Countless service members have been told otherwise by bank officials, mortgage brokers and others but the truth is a little different: Foreclosure on a previous VA loan does not preclude a vet from getting another VA loan. Instead, the more important question involves how much of a loan the veteran will be able to obtain when the time comes.
The concept here is called second-tier entitlement and it’s confusing to both borrowers and lenders. As a refresher, here’s a snapshot of how VA entitlements are broken down:
Primary entitlement: $36,000
Secondary entitlement: $68,250
When a veteran has a foreclosed VA loan, the lender must determine how much, if any, primary entitlement the borrower has left. If the VA lost money on the original deal, odds are the veteran will not have much, if any, primary entitlement remaining. It might be $15,000. But it could just as easily be zero.
But, because veterans essentially have two separate VA entitlements, agency-approved lenders can secure a loan based solely on the borrower’s secondary entitlement. Of course, there’s a formula and some math involved to help make it extra confusing.
Getting a VA Loan After A Foreclosure
Let’s say the veteran has used $48,000 of entitlement on a prior loan, which may not be restored, and is purchasing a home for $320,000 where the county loan limit is $625,000. At that point, here’s the formula VA-approved lenders will follow:
$625,000 x 25% = $156,250 Maximum Guaranty
$156,250 – $48,000 = $108,250 Entitlement Available
$108,250 x 4 = $433,000 Maximum Loan Amount with 25 percent guaranty
In this example, the borrower’s loan amount ($320,000) is well below the maximum amount that carries a full VA guaranty ($433,000). Given that, the hypothetical borrower won’t need to come up with a down payment.
Minimum Loan Amount
One of the quirks of the second-tier entitlement option is that there’s also a minimum loan amount — $144,000. Veterans using their second-tier entitlement have to purchase a home for at least that amount to utilize the VA guaranty.
There are also situations where a veteran can have two VA loans at the same time. Yes, it’s possible, although it’s relatively infrequent (a good example would be a situation where a veteran must move from his family because of a job transfer but wants to rent out his old home).
It’s easy to see why many people get confused about entitlements. But this can actually be an incredible opportunity for veterans who have gone through hard times.
About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, from Lenderama and Bigger Pockets to the Huffington Post and Motley Fool. A former newspaper and magazine writer, he is also content director for a leading VA lender. Follow him on Google+.