VA Loan Entitlement

What is VA loan entitlement? This is a common question usually asked at the start of the home loan journey–a first-time VA borrower might not understand how the VA loan entitlement process works at first, but it’s not difficult to understand once you know some basic concepts.

How VA Loans Work

The first thing to understand about VA loan entitlement rules is that you have to serve a minimum time in uniform in order to qualify for the VA loan benefit. Qualifying for the benefit means being awarded VA loan entitlement and all new borrowers have 100% of that entitlement to use if they are approved for the mortgage.

Being eligible to apply for the VA loan is NOT the same as being pre-approved for a loan or being approved for a specific loan amount. All new applicants must financially qualify so by becoming eligible for the VA loan benefit, you are being allowed to APPLY for the home loan based on your minimum qualifying service.

You apply for the loan and get approved the same as with any mortgage–borrowers will have their credit reports pulled and reviewed, your debt-to-income ratio and FICO scores will play an important part in loan approval.

Part of that application process requires the lender to get a copy of the VA document that explains your eligibility for the VA loan program and how much VA loan entitlement you have. This document is known as the VA Certificate of Eligibility (VA COE) and you can get an electronic copy yourself via the VA official site or you can request that your loan officer help you obtain the COE.

If you haven’t served enough time in uniform to “unlock” your VA loan benefits, you won’t be issued a COE and your participating lender cannot work on the loan. If you are currently eligible and have never used your VA loan benefits before, your COE should read that you have 100% of your VA home loan entitlement available to use.

The lender will use the COE to determine if you have 100% VA loan entitlement or whether you only have partial entitlement remaining to use for the new loan. You may be eligible to have your VA loan benefit restored to 100% (see below) if you meet certain requirements, and there are options to use partial entitlement for a new VA mortgage (see below) alone or with another borrower.

VA Loan Entitlement

The Department of Veterans Affairs defines the VA loan entitlement as follows:

“Entitlement is the amount available for use on a loan. The amount of basic entitlement is $36,000.” Some borrowers will get confused at this stage, assuming that only $36,000 is available for a home loan. This is not true.

The dollar amount you see here is the amount of the basic loan amount the VA will guarantee. The VA loan rules found in VA Pamphlet 26-7 address this concern, stating that for loans greater than $144,000 but less than $484,350, “the entitlement is 25 percent. For loans greater than $484,350, the maximum entitlement is 25 percent of the loan limit, which can vary…”.

The borrower may have entitlement for loans greater than $144,000 but the COE “does not reflect the bonus entitlement.” Instead, the VA official site states, there is an indication to the lender that additional entitlement may be available.

And again, in these transactions, the VA loan entitlement is NOT the loan LIMIT–it’s the amount of the loan the VA will guarantee in case the borrower goes into default and foreclosure. You and your loan officer will work out what the maximum loan amount will be including options to finance certain closing costs where applicable.

VA Loan Entitlement Isn’t Always Used 100%

VA loan entitlement is used when the home loan is approved, but not all the entitlement is always utilized for the transaction. In such cases, the remaining entitlement could be used later on in another VA loan transaction.

The amount of entitlement remaining will vary depending on the original home loan transaction, and borrowers who bring a partial entitlement to the VA loan application process may wish to do so with another veteran borrower who also has partial entitlement. When two or more borrowers are using their VA home loan benefits on the same transaction, the use of the individual borrower’s VA loan entitlement is proportional to the financial obligation on the mortgage.

The lender who processes a VA loan application from someone who has used their home loan benefits before has three basic options:

• Approve the loan limited to the amount of available entitlement, or
• Ask the Veteran apply for restoration of previously used entitlement, or
• Ask the veteran to make a down payment “in conjunction with their remaining entitlement”

Restoring Previously Used VA Loan Entitlement

Borrowers who have used their VA loan entitlement before are eligible to apply to have their VA loan entitlement restored. Restoration is never automatic, so it’s not safe to assume that your benefits don’t need you to act in order to use them once more. Your lender can help you determine what needs to happen in order to restore your entitlement or you can contact the VA directly for assistance.

The VA Lender’s Handbook states that VA loan entitlement can be restored when the prior VA mortgage has been paid in full either by refinancing, selling the home, or paying off the loan amount.

But there are other options; one possibility is found in VA Pamphlet 26-7, Chapter Two, Section Six which states that an “eligible Veteran-transferee” who has agreed to assume the outstanding balance on a VA loan “and substitute his or her entitlement for the same amount originally used on the loan” can be permitted to do so if the assuming veteran can meet financial qualifications.

Another possibility is what the VA terms as a “one –time restoration where the prior VA loan has been paid in full, but the Veteran has not disposed of the property securing the loan”.

In these cases, the borrower can apply to have VA loan entitlement restored back to 100% “in order to purchase a different property” on a one-time basis only. The VA will advise the lender that for that borrower, “any future restoration (purchase or cash-out refinance) will require disposal of all property or properties obtained with a VA loan” as a condition of loan approval.

In all cases where VA loan eligibility is restored to 100% or if the veteran simply uses the amount of remaining entitlement, the purchase of property with the new VA mortgage requires occupancy.

VA Pamphlet 26-7 states, “A basic requirement of the law governing the VA home loan program is that the Veteran has a bona fide intention of occupying his or her property as a home.” You cannot use a VA mortgage to purchase a property you intend to provide to someone else prior to the closing of your new mortgage.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News