VA Loans offer distinct advantages for veterans and active-duty Military members. These advantages aren’t just limited to a single home loan either. With 2nd Tier entitlement, veterans and active military service members can have two VA loans at the same time. Second tier entitlement may also be referred to as “bonus entitlement”, “additional entitlement” or “tier 2 entitlement”.
Not only does the various names cause some confusion for home buyers, but it can also be tricky understanding what situations you can use your 2nd Tier entitlement and what exactly entitlement means.
Let’s break all of this down to help you understand how you can use your second-tier entitlement on your next home purchase.
What Is VA Loan Entitlement?
When a borrower obtains a VA loan, the VA usually backs about 25% of the loan if borrower is unable to pay the loan back. The dollar amount that the VA will guarantee on a home loan is known as the “entitlement”.
Eligible veterans and active service members typically receive an entitlement of $137,062.50. Given that this number represents the amount the VA will guarantee on a loan, which is 25% of the loan value, those eligible for a VA loan can take out a maximum loan amount of $548,250.
This entitlement amount can differ depending on where you are purchasing a home. For some areas with high average home prices, the VA will offer a higher entitlement amount. This ensures that veterans and active military members can competitively buy homes using a VA loan, regardless of their location.
As an example, let’s say a VA loan borrower takes out a home loan of $200,000 on their first home purchase. Given that the VA will back 25% of that loan, that means that the borrower has used $50,000 of their VA loan entitlement.
If they are wanting to take out a second VA home loan, using their second-tier entitlement, in most cases they would have $77,600 of entitlement left (assuming their total entitlement is $127,600). Therefore, for their second VA loan using second-tier entitlement, the maximum loan amount they could take out is $310,400. A knowledgeable lender can assist you with additional options and show you how to increase the purchase price if you have funds for a down payment.
Understanding how much entitlement you have after getting your first VA loan will help you determine what loan amount you will be able to receive when using your second-tier entitlement.
This is often considered the biggest benefit that comes with VA loans. Those eligible for a VA loan can purchase a home without a down payment. This means veterans and service members do not need to spend years saving up for a large lump-sum down payment, as they would with a conventional mortgage.
What Are The Common Scenarios for Using Second-Tier Entitlement?
There are many reasons someone may want to purchase a second home using a VA loan, but below we will outline two of the more common scenarios.
Permanent Change of Station Orders
It is common for active-duty military members to receive Permanent Change of Station orders, causing them to relocate to a new part of the country. If the military member already purchased a home with a VA loan, but then wishes to purchase a home to live in at their new station location, they are eligible to keep their existing home as a rental property or second home and use their remaining second tier entitlement to purchase a new house with a second VA Loan.
Foreclosure on First Home Purchase
Even though a borrower may foreclose on their first home purchase, in some cases they are still eligible to receive a second VA loan through second tier entitlement.
What Should You Consider Before Using Second-Tier Entitlement?
If you are purchasing a second home using a VA loan, one of the key things to consider is whether or not you will meet a lenders debt-to-income ratio. Since you will have two mortgage payments you will be responsible for, lenders want to ensure that your income is enough that you will be able to pay those monthly mortgage payments.
It is beneficial to speak with a lender experienced in VA lending, as they will be able to help you determine how big or small of a loan you can take out in order to meet the debt-to-income requirements.
The second consideration is to understand whether or not you will need to make a down payment on the second home purchase, in order to stay within your entitlement range. One of the benefits of a VA loan is that a down payment is not often required. However, depending on the amount of entitlement you have leftover from your first VA loan, you may need to put money down on the second home purchase. Once again, an experienced VA lender will be able to help you with these calculations so you can understand what price range is within your budget.
VA loans offer great advantages to veterans and active-duty service members, with one of them being the ability to have two VA home loans at once. It is important to understand your unique situation regarding second tier entitlement prior to beginning the process of purchasing another home.
As a mortgage lender experienced in VA loans, we are happy to be a resource to you. Please feel free to reach out and we can help you “unlock the feeling of home” using VA loans.
As an active duty or retired Military member, you are eligible to take advantage of the great benefits offered by a VA loan. West Town Bank & Trust is proud to have helped hundreds of Military members “unlock the feeling of home”. We are well equipped with the experience to help you achieve a smooth home-buying experience.
If you have any questions or would like to get started with the process of getting a VA loan, contact us today!
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About West Town Bank & Trust
At West Town Bank & Trust, our most important goal is to understand what’s important to you, what’s getting in your way, and what you hope to achieve, so we can help you get there. Since 1922, we’ve been creating long-lasting relationships with our customers based on old-fashioned values and future-thinking ideas. Whether solutions come from surprisingly innovative tools or trusted products you’re familiar with, our single-focused purpose is your financial well-being.
Whether you’re purchasing your first home or refinancing an adjustable rate mortgage, it’s our commitment to find the most suitable loan program available to you at the lowest rate possible. With hundreds of programs available, let us help you unlock the feeling of home today.