The VA loan benefit is for veterans that serve enough time in the military or Reserves and have an honorable discharge. It provides veterans with 100% financing and flexible underwriting guidelines. Is it a one-time benefit or can you use it repeatedly?
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Keep reading to find out the answer to this common question about VA loans.
What is the VA Loan Benefit?
First, let’s look at how the VA loan benefit works. If you can prove that you served at least 91 days during wartime; 181 days during peacetime; or 6 years in the National Guard/Reserves, you may be eligible. As we stated above, you must also have an honorable discharge.
If you are eligible, you can obtain a loan amount of up to $453,100 with no down payment. This is comprised of your basic benefit of $144,000 plus bonus entitlement of $309,100. The VA started off with the basic entitlement of $144,000, but realizing that many veterans cannot find a home for that amount in many areas of the country, they added the bonus entitlement.
The VA deducts the amount of your entitlement based on the loan amount you take. For example, if you borrowed $200,000, you would have $253,100 in entitlement left unused. This may come in handy in the future.
How the VA Loan Benefit Works
Once you use your VA loan benefit, as we discussed above, you use up that portion of your entitlement. If you want to reuse it, which you can, you have to pay the loan off in full and sell the home. You must satisfy both of those requirements.
What if you don’t want to sell the home, though? The VA does offer a one-time exception to the rule that you must pay off the loan and sell the home. If you can prove that you need to move due to a job/military relocation, outgrowing your home, or any other reason that makes it almost ‘required’ that you move, the VA may grant you a one-time exception.
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If you get this exception, you can keep your current home and buy another home using your remaining entitlement. Using our above example, you would have $253,100 in remaining entitlement. If you could find a home for that amount or less, you would not need to make a down payment on the next home that you buy either. But, you can only use this option once. After that, you would have to sell the home and pay off the loan to use your benefits again.
Requesting VA Loan Benefit Reinstatement
Reinstating your VA benefit isn’t automatic. You have to petition the VA for reinstatement. This means you have to show them that you sold the home (with your Closing Statement) and paid off the loan in full. They will then reinstatement your benefit as long as you were in good standing on your previous VA loan. This allows you to go and buy another home using your VA home loan benefit.
Buying a Home for More Than Your Benefit
What happens if you want to use your one-time exception and buy another home, but you don’t have enough entitlement to cover the entire amount of the home? You may still be able to buy the home, but you’ll need a down payment. The down payment will be equal to 25% of your home’s purchase price and the amount of entitlement you have left.
Let’s say you have $100,000 in entitlement left, but you want to buy a $200,000 home. You would need to put down 25% of the $100,000 difference or $25,000.
The VA requires this because 25% is the amount of the guarantee they provide on the amount of entitlement that you have. In other words, the VA will guaranty the lender 25% of your loan amount. If you default on your loan, the VA will pay the lender 25% of what they lost. Since you don’t have entitlement for the full amount of the loan, the VA wants you to put down that 25% to make up the difference for the lender.
Luckily, the VA loan is easy to qualify for, especially when you have enough entitlement. You only need around a 620 credit score, 43% maximum debt ratio, and enough disposable income to meet the VA’s requirements for your location and the size of your family. The VA offers some of the most flexible guidelines in all of the loan programs available today.
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