VA loans are hands-down the best choice for those who qualify wanting a low cost, no down payment financing with competitive rates.
It’s a benefit reserved for the select few who have served or are serving in the Armed Forces, Guard or Reserves and was first introduced as part of the original GI Bill of 1944.
VA loans have multiple benefits that others don’t have and isn’t a one-time affair. A veteran can use the VA home loan benefit more than once to buy and finance a home. But a little known and rarely used provision of the VA home loan guarantee allows a veteran to have more than one VA loan at a time.
That means a veteran can buy and finance a home with zero down, later keep the property as a rental and buy yet another property using the VA program.
It takes a little math, but we must first understand VA home loan entitlement.
Certificate of Entitlement
The only document the Department of Veteran’s Affairs issues to validate someone’s eligibility for the VA home loan program is with the Certificate of Eligibility, or COE. This certificate can be obtained by the veteran directly from the VA or the veteran can let their chosen VA approved lender request it for them. Once the certificate is received- lenders can obtain this document electronically- the amount of entitlement available is listed. Currently the entitlement amount is $36,000. But that’s hardly the amount the veteran can borrow.
VA loans have the lowest default rate of any mortgage in today’s marketplace but in those rare occasions when a borrower does default and the lender is forced to foreclose, the lender is compensated at 25 percent of the loss. This compensation comes from a Funding Fee which is charged on all loans.
The funding fee is a closing cost but it’s not a fee that must be paid out of pocket and can be rolled into the final loan amount.
How Much is The VA Loan Fee?
The fee can vary based upon the term of the loan, type of service and any down payment made. However, for veterans using their VA home loan benefit for the first time the funding fee is 2.15% of the loan amount.
Let’s say a veteran makes an offer on a home for $400,000 and wants to use the VA home loan program and put zero down. The funding fee is $8,600 making the final loan amount $400,000 + $8,600 = $408,600. The veteran will qualify based upon the $408,600 amount.
Now, let’s return to the 25 percent guarantee. The VA will guarantee 25 percent of the loan amount and the maximum loan amount is then $36,000 times four = $144,000. For home purchases above this amount, the VA will guarantee 25 percent of the loan up to $580,750 here in San Diego County.
For example, let’s use that same $408,600 figure. Since the VA will guarantee the loan to 25 percent of the loan, the guarantee is $408,600 X .25 = $102,150. This is the amount the lender will receive as compensation and the lender will then attempt to sell the property to recover the remainder.
So far, these examples are based upon the veteran using all of the original $36,000 entitlement.
But what if the veteran only uses a portion of it?
More Than One VA Loan…
Now let’s say another veteran is buying a condo and the sales price is $75,000. 25 percent of that loan is guaranteed by the VA but only $18,750 was taken from the original entitlement amount of $36,000, leaving $17,250. So far that’s a lot of math but we’re almost done.
A few years later the veteran decides to keep that condo and rent it out. The rental payments will not only cover the mortgage, taxes and homeowner’s dues plus some extra cash each month for retirement. But there is still some entitlement remaining and can be used once again to buy a home using the VA loan with no money down as long as the veteran intends to occupy the property as a primary residence. $17,250 X four = $69,000. The veteran can buy and finance another home up to $69,000 with no money down.
That might be a bit hard to find given property values but it’s possible. Now let’s say the veteran did find a property at $90,000. The veteran can still use the VA program but not without some form of a down payment. In this example, the veteran would need to come in not with the difference between $90,000 and $69,000 = $21,000 but with 25 percent of the difference, or just $5,250.
No, this is no longer a zero down loan but it still can be a better choice. VA loans do not have a monthly mortgage insurance payment while other low down programs do. The down payment in this example is just under 6 percent of the sales price. Conventional loans require a mortgage insurance policy for all loans more than 80 percent of the value of the property. FHA not only has its own form of a funding fee called the upfront mortgage insurance premium but also a monthly premium that must be paid as well.
It’s not often someone can have two VA loans at the same time but it’s possible and in the right situation can be the best choice among all of the loan programs available today.
If you’re curious if this might work for you, give us a call and let’s do a little math together.