The VA Loan is one of the most powerful financial tools available. Many service members and veterans (ourselves included) have used it to become homeowners. If you know using the VA loan is in your future, it pays to understand how VA loan entitlement and funding fee work. Understanding how these affect the properties you can buy allows you to make the best decision when making your purchase with the VA loan.
In This Article
What is VA Loan Entitlement?
Entitlement is different from eligibility.
Entitlement is how much of the VA loan benefit the service member has available.
Eligibility refers to who is able to use the VA Loan. Active Duty and Veterans are eligible.
The VA loan is backed by the VA. They guarantee to pay your lender 25% of the loan if you default. The amount they’re willing to back determines the amount you are entitled to. Your entitlement is the amount you can purchase without a down payment.
You are fully entitled if:
1. You’ve never used the VA Loan.
2. You sold a property that had a VA Loan (or refinanced), therefore “resetting” your entitlement to full entitlement.
What is full entitlement?
The rules for the VA Loan changed in 2020. If you are purchasing a home with full entitlement there is no limit. You can technically buy as much house as you qualify for with zero down payment.
To check your entitlement right now, follow this link to the VA website. You can check your Certificate of Eligibility (requires CAC to access). It is also required from your bank when applying for a VA loan, so keeping it for your records will save you time down the road.
Buying a Home With Full Entitlement
In today’s market, homes go quickly and bidding wars are common. It might seem that having full entitlement to your VA Loan is the perfect way to compete with other buyers.
But there’s a catch.
The home price you agree to pay still needs to be certified by the appraiser. This is someone who inspects the property and makes an independent assessment of whether the price you pay is a fair market value.
If the appraisal comes in below what you are offering, the VA will only back the amount determined by the appraiser.
Any amount over the appraisal the VA will not back. You will need to come up with a 25% down payment on that difference.
The home you are trying to buy appraises for $500,000.
Due to a competitive market and multiple bids you need to offer $600,000 to get the house.
The difference of those two is $100,000. You will now need to come up with a $25,000 down payment for that amount. This is independent of and in addition to any other part of closing costs or the home buying transaction.
If you’ve previously used a VA loan, you can use it to buy more than one property. Once again, entitlement will drive what this looks like for you.
You can buy more than one home with the VA loan. The catch is that VA will only back a certain amount- basically your entitlement is now capped. This limit is set by the FHA annually, and you can view the 2022 limit here.
You can still buy a home that cost more than this, but you will have to put 25% down of the amount that exceeds the FHA limits.
To find your remaining eligibility:
1. Find your eligibility amount for the county you currently live in, and for the property type you’d like to buy.
2. Subtract the amount you already used (how much your loan was) from that amount.
3. The remaining amount is how much you can buy without a down payment. Any amount above that will require you to put 25% of the difference down.
4. Your Certificate of Entitlement should reflect this number; you can check that here.
You are PCSing to Norfolk and want to buy a home in Newport News County. The 2022 limit for that county is $647,200. You already bought a home where you currently live for $250,000.
This is the amount you are entitled too, so the purchase of a new home at this price or less will not require a down payment. Any cost more than this will require a down payment of 25% of the difference.
Even if you can buy a second home without putting any money down, it’s important to consider the funding fee. Understanding this is why I chose to put 5% down on the second home I bought with my VA loan.
The VA Loan Funding Fee
Although the VA loan is an amazing financial tool, it is not free. The price you pay is known as the funding fee. The funding fee can be either included in the loan amount or paid at closing as part of closing costs. Its structure is shown below.
|Property||Down Payment||Funding Fee|
|First||10% or more||1.4%|
|Additional||10% or more||1.4%|
It is easy to forget about the funding fee, because you can add this and other closing costs to the loan and still put no money down. It’s important to realize that this may be risky, because you can easily close with a loan amount that is greater than the value of the house.
As you can see from the rates, putting no money down on an additional home will incur a relatively large funding fee.
Smart Ways to Use the VA Loan
The VA Loan is an excellent financial tool for becoming a homeowner.
Understanding how it works allows you to use it as part of a larger financial plan.
For example, you can use it to buy multi-family complexes, or collect rental properties as you move across duty stations. More articles on these topics are coming soon, and you can subscribe to get them delivered to your inbox.
Whether you are just getting started or buying your next place, here are the key takeaways to help you make the best financial decisions.
1. Entitlement drives the VA loan. Any amount outside your entitlement will require you to put 25% of that amount down.
2.The VA Loan is not free. The funding fee is an expense unique to the VA loan. You can control this fee through your down payment.
3. Pay closing costs where it makes sense. It is worth putting some money down to avoid negative equity in a home.
4.Using the VA loan should be part of a larger financial plan. When you are unsure of a factor such as to sell or rent your home, leave both doors open by choosing a house that can work for both. Future moves, family planning and desire to be a landlord should all be considered.
Did you know?
- I Bonds are a risk free government bond that are currently yielding 9.62% You can use them tax free for educational expenses.
- These two investments have both beaten the market this year (one has had positive returns). But then again, they were designed to be low volatility long term investments.