This is a question that comes up often, and the Department of Veterans Affairs addresses such issues in the VA Lenders’ Handbook, VA Pamphlet 26-7.
Chapter Two of the handbook addresses issues related to VA loan entitlement and reusing that entitlement to buy another property.
There are some basic issues you need to understand about VA mortgages that can help the rules in this section make sense, the first being that when you purchase a home using a VA mortgage, you are using some or all of your VA loan entitlement and you must be purchasing a home you intend to use as your primary residence.
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VA Loan Entitlement Rules
Those who serve enough time in uniform are eligible to apply for VA home loan benefits. The VA agrees to back a portion of the mortgage loan (not the entire loan) for up to a basic entitlement amount ($36,000 in FY 2020, though the Department of Veterans Affairs may revise these numbers at any time if conditions warrant).
That does NOT mean the borrower is limited to a home loan of $36,000. That is simply the amount of VA loan entitlement available to the borrower as backed by the VA. Furthermore, for VA loans that are in excess of $144,000, there is an option for “bonus entitlement” which is essentially 25% of the loan.
Entitlement previously used for a VA home loan may be restored, but the borrower must request it. It is never automatic even if you have paid off the property in full. In general, restoration of previously used entitlement is possible in cases where:
- The property which secured the VA-guaranteed loan has been sold, and the loan has been paid in full
- An eligible veteran-transferee has agreed to assume the outstanding balance on a VA loan and substitute his or her entitlement for the same amount originally used on the loan
- The borrower has paid off a prior VA mortgage loan in full but has not yet sold the property (See below for more information on this scenario)
Why are we talking about VA loan entitlement in an article discussing the choices you have in purchasing a second home with a VA mortgage? Because borrowers who use their entitlement to buy a home use up that entitlement in whole or in part and that is a consideration for the lender when trying to approve your loan.
Initial Questions
The first thing a borrower should do is to take stock of their current home loan–is it paid in full? Or close to being paid in full? Or do you still have a ways to go before your mortgage is fully amortized?
Also crucial–the nature of your loan. Is the current home financed with a VA mortgage? An FHA home loan? Conventional? This can make a difference in how you proceed with a new VA mortgage.
The occupancy issue applies no matter what kind of circumstance you find yourself in with a VA loan to purchase property–you can’t buy a house you don’t intend to live in as your main home. That does not mean you can’t buy a multi-unit property and rent out the unused units, but the borrowers obligated on the mortgage are required to use the house they buy with a VA mortgage as their home.