Using the VA Loan a Second Time

Due to the VA loan program’s zero-down, low-interest terms, eligible borrowers frequently ask about using the VA loan a second time. In this article, we’ll explain how veterans can use their VA loan benefits a second time.

Specifically, after using this outstanding program once, multiple ways exist for veterans to use the VA loan again to buy a second home, and we’ll cover how to do so by diving into the following topics:

• VA Home Loan Overview and Advantages
• VA Loan Entitlement
• Option 1: Restore Entitlement to Use the VA Loan Twice
• Option 2: Use Remaining Entitlement to Use the VA Loan Twice
• Final Thoughts

VA Home Loan Overview and Advantages

What we know now as the VA home loan actually began with the 1944 Servicemen’s Readjustment Act. Among other benefits (e.g. education and job training), this bill established the predecessor to the current VA home loan, increasing veteran homeownership via access to affordable mortgages.

Currently, the VA home loan offers the following key benefits, all of which make using the program a second time extremely appealing:

• No down payment required
• No private mortgage insurance, or PMI, required
• Partial government loan guarantee
• Low interest rates (due to the reduced lender risk associated with this guarantee)
• Streamlined refinance via the Interest Rate Reduction Refinance Loan (IRRRL)

VA Loan Entitlement

Before explaining how to use the VA loan twice, we need to outline a critical element of the loan program: entitlement.

A borrower’s VA loan entitlement represents the dollar amount the Department of Veteran Affairs will guarantee on each VA loan, and lenders use the number to determine how much a veteran can borrow without a down payment. Broadly, speaking, a veteran’s entitlement totals either:

• $36,000; or,
• 25% of the loan amount up to the geographically-adjusted loan limit

So, what does that actually mean?

Well, more specifically, the VA divides loan entitlement amounts into two types: basic (or primary) and secondary.

• Basic entitlement: This totals $36,000 (the first number above). And, as the VA guarantees up to 25% of a loan, this number allows veterans to qualify for loans up to $144,000 (4 x $36,000).
• Secondary entitlement: As most veterans need to borrow more than $144,000, the VA created secondary entitlement, which links the VA-guaranteed portion of loans to the conforming loan limit for conventional financing, currently $510,400 for the majority of US counties. In other words, the VA further guarantees up to a quarter of $510,400, or $127,600.

In pure numbers, here’s what it looks like:

• Total guaranteed entitlement: $127,600
• Minus basic entitlement: -$36,000
• Equals secondary entitlement: $91,600

While this may seem unnecessarily confusing, the important takeaway is that borrowers in most of the country have enough VA loan entitlement to borrow up to a $510,400 loan with no down payment.

Option 1: Restore Entitlement to Use the VA Loan Twice

Having outlined VA loan entitlement, the next question becomes: how can I ensure I have enough entitlement to use my VA loan twice? Broadly speaking, two paths exist to accomplishing this, the first being to actually restore your original VA loan entitlement after using it once.

Veterans have three primary means to restore their VA loan eligibility, as outlined here:

1a. Sell the original property and repay your current VA loan in full.

For most borrowers, this represents the easiest path to restoring entitlement and using the VA loan a second time. When veterans sell their VA loan-financed homes, they first need to ensure that the proceeds actually pay off the loan (selling for less than you owe, known as a short sale, will result in a loss of the original entitlement).

Assuming sales proceeds pay off the entire original VA loan, veterans then simply need to file paperwork with the Department of Veterans Affairs to have their full entitlement restored.

For borrowers looking to move houses – not build a portfolio of investment properties – this is a great option, as you can do it as many times as you need.

1b. Allow a qualified veteran to assume your current VA loan and substitute eligibility.

This option relates to the above but represents a unique option for VA loans: assumability.

With assumable mortgages, a qualified buyer can take over, or assume, the original borrower’s mortgage. For VA borrowers, this means that, rather than sell your home, you can find a fellow veteran with VA loan eligibility to take over your mortgage payments and interest in the property (at the current loan balance, interest rate, and monthly payment amount of your current mortgage).

In this scenario, the original borrower receives his or her full entitlement back, and the buyer replaces it with his or her own VA entitlement. However, veterans should note that the entitlement swap is not automatic, as both borrowers – original and new – need to apply for and receive a formal Substitution of Entitlement from the Department of Veterans Affairs.

1c. Refinance your existing VA loan into a non-VA product with a “one-time restoration of entitlement.”

The description of this option is clear, that is, borrowers refinance their VA loan into a non-VA loan (e.g. conventional or FHA loan), paying off the original VA loan. However, this option becomes murkier with the VA-specific phrase “one-time restoration of entitlement.”

Basically, the VA wants to ensure veterans use their VA home loan benefits for homeownership, not real estate investment. Consequently, as you’re not actually selling the original house in this scenario, options for restoring your entitlement narrow.

But, one option exists.  The VA allows a one-time exception to its “must-sell” mandate, giving borrowers the ability to retain their first home while using a second VA loan to purchase another home.

If a borrower completes the above refinance, he or she may file a “one-time restoration” request with the Department of Veterans Affairs which, when completed, restores 100% of the original entitlement. And, once completed successfully, no restrictions exist on the original house’s use, that is, it can be used as a rental property or vacation home (but the new property still faces the same VA-specific occupancy restrictions).

Option 2: Use Remaining Entitlement to Use the VA Loan Twice

In the section on VA loan entitlement above, we explained that eligible veterans have enough VA loan entitlement to borrow up to a $510,400 loan with no down payment. So, what happens if a veteran’s first VA loan is for less than $510,400? This scenario creates the next major option for using your VA loan twice: using up your remaining entitlement.

When a veteran uses the VA loan, a portion of his or her entitlement becomes tied up in the mortgage.  Recalling that the VA guarantees 25% of the loan amount, this means that, if a veteran purchases a $200,000 home, $50,000 of entitlement is committed ($200,000 x 25%).  But, as we discussed, total entitlement is $127,600 ($510,400 x 25%).  In this scenario:

• Total guaranteed entitlement: $127,600
• Minus 1st loan entitlement: -$50,000
• Equals remaining entitlement: $77,600

Next, veterans need to multiply their remaining entitlement by four to determine the loan amount they can still borrow without needing a down payment. For the above scenario, $77,600 x 4 = $310,400, which means that this veteran could use the VA loan a second time to purchase a $310,400 home without a down payment.

However, veterans need to note that, just because they have entitlement remaining does not mean that they will actually qualify for a second VA loan. They still need to meet the credit, income, and asset requirements necessary to qualify for a loan.

Final Thoughts

Though some of the options prove more restrictive or challenging than others, the important takeaway for veterans is that options exist to use the VA loan a second time (and more, in some cases).