Q: Our current house is financed with a VA loan, and we are in the market for a bigger home for our growing family. We would like to use our home loan benefits again to purchase our new home once we sell our old one. I’ve heard we would have to restore our entitlement before we can use our benefits again, but that can’t be done until we sell and pay off our loan. Doesn’t that leave us without a house between the selling and buying processes?
A: Foremost, the VA home loan program was established to put veterans and their families in homes and keep them there. If you are looking to sell your current home and buy a new one, and reuse the VA-backed loan program to do it, you may have a couple of viable options.
Restoration of Entitlement May or May Not be Necessary for Another VA Loan
Depending on the amount of your original VA loan, you may or may not have to sell your current home and pay off your loan to restore entitlement for your next purchase. Your income and credit also plays an important role in how you proceed.
Typically, a veteran must dispose of a property financed with a VA loan before he or she can get a VA guarantee on another loan. However, there is a one-time exception to this rule. The VA allows borrowers to use their remaining entitlement, one time, in the purchase of a second home. Assuming you haven’t exercised this right yet, restoration of entitlement may not be required before you can get another VA loan. Often, VA borrowers have enough entitlement for two loans simultaneously.
A veteran with full entitlement has enough for a loan of up to $417,000 (more in some high-cost areas). According to the VA Annual Benefits Report of 2011, the average VA loan is about $210,000. A veteran with one VA loan of $210,000 would have enough entitlement for another loan of $207,000 using what’s known as tier 2, or bonus, entitlement.
Only basic entitlement is shown on a Certificate of Entitlement (COE). Your total available entitlement must be calculated separately, for instance, by an experienced VA loan officer. Tier 2 entitlement can only be used for loans over $144,000. So, the second home will likely have to be over this price if you want to finance it with a VA loan.
Sometimes the sale of a current home and the purchase of a new home can’t be timed exactly right for borrowers to pay off a VA loan, get entitlement restored and purchase another house in that order. If you can qualify for two loans at once, using tier 2 entitlement to purchase your new home could be an option.
A Purchase Contract Contingency May Enable Perfect Timing for Another VA Mortgage
A second option might be for you to request a contingency of the sale of your current home in your new purchase agreement. A contingency, if the seller agrees, would allow you to orchestrate the sale of your current home, payoff of your VA loan, restore your VA entitlement and purchase of your new home with a VA loan all in perfect harmony.
Working with a VA-approved lender whose majority product is VA loans early in this process can help assure, if possible, that your entitlement is restored promptly and your new COE is obtained as quickly as possible.
Tim Lewis started working with iFreedom Direct® in 2008. He is group sales manager in the Purchase Division overseeing 16 VA loan professionals. Tim is a former Army Major and veteran of Operation Iraqi Freedom. His 22-year military background along with his vast knowledge of the VA Home Loan Guaranty Program helps ensure the purchase clients of iFreedom Direct® have an experience that exceeds their expectations.