Understanding VA Entitlement can be very confusing and often misunderstood. While it is something that is a VA benefit, it is actually a dollar amount that the VA guarantees to pay back to a lender in the case of a default on a VA loan. The basic VA entitlement is $36,000. However, there is much more involved since further entitlement based on conforming loan limits is possible.
VA Loans – Conforming Loan Limit
Generally speaking, the VA promises to guarantee up to a quarter of the loan amount to the lender. The $36,000 basic entitlement x 4 equals $144,000 which is the maximum loan amount for most borrowers. However, since home prices vary across the country, VA actually uses the conforming loan limit, which is $417,000 in most areas at this time, so that veterans everywhere have the opportunity to become homeowners in a competitive market. This can be considered a bonus entitlement in addition to the basic entitlement.
Since the VA promises to guarantee a quarter of the loan amount; a quarter of the conforming loan limit of $417,000 is $104,250. This is where the additional entitlement comes in to play. The guarantee of $104,250 minus the basic entitlement of $36,000 equals $68,250 which represents the additional entitlement that is used when the home purchase is more than $144,000.
Some counties across the country have higher loan limits because of their cost of living and location. The same formula is also used to the determine entitlement, 25% of the loan amount. Let’s say the county loan limit is $843,750 and VA guarantees 25%, the total entitlement is $210,937. No down payment is required by the borrower on the purchase of a home that requires financing up to $843,750.
VA Jumbo Loans
When a borrower purchases a home that is above the conforming loan limit, the VA loan is considered a VA jumbo loan. For instance, the county loan limit is $417,000 and the home purchase is $500,000. The difference between the purchase price or appraised value (whichever is less) is $500,000 minus the county loan limit of $417,000 equals $83,000. The borrower is required to make a down payment contribution of 25% of the difference ($83,000) which is $20,750; still quite a bargain for the borrower. Depending on the VA county loan limit, VA borrowers would be required to put down much less of a down payment than any other type of loan program, and still get a fantastic interest rate. Some VA lenders can write VA loans up to $1.5 million.
VA Entitlement with a Second Home
Some VA borrowers have already used some of their entitlement, but may want to purchase another home as a new primary residence without selling the original home. Let’s say that the veteran used $50,000 of their entitlement and the county limit is $843,750. Since a quarter of the entitlement is $210,937 and $50,000 was already used, the balance entitlement of $160,937 is remaining. Remember that the $160,937 represents the one quarter guarantee. When multiplied by 4, the result is $643,748 which is the amount that a borrower can finance at 100% (no down payment) in this particular county where the loan limit is $843,750.
The key to determining a VA entitlement is to remember that there is a basic entitlement and an additional entitlement based on county loan limit. While these equations and calculations may seem confusing, they are common for an experienced lender who specialized in VA loans.
Feel free at any time to contact me for more information about how much entitlement you have, as well as, how much you can borrow anywhere across the country.
My loan process was very easy and quick. Not to mention a great loan rate. I couldn't be happier!
Capt Sam T. - US Army
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