Tips & Special Topics
Restoring VA Loan Entitlement
Added September 9, 2009
One of the most common myths about VA Loans is that once used, the benefit can never be used again. This is simply untrue. VA entitlement can be restored and used again and again. In fact, VA borrowers can use VA home loans as many times as they want, as long as they have entitlement. Entitlement is what determines military mortgage eligibility for veterans qualified to receive VA benefits.
In some cases, entitlement may need to be restored from a previous loan in order to cover the new loan being sought. There are several different ways to restore entitlement.
One way is if a VA borrower simply pays off the loan in full and disposes of the property. A common scenario would include selling the home and paying the VA Loan with proceeds from the sale. In this instance VA entitlement will be restored.
If a homeowner chooses not to sell the property after paying off a VA Home Loan, there is a one-time entitlement restoration for each borrower on loans paid in full for property retained. In this situation, a veteran might simply have lived in the home long enough to achieve satisfaction of mortgage through monthly payments over time or may have made extra payments toward principal to shorten the duration of the military home loan. Either way, full payment could mean restoration of entitlement even if he or she still owns the home.
Another way to restore entitlement is through replacement. If a veteran buys another veteran’s home and assumes the VA mortgage, the veteran buyer can substitute his or her entitlement for that of the veteran seller’s. In this case, the following must be met:
1. The veteran buyer must occupy the property and complete VA Form 26-8106
2. The veteran buyer must have enough entitlement to put in place of the seller’s
3. Both buyer and seller must prove eligibility
The result is a release of liability (ROL) and the veteran seller’s entitlement used for that VA Loan is restored and can be used again.
There are certain circumstances in which entitlement cannot be restored. If a VA Loan is assumed without substitution of entitlement, and the assumer defaults on the loan, VA would likely end up paying a claim to the lender. The entitlement used by the original borrower will not be restored until VA has been reimbursed for the loss. Also, if a borrower defaults on a VA loan and gives deed in lieu of foreclosure, the VA may likely still pay a partial claim to the lender which is still considered a loss. The borrower’s entitlement may not be restored until the borrower repays the loss in full.
In short, eligibility or entitlement is restored when a VA mortgage is paid off or when an eligible qualified veteran assumes a VA Loan and substitutes his or her eligibility for the seller’s. In some cases, there may be enough entitlement to purchase a home even if the previous loan is not paid off. Again, it all has to do with entitlement.
All veterans who are eligible for VA Loans have “basic entitlement” of $36,000 that can be used alone for loans of up to $144,000. In 2009, the maximum loan amount for which VA will provide its guaranty is $417,000 in most U.S. counties (higher where housing is more expensive). This means that veterans who are eligible for VA Loans also have a bonus entitlement of up to $68,250 that kicks in for loans over $144,000, in other words after basic entitlement is used. There are some instances where homes are purchased using only bonus entitlement with no money down as long as the loan is between $144,000 and $273,000.
If only bonus entitlement is being used, it means that a veteran has already used all of his or her basic entitlement, and it has not been restored. Bonus entitlement is available for use as long as it is sufficient for the loan amount being sought. The borrower would likely be urged by the lender to consider whether any down payment is necessary with the subsequent VA loan, based on remaining entitlement, and if so, whether any other loans may make sense for the new purchase or refinance being sought. Typically, insufficient entitlement would be less than 25% down worth of entitlement.
For veterans with insufficient entitlement, there is an FHA loan program for U.S. citizens that requires lower than typical down payment. It can be the right program for vets who have entitlement tied up in a previous VA Loan or don’t meet VA’s qualifying ratios.
Whether entitlement has been restored or not, veterans seeking subsequent VA Loans may be subject to an increased funding fee of up to 3.30% depending on their military status.
The short of it is, in order to fully restore entitlement, a previous or current VA Loan will have to be paid in full. Veterans should understand that restoration of entitlement is not automatic. Once a VA Loan has been paid in full through any of the various means described, the veteran must complete VA Form 26-1880 to notify the Department that his or her intention is to have entitlement restored. As long as he or she provides proof of payment in full, and in some cases disposal of property, restoration of entitlement is typically granted.
Entitlement can vary per veteran. Talking to a VA Loan specialist can help answer any questions regarding restoration of entitlement.
