Did you know you could qualify for a second VA loan--whether or not you have paid off your first? It's called a second VA loan, or second-tier entitlement, and many veterans have no idea that they could be taking advantage of it! Here's how it works:
The current entitlement for a qualifying veteran is $36,000, and the VA loan is guaranteed up to four times that amount (that's $144,000, if you don't feel like doing math). And, for loan amounts above $144,000, the VA guarantees one-fourth of the loan amount up to $417,000 (this is particularly helpful for those buying in higher-priced areas like Southern California and Virginia).
Step one to applying for a VA mortgage is to obtain the Certificate of Eligibility (COE) from the Department of Veteran's Affairs. This document proves a borrower is eligible to receive a VA loan and includes the amount of entitlement available. It is this certificate that allows you to take advantage of your VA loan more than once as long as part, or all, of the entitlement remains.
WHAT CAN I USE MY SECOND VA LOAN FOR?
Assuming you have part of your entitlement left, there are several things you can use a second VA loan for:
If interest rates have dropped since you took out your home loan (and seeing as rates are lower than they have been in years, I can almost guarantee they have!), you can lower your interest rate and your monthly payment by refinancing the terms of your loan with the lower interest rate. You also get to skip one month's mortgage payment, which can make all the difference for many families in paying off a debt or purchasing something needed.
Refinancing essentially pays off your original VA loan, the original entitlement is restored, and is immediately replaced by the new, refinanced loan.
2. NEW HOME PURCHASE
When you decide to sell your existing home financed with a VA loan, your entitlement is restored and you may use it to buy another property. Or, you may elect to use the interest built up in the home paid for with a VA loan as a down payment to obtain a Conventional Loan which, unlike a VA loan, has no funding fee. You then have all your original entitlement to use again, should you need it.
3. USING AN EXISTING HOME FOR RENTAL
If you purchased a lower-priced home or condo that didn't take your entire entitlement, and you are looking to rent that property (for example, while you are being re-stationed), you can use what is left in your entitlement (times four) for another zero down VA home loan to purchase a second property.
4. VA LOAN ASSUMPTION
One of the great features of VA loans is that they are assumable by third parties. The original terms and rate of the loan stay the same and a new buyer takes over the payments--assuming that person qualifies for the mortgage (using credit and income). This can make for easy, quick transactions, and--once the new owner refinances the loan--your VA entitlement will be restored, and you may use it again.
This allows many veterans the time they need to decide if they want to sell their original property or return to it one day.
5. PURCHASING AFTER FORECLOSURE
If you have taken a loss via a short sale or foreclosure, a second VA loan may still be obtained with whatever amount of the entitlement remains. If you don't have sufficient remaining entitlement for a new home purchase, you may still be able to obtain a VA loan by making a down payment--usually significantly less than would be required with other types of loans, and you will not have to carry any mortgage insurance.
WHAT ARE THE DISADVANTAGES OF TAKING OUT A SECOND VA LOAN?
Now that we've told you all the great things you can do with your second VA loan, we'll let you know a few of the disadvantages:
First it's a trickier process to qualify for second-tier entitlement. You'll need to work with a qualified and licensed mortgage broker, like those here at Patriot Home Mortgage-Pacific Group, who understand the unique circumstances of a second VA loan.
There will also be a higher percentage of funding fees involved. They may or may not be rolled into your mortgage, but they will either result in a higher monthly payment or in your bringing more cash to the closing table. These fees work on a sliding scale according to the amount being borrowed and the veteran's type of service, so it helps to talk with one of Patriot Home Mortgage-Pacific Group's licensed mortgage brokers to work through what the numbers will look like in your particular situation. Generally the highest amount of funding fees anyone has to pay will be 3.3%.
Finally, while you may buy a second home while renting out your first with your second VA loan, you can not use any of that second-tier entitlement to buy a second home for vacation use, or to purchase investment properties. However, if that's what you're looking to do, we would be happy to discuss other loan options with you--let's talk!
We are proud to be VA Loan experts helping Veterans take full advantage of their years of service to help them in their dreams of home ownership.