For those that are eligible, the VA home loan program is peerless when it comes to financing a primary residence when savings as much cash as possible is a priority. VA loans don’t require a down payment and the veteran is restricted from paying certain types of closing costs. When lenders review an application for a VA loan, they first look at the very same application that is used for other program types. The applicant simply checks a box that says, “VA” at the top of the application and the loan is processed as such moving forward.
Yet just checking that box isn’t enough for a lender to verify the applicant is eligible for this special program. Instead, the lender contacts the VA directly (the borrower can but it takes too much time) and asks for eligibility. This eligibility is verified by receiving a copy of the applicant’s Certificate of Eligibility.
The certificate is received almost momentarily after the request. The interesting part of this process is how much eligibility the applicant has. For someone that has never used their VA entitlement to buy a home, that individual will have full entitlement. But the certificate will show the entitlement amount is $36,000.
That’s not much, is it? However, because there is a 25% guarantee to the lender, the maximum VA loan amount is four times $36,000, or $144,000. Still, that’s much lower than what many want to borrow. In 2019 for example the maximum VA loan limit is the same as the conventional one. In most parts of the country, that amount is $484,450 for a single family home. So, what’s the point of the certificate?
Guidelines have changed over the years and today, VA loan limits match conforming ones, regardless of what the eligibility certificate says. If a veteran buys a property and finances $300,000 with a VA loan, that uses up all of the eligibility. Stay with me here.
Now let’s say a veteran sees a house for $80,000 and uses the VA loan. The 25% guarantee would be $20,000. If you subtract that from the original $36,000, that leaves $16,000. Four times that is $64,000. Again, not many properties would fall into that category. However, that is possible and any remaining entitlement would be listed at $16,000 on the certificate. But this is only an issue if the borrower keeps the existing home and buys another. In that scenario, the VA loan isn’t an option and full entitlement can’t be restored.
Instead, the veteran can sell the existing home which would restore the original entitlement and use the VA loan once again. The VA home loan benefit is not a one-time deal. It can be used again. One final note, when using the VA loan the second time around, let your lender help at the outset to make sure there won’t be any entitlement amount issues as your loan is being processed.