Unlocking the Power of VA Loan Second Tier Entitlement

Buying a home is an exciting milestone in life. For military servicemembers and veterans VA loans make homeownership more accessible with perks like no down payment and no private mortgage insurance. What many borrowers don’t realize is that they can tap into VA loan benefits more than once in their lifetime thanks to something called second tier entitlement. Keep reading to learn how second tier entitlement works and how you can maximize this valuable benefit.

What is VA Loan Entitlement?

First let’s cover the basics. VA loan entitlement refers to the amount of the loan that the Department of Veterans Affairs guarantees. This guarantee means that if the borrower defaults the VA will reimburse the lender for losses up to the entitlement amount.

The standard VA entitlement is 25% of the loan amount, up to the maximum loan limit for each county. For example, if you buy a $200,000 home, your entitlement would be $50,000 (25% of $200,000). The VA would guarantee up to $50,000 of that loan.

Entitlement is extremely valuable because it allows borrowers to get a mortgage with no down payment. Lenders feel comfortable offering 100% financing knowing that 25% of the loan is protected.

What is Second Tier Entitlement?

This is where things get really interesting. The VA actually offers veterans two tiers of entitlement that can be combined to maximize benefits.

The first tier is the basic entitlement mentioned above. This covers 25% of the loan amount up to the county limit. The second tier offers additional entitlement above and beyond that first tier.

Here is how it works

• First tier entitlement: 25% of loan amount, up to county limit

• Second tier entitlement: $144,000 minimum, plus any leftover entitlement from first tier

For example, let’s say the loan amount is $200,000 and the county limit is $700,000.

• First tier entitlement: $200,000 x 25% = $50,000

• Second tier entitlement: $144,000

• Total combined entitlement: $194,000

This combined entitlement allows veterans to reuse their benefits for a second VA loan while retaining the ability to borrow with no down payment. Pretty cool!

When Can You Use Second Tier Entitlement?

There are a few common scenarios where second tier entitlement comes into play:

1. Buying Again After Selling a Home with a VA Loan

If you sell the home you purchased with a VA loan, your entitlement will be freed up to use on another VA purchase. As long as you have enough proceeds to pay off the first mortgage, you can tap into your full entitlement all over again.

Just make sure to request an updated Certificate of Eligibility from the VA before applying for the new loan. This will combine your first and second tier entitlement.

2. Buying a Second Home While Keeping the First

What if you want to buy a second home but keep the first as a rental property? This is allowed with some limitations.

You can only have one VA loan at a time unless active duty military orders require a move. In that case, you may be allowed to have two VA mortgages simultaneously for a short period.

Otherwise, you’d need to rent out the first home for at least a year before getting the second VA loan. Work with your lender to determine how much entitlement you have remaining. You may need a down payment on the second home if you’ve used up your second tier entitlement.

3. Buying Again After Foreclosure

Veterans who lose their home to foreclosure can restore their entitlement and purchase another primary residence with a VA loan after just two years.

However, some entitlement may be used up in the foreclosure, so you’ll likely need to rely on second tier entitlement for the new purchase. Speak with a lender to find out if you’ll need a down payment.

How Much House Can You Buy with Second Tier Entitlement?

The amount of home you can purchase with no down payment depends on the combined amount of your first and second tier entitlement.

As explained above, second tier entitlement is at least $144,000. That allows you to buy a home up to $576,000 with no down payment based on the 25% guarantee.

Of course, this varies by county loan limits. In lower cost areas your first tier entitlement may not be fully used, freeing up even more for the second purchase.

Tip: Use the VA entitlement calculator to estimate your available entitlement and how much you can borrow with no down payment.

Can You Ever Lose Second Tier Entitlement?

Second tier entitlement is yours for life as long as you remain eligible for VA loans. However, there are a couple cases where you may lose the ability to reuse it:

• Failure to repay a VA loan: If you default on a VA loan and the entitlement is used to reimburse the lender for losses, it is gone. You cannot restore second tier entitlement once paid out.

• Entitlement substitution: If you sell your home to a veteran who assumes the loan, they may substitute your entitlement with theirs. This transfers the entitlement away from you.

• Reduced circumstances: Severe financial hardship may cause the VA to take away benefits. This is rare but can include bankruptcy or surviving spouse benefits.

Barring these unusual cases, you should be able to tap into your full VA entitlement multiple times.

Tips for Using Second Tier Entitlement

• Review your Certificate of Eligibility before applying to see your available entitlement.

• Consider working with the same lender. They will already have your entitlement information on file.

• If keeping your first home, make sure rental income is sufficient to cover mortgage payments.

• Know your county loan limits. Entitlement is capped at 25% of the limit.

• Be mindful of debt-to-income ratios. The VA will look at both mortgage payments.

• Talk to your lender early about your specific circumstances to create a plan.

Key Takeaways on VA Loan Second Tier Entitlement

• Second tier entitlement allows veterans to reuse VA loan benefits for multiple purchases.

• Total entitlement is at least $144,000 plus any leftover amount from the first tier.

• You can buy again after selling the first home or keeping it as a rental.

• Defaulting on a VA loan may cause you to lose the ability to reuse entitlement.

• Combined entitlement allows purchases up to $576,000 with no down payment in most areas.

• Work closely with your lender to maximize this benefit over your lifetime.

Homeownership can become a reality for more veterans thanks to second tier VA loan entitlement. Unlocking this benefit allows for no down payment financing on multiple purchases rather than just one and done. If you have questions, discuss your personal situation with a VA lender to create a strategic plan.