The VA loan provides 100% financing for veterans, but not all of the time. There are certain circumstances when you may need to make a down payment.
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The VA has limits as to how much you can borrow without a down payment. They also have requirements regarding what happens when you use your VA benefit. Understanding the terms can help you make the most of your VA benefits.
The VA Entitlement
The VA provides what they call entitlement. This is the amount that the VA will guarantee a lender in your name. Each veteran starts with basic and bonus entitlement. Basic entitlement is $36,000 and bonus entitlement is $77,275.
This is the maximum amount the VA will pay a lender if you default. This is representative of 25% of your loan amount. The basic entitlement is equal to a $144,000 loan and with the bonus entitlement; it’s equal to a loan of $453,100.
Once you use your entitlement, it remains tied to the home. You cannot reuse that entitlement until you sell the home, pay the loan off, and request reinstatement of your entitlement. If you find a home for less than $453,100 (in most areas), then you may not need a down payment if you have full entitlement. In some high-cost areas, the VA does allow a higher maximum loan amount with no down payment of $679,650.
Note that in 2019, these limits will increase to $484,350 and $726,525.
Borrowing More Than Your Entitlement
Now, if you borrow more than the entitlement you have available, you will have to make a down payment. The VA doesn’t have a loan limit per se, but they do have a limit as to how much you can borrow without making a down payment.
If you have full entitlement, you don’t need a down payment until you need more than the amount of the entitlement. If you do, you’ll then need to make a down payment worth 25% of the difference between the loan amount and the entitlement.
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For example, if you need a loan amount of $500,000 and you have full entitlement of $453,100, you would need a down payment of $11,725.
Using Remaining Entitlement
The thing about VA entitlement is that once you use it, you can’t use it again. But you can use your remaining entitlement to buy another home in some cases.
The VA requires you to certify that you’ll live in the home as your primary residence. VA loans are not for investment properties or second homes. If you do want to move, the VA allows a one-time exception for you to keep the home. You must first refinance with the VA streamline refinance. You are then not obligated to live in the home.
When you buy your next home, you can only use the entitlement you didn’t use for your original loan. Let’s say that you have $100,000 left in entitlement. That means you can only get the first $100,000 of your new loan without a down payment. Any amount above that will require a 25% down payment.
If you have to make a down payment on the VA loan, you may want to explore your other options as well. Other loans, such as the FHA loan only require a 3.5% down payment, which is much less than the 25% on the difference you’d have to pay with the VA. Explore all of your options and see which one makes the financial sense for you.
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