Keeping Your Home & Buying Again

VA borrowers have options to retain their current home and purchase another using their remaining entitlement.

One of the most common circumstances is when an active military member has to PCS to a new duty station. One reason borrowers may keep their home is because it can be difficult to sell. Others like the idea of using the home as a rental property. While you can’t purchase a home with this as your intent, it’s possible to buy with a VA loan, live in the property for a while, and then rent it out to others upon relocating.

The VA backs a portion of every loan. That backing, known as a guaranty, is reflected in a dollar amount called “entitlement.” VA buyers with their full VA loan entitlement can borrow as much as a lender is willing to lend without the need for a down payment.

Those with reduced entitlement -- either because of one or more active VA loans or default on a previous VA loan -- may have to factor in a down payment when the time comes.

The VA’s second-tier entitlement allows you to take out another VA loan to buy a second home.

This is common for active duty military members who get PCS orders but want to keep their current home. Some choose to use their current home as a rental property when they move to their new base. Others keep their current home for future military retirement.

It’s also possible to buy a second home with a second-tier VA loan without PCS orders. Perhaps you decide to turn your current home into an income-generating rental property. You can purchase a new residence for yourself with a VA loan, and find renters to move into your current house. However, this cannot be your intention when buying the home initially, as the VA does not finance investment properties outright.

There are two layers of entitlement, a basic and a bonus, or secondary, level. The basic entitlement is $36,000. For borrowers in most parts of the country, there’s an additional, second tier currently worth $145,550. Add those together and you get $181,550.

Because you’re keeping your home, the entitlement used to secure that original VA loan isn’t accessible for another purchase.

Let’s look at an example. We’ll say you purchased a home a few years ago for $300,000 utilizing $75,000 ($300,000 x 25%) of entitlement in the process. Now, you’re moving to take a new job. You want to hold onto and rent out your current home and buy a $500,000 home in an area with the standard county loan limit.

As a refresher, the loan limit for most U.S. counties in 2023 is $726,200, which means the full entitlement would be $181,550 ($726,200 x 25%, because the VA guarantees a quarter of the loan).

Here’s how the math breaks down:

• $181,550 - $75,000 in current entitlement = $106,550 remaining entitlement
• $106,550 remaining entitlement x 4 = $426,200

That $426,200 figure represents how much you could look to borrow before factoring in a down payment.

You could certainly aim for a bigger loan, but buyers who purchase above where their entitlement caps out must put down 25 percent of the difference between their cap and the purchase price.

For this example $500,000 purchase, you would need to come up with about $18,450 for a down payment because of your reduced VA loan entitlement.

Here’s what the math looks like:

• $500,000 purchase price – $426,200 entitlement cap = $73,800 difference
• $52,800 x 25% = $18,450

That could still be a great deal compared to conventional financing, which requires a minimum 5 percent down payment. Our example with a $18,450 down payment on a $500,000 loan represents a 3.7 percent down payment. You’d also wind up paying for mortgage insurance with a conventional loan.

If you’re purchasing in one of the VA’s high-cost counties, you’ll have more entitlement at your disposal.

Remember, the $181,550 in total entitlement reflects a loan limit of $726,200, which is standard for most of the country. But high-cost counties can have loan limits well over that. That means more $0 down buying power.

VA loan limits currently cap out at $1,089,300.

For example, let’s say the limit where you want to buy again is $1,089,300. The full entitlement for a qualified borrower in this county would be $272,325 ($1,089,300 x 25%).

Continuing our example, let's say you have $75,000 in entitlement tied up in an existing property. That leaves you with $197,325 in remaining entitlement ($272,325 – 75,000). And that means qualified buyers could borrow about $789,300 in this high-cost county before worrying about a down payment.

Remember, the additional entitlement only applies when buying in a high-cost county. If you’re moving from a high-cost county to one with the conforming loan limit, you would be limited to a lower maximum entitlement.

Purchasing again using your second-tier entitlement also comes with a unique caveat: You can’t have a loan amount below $144,001.

VA borrowers can count their VA Funding Fee toward that total, but not any qualified energy efficiency improvements. Remember that you may need to factor in your down payment too, which will affect how much you're borrowing. At the end of the day, you'll need to borrow at least $144,001 to purchase again using your remaining VA Loan entitlement.

Buyers who have some of their basic entitlement remaining may be able to utilize that and avoid the minimum loan amount. You can ask a loan officer to go over your Certificate of Eligibility with you in more detail.

One of the potential challenges of having two VA loans at the same time is being able to afford two mortgage payments. Borrowers who plan to rent out their old home may be able to use that pending income to cover the original mortgage payment.

It’s important to understand that lenders typically treat this as an “offset” and not as effective income. If the mortgage payment on your old house is $1,000 per month and you’re charging $1,500 per month in rent, lenders might only consider that initial $1,000 to offset the obligation.

Veterans United will typically allow a 100 percent offset as long as:

• You have a renter locked into a 12-month lease
• You can document their security deposit in your bank account
• You’re not leasing the home to a family member

Lenders won’t typically count rental income as effective income until you can document it on two years’ worth of tax returns. Different lenders can have different policies on this.

It’s important to remember this program is focused on helping veterans and service members purchase primary residences.

You’ll need to satisfy the VA’s occupancy requirements and buy a home you’ll live in as your primary residence. Generally, that means living in the new home within 60 days of closing.

Talk with a loan officer if you may have problems fulfilling the occupancy requirement. There are exceptions in some cases.

The VA gives borrowers a one-time opportunity to fully restore their entitlement without selling or otherwise disposing of their home. This benefit allows veterans to retain an investment property or a second home and purchase again using the full reach of their entitlement.

The original VA loan would need to be paid in full to pursue the one-time restoration. You can’t take advantage of this if you’re still making mortgage payments on the property.

For example, let's say you buy a home with a VA loan and then refinance into a conventional mortgage. Refinancing pays off the original loan in full. At that point, if you're planning to hold onto the home rather than sell it, you could look to apply for the one-time restoration of entitlement to purchase again using your full VA loan entitlement.

There's a big caveat here worth noting: If you obtain the one-time restoration and then later want to seek another VA loan, you'll have to sell every property you obtained with a VA loan in order to restore your entitlement.

The VA’s second-tier entitlement makes it possible for qualified borrowers to keep a home they already own and buy another. This gives VA homeowners the option to retain ownership of their current property, possibly to rent it out as an investment property, while buying a new primary residence for themselves.

You can currently access a total entitlement of $181,550 to own two homes in most of the country. This amount jumps up to $272,325 when your second home is located in a high-cost county. The amount of the entitlement you used for your first home is deducted from your total entitlement, and you can use the remaining amount for your second home.

If your remaining entitlement doesn’t cover the loan amount on your new property in full, you would need to pay 25% of the difference out-of-pocket.

Even if you have to pay a partial down payment, a VA loan could still be a better option than a conventional loan or FHA loan, in which you would have to make a minimum down payment of 5% or 3.5%, respectively. For more information about VA-backed loans and entitlements, talk to a loan specialist at Veterans United.