VA Restoration of Entitlement
- May 23, 2023
- Ailin Goode
- Personal Finance
One of the most significant benefits offered to veterans of the United States military is the VA home loan. The VA home loan was created in 1944, as part of the Servicemen’s Readjustment Act, as a tool to help servicemembers readjust to civilian life by creating a path for them to become homeowners. VA loans are backed by the United States Department of Veterans Affairs. The VA does not service the loan, but rather the loan is guaranteed against full default by the government.
How does VA Entitlement Work?
The amount of money that the VA will guarantee to your lender on your behalf is called your entitlement. The entitlement dictates what amount the VA will pay to the lender if the borrower defaults on their home loan. How much entitlement you have is also the deciding factor in how much you can borrow while still not being required to make a down payment, one of the main benefits of using a VA loan to buy your home.
How much entitlement you are able to utilize depends on the type of entitlement you have.
Full entitlement: If you have full entitlement then you do not have to pay a down payment at all and the VA will guarantee up to 25% of the loan amount if you default on the loan even if the loan amount is over the conforming loan limits. This guarantee is a significant benefit of VA home loans because it makes them a less risky option for lenders allowing them to be more flexible with the terms and conditions of the loan agreement.
According to the VA, you have full entitlement if you:
- Have never used your VA home loan benefit to purchase a house
- Have used your VA home loan before, but you have paid it off in full and also sold the property
- Have used your benefit, but the property has been foreclosed on or you’ve had a short sale (meaning you sold the house for less than you currently owed on the mortgage) and repaid the loan in full
Remaining entitlement: If you have remaining entitlement then the financial amount that it is worth will depend on how much of your entitlement you have already used and the loan limit of the county in which you live. Where with a full entitlement, the VA will guarantee 25% of the total loan amount, with remaining entitlement, the VA will guarantee 25% of the county loan limit minus whatever amount of your entitlement has already been used. With remaining entitlement, you may have to pay a down payment.
According to the VA, you have remaining entitlement if:
- Your VA loan is currently active and you are still in the process of repaying it
- You’ve repaid your VA loan entirely, but you still own the house
- You still own the house and have refinanced your VA loan into a non-VA loan
- You sold your house for less than you currently owed on the mortgage and you have not repaid your VA loan in full
- The home that was purchased with a VA loan was foreclosed on and you have not repaid the loan in full
It’s important to note that the amount of entitlement that you have does not dictate how much you will be able to borrow for the loan. How much you can borrow will depend on factors like your credit score, how much income you have, where you are trying to buy, and other assets you may have.
Your entitlement is a lifelong benefit from the VA. You are able to use and reuse it as long as you continue to meet certain requirements and are open to possibly having to pay a down payment. VA entitlement is also a spousal benefit that may be available to eligible spouses of veterans or servicemembers.
Having VA entitlement does not guarantee a borrower loan approval. Your lender will still have their own additional requirements and qualifications.
What is VA Restoration of Entitlement?
Restoration of entitlement is the process of restoring your VA entitlement to its full amount. When you use your entitlement to take out a VA home loan, that entitlement is now attached to that specific loan and is no longer available to you. However, there are ways you can restore this entitlement in order to use it multiple times.
Ways To Restore VA Entitlement
Your VA entitlement is a benefit that is available to eligible veterans and servicemembers for the duration of their lifetime. It is designed to be used multiple times and can even be used at the same time. An example of this would be using your remaining entitlement to purchase a second home under a new VA loan while retaining your first.
There are several ways to fully restore your VA entitlement. You can:
- Sell the property: Selling the property you bought with your current VA loan is the simplest way to restore your entitlement. However, you must also be able to repay the full amount of the loan in addition to selling your property.
- Allow a qualified veteran to assume the loan: The VA allows borrowers to work with other qualified veterans and servicemembers to exchange their entitlements. What this means is that if find another veteran who is willing to assume your current VA loan, you can let them take it over in exchange for their entitlement. They will have your loan and you will have their full entitlement at your disposal.
- Refinance your loan and apply for one-time restoration: The main difference in refinancing your VA loan in order to restore your entitlement is the fact that you are allowed to keep the property. Since you are not selling it, you are limited in your options for restoration and you will need to apply for something known as a one-time restoration.
What is A One-Time Restoration of Entitlement?
Being able to restore your full entitlement usually requires you to see your property. Entitlement restoration is designed this way to deter borrowers from purchasing multiple properties that can be used as investment properties. This is because the goal of VA benefits is to enable veterans and servicemembers to achieve their dream of homeownership and offer them support as they reacclimate to society.
One-time restoration is the exception that does not require you to sell your home. Borrowers may only do this once. They may keep their original property, refinance their VA loan to another non-VA loan, pay off their current VA loan in full, then apply for a new VA loan for another house. Once the original property is no longer under a VA loan, the restrictions the VA puts on the use of the property no longer apply. This means it can be used as a rental or a vacation property. The new property under the new VA loan will be subject to VA regulations.
How to Apply for VA Restoration of Entitlement
In order to apply for restoration of entitlement, you’ll need to fill out VA Form 26-1880. This is a request for an updated Certificate of Eligibility (COE). Your COE is the document that confirms to your lender that you qualify for VA benefits, including your entitlement benefit.
The amount of entitlement you have is noted on your COE. Since you want to be able to use your full entitlement again, you must first have the amount of entitlement that is listed on your COE changed by the VA. They will need certain verifying information in order to restore your entitlement. They will need to determine the state of the property, an example of this would be providing the VA with proof of sale to confirm that the original property is no longer in your possession.
Once you’ve filled out this form, you’ll send it to your local VA loan office.
Why can't I get my VA loan entitlement restored?
There are several reasons why you might not be able to restore your VA loan entitlement. Your entitlement is a service-specific benefit offered by the VA. This means that if someone has been dishonorably discharged, then these benefits will no longer apply to them.
Your entitlement may also not be restored if the VA does not know the current status of your property. If you have paid off your VA home loan in full, but you still have the property, you may not be eligible. In addition, if you have an outstanding loan balance on a property, you will likely be unable to get your full entitlement restored. However, if this is true, then you should check to make sure you spent all of your entitlement on this loan and don’t have any left over that you can use towards a second home.
How long does it take for VA entitlement to be restored?
The amount of time it will take to restore your VA entitlement can depend on several factors. Working with your lender may help speed up the process. One of our Loan Officers can work with you and the VA to figure out the right path for your unique needs.
How many times can VA entitlement be restored?
There is no technical limit to how many times VA entitlement can be restored, however there are criteria that must be met every time you want to reuse it.
Can you restore VA entitlement after foreclosure?
You can restore VA entitlement after a foreclosure as long as you were able to repay the loan you took out in full.
Using another VA loan after a foreclosure can be a complicated process. Generally, lenders will not lend to a borrower again until after a certain period of time, usually two years. However, there are exceptions to this for veterans, so make sure to check with both your lender and the VA on the details.
For more information contact New American Funding. Our Loan Officers are happy to discuss your needs, answer any questions, and help you through the application process.