reduced entitlement.
Borrowers taking out VA loans after January 1, 2020, will not have a limit on how much they can borrow without making a down payment. However, the VA will only guarantee up to 25% of the loan amount.
Borrowers can get full entitlement if they’ve never gotten a VA loan before or have fully paid off a VA loan. While these borrowers don’t limit how much they can borrow without a down payment, it’s ultimately up to the lender how much the borrower qualifies for.
>> More: See the Best VA Loan Lenders
Borrowers with reduced entitlement will need to pay the difference between their borrowed amount and their entitlement. This will be the down payment.
You may have reduced entitlement if you are still paying back a VA loan, defaulted on a VA loan, or paid back a VA loan but still own the home. In this case, the VA only guarantees the amount up to the conforming loan limit minus the current entitlement.
Read on to see how you can calculate your entitlement.
Understanding VA Loan Certificate of Eligibility (COE)
Anyone applying for a VA loan will need to show their Certificate of Eligibility (COE). This document states that you meet the military service requirements for a VA loan and will also provide your entitlement amount.
>> More: Understanding the VA Loan Funding Fee
Different Types of VA Loan Entitlements
There are two types of entitlements with VA loans: basic entitlement and bonus entitlement. Your COE will list your type of entitlement.
VA Loan Basic Entitlement
Eligible VA loan borrowers with full entitlement no longer have limits on loans over $144,000. With your basic entitlement, the VA will guarantee up to $36,000, or 25% of the loan amount. This does not mean that you can’t borrow more than $144,000, but you’ll use your bonus entitlement past this amount.
VA Loan Bonus Entitlement
Your bonus entitlement will kick in after the $144,000 mark if you have full entitlement. The VA will cover 25% of your area’s conforming loan limit minus the entitlement you’re already using if you have reduced entitlement.
How to Calculate the VA Loan Entitlement?
So how can you know exactly how much your entitlement will be? First, determine whether you have full or reduced entitlement. If you have full entitlement, you won’t need to worry about making entitlement calculations; the VA will back however much your lender is willing to lend with no down payment.
If you have reduced entitlement, the VA will back 25% of your loan. To calculate your entitlement, use the following equation:
Loan amount × 0.25 = entitlement you’ve already used
VA Loan Entitlement Example
Let’s say you have reduced entitlement because you have a $200,000 loan on your home and are looking to buy in another state. Part of your entitlement is taken by your current home, leaving you with a remaining amount to use on your upcoming purchase.
$200,000 × 0.25 = $25,000
You’re currently using $25,000 of your entitlement. Now, let’s say the conforming loan limit in the area you’re moving to is $647,200.
$647,200 × 0.25 = $161,800
Now that we know the maximum amount the VA will back, we can subtract the entitlement you’re currently using to find your remaining entitlement.
$161,800 – $25,000 = $136,800
Take this number and multiply by 4 to see how much you can borrow without making a down payment.
$136,800 x 4 = $547,200
You can still take out a loan larger than $547,200, but you’d need to make a downpayment to cover the difference.
Is a VA Loan Entitlement a Lifetime Benefit?
Your VA loan entitlement can change throughout your life. For example, if you’ve never taken out a loan, you can qualify for full entitlement, but you may have reduced entitlement down the road. This can often happen with military families as they frequently move, meaning they’re using some of their entitlement on their current property while trying to qualify for the next.
>> More: Can You Buy a Second Home with a VA Loan?
Can You Restore Your VA Loan Entitlement?
Your entitlement can be fully restored after paying off the loan and selling the property. Some borrowers may qualify for a one-time entitlement restoration if they’ve paid back the loan but don’t plan on selling, either because they’ve refinanced into another loan type or by simply paying it off.
How Do I Check My VA Loan Entitlement?
Checking your VA Loan Entitlement is straightforward. You can use the formula (Loan amount × 0.25 = entitlement you’ve already used).
Bottom Line: VA Loan Entitlement
It’s important to understand VA loan entitlement when considering a VA loan. Your entitlement is the amount the VA will guarantee and will change depending on several factors. But at the end of the day, your lender will be the one to determine the final loan amount.