One of the most complicated things about Veterans Affairs debentures is entitlement. While the concept is relatively easy to understand, the way it is set up is almost guaranteed to make people’s heads spin. It does not help that the agency’s own explanation of its benefit programs can be very technical.
As a matter of fact, the Housing Loans section of the agency website does not really explain what the meaning of entitlement is – they just start talking about it and let the public to figure it out in the process. Aside from that, it is similar but not identical to the Veterans Affairs assurance. And that thing is not also appropriately explained.
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Guarantee versus entitlement
In the simplest terms, entitlements are how much the agency will guarantee for qualified vets or other eligible individuals on property debentures they might purchase or obtain. It is not how much people can borrow – that is a different matter that needs to be discussed – but makes sure that a part of the mortgage will be paid to the lending firms in case of a default.
It is why people can get this type of debenture with no down payment, pay no private mortgage insurance, as well as get the lowers interest rate available in the market. The basic entitlement is $30,000. That is how much the agency will assure on a housing loan.
Lending firms will usually approve mortgages for four times the mentioned amount without a DP, assuming the borrower meets income and credit guidelines, so they can use the basic entitlement to purchase a house for $140,000 with no down payment. On the other hand, the agency’s guarantee is the amount the government actually guarantees on one debenture. SO if the borrower purchased a one hundred thousand dollar house with no down payment, the assurance would be $25,000.
Going beyond the standard entitlement
Does it not sound like much? Do not worry because, for properties over one hundred forty-four thousand dollars, the government will guarantee up to one-quarter of the home price up to the local mortgage limit determined by the FHFA or Federal Housing Finance Agency for single-family houses. That ranges from $400,000 to $600,000, depending on the local real estate value.
It is even higher in some parts of Hawaii. The maximum Veterans Affairs assurance is based on the same limit used for traditional debentures backed by Freddie Mac and Fannie Mae. Borrowers can still use this type of mortgage to purchase a house that exceeds the limits, but if they do, they will need to make a DP equal to 25% of the excess amount. For more information about this topic, click websites like lånutensikkerhetguide.no for details.
So if the individual purchases a property for $517,000 in a state or city with a debenture limit of $417,000, they would need to make a DP of $25,000, or 25% of the difference between the two amounts. The agency will guarantee the mortgage for $104,250, or one-quarter of the loan limit.
The good thing about this guarantee is that it takes the place of down payments. Suppose people purchase a three hundred thousand dollar house with a seventy-five thousand assurance. In that case, the agency is guaranteeing it will pay up to seventy-five thousand dollars to lending firms in case the borrower defaults.
So lending firms would have to recover two hundred twenty-five thousand dollars in foreclosed money before they would suffer losses. The lending firm’s point of view is similar to the safety net provided by a down payment. So it is willing to offer individuals the best possible terms.
That is also why this kind of loan does not require insurance, which is a requirement for traditional mortgages with less than a 20% down payment. Always remember that the guarantee and entitlement are the only amounts that the government insures – they are not loans or grants that pay for part of people’s mortgages. Individuals still pay 100% of the cost of the property – it is just that the government is backing the borrower up.
It gets complicated – purchasing the next property
So, why is there a significant distinction between the Veterans Affairs entitlement and debenture assurance? It will not affect people as first-time buyers. Still, it does come into play if they decide to purchase another property using a VA debenture plan – either to replace their first house, a second home, or vacation property. Technically speaking, people can only use their VA entitlement once. If they use the amount to purchase a $145,000-house, that’s it – it is all gone.
People do not have entitlements left if they decide sooner or later that they want to purchase an eighty-thousand dollar cabin in the woods as a vacation getaway while they are still paying on the first housing loan (though individuals can apply for a one-time reinstatement once that the loan is paid off).
Although, the exception is that the individual is still entitled to their additional guarantee amount if they choose to purchase another property that exceeds $145,000 in price. Always remember that this assurance will cover one-quarter of the price up to four hundred seventeen thousand dollars anywhere in the country and up to more or less six hundred twenty-five thousand dollars in high-value areas. So people have still got some funds to work with.
Calculating the guarantee on the second purchase
The way these things are calculated is to take the base guarantee for the house the person is purchasing and subtract the entitlement they have used so far. So let us say the borrower used the amount of their base entitlement to purchase their first house for $130,000 and now is looking to purchase another house for $400,000.
The base assurance on the second house is $104,250, or one-quarter of the amount of the second house. But they have already used, the amount of their entitlement to purchase their first property, so they subtract the $104,250 and get seventy-four thousand two hundred fifty dollars as the guarantee available to them on the second property.
They would then need to come up with the thirty thousand dollars down payment (DP) to cover the difference. The key is that additional guarantees readily available for borrowers depend on a combination of the property price and the loan limit of the area.
Suppose, in the example mentioned above, the borrower was purchasing a half-a-million-dollar house in an area where the limit is $625,500. Instead of the max guarantee being $125,000 or one-quarter of the home price, it would be $156,375 or one-quarter of the six hundred twenty-five thousand dollar loan limit.
The borrower then subtracts the thirty thousand dollars they previously used from $156,375 to get the $126,375 value, which is the max readily available to them for purchasing a house in the area. The Veterans Affairs will still only guarantee one-quarter of the price, or $125,000, but borrowers still would avoid having to make a DP in that case. The Veterans Affairs program is a good benefit for people who have served in the military or in other military affiliations. But the rules and regulations can be pretty complicated, especially if the borrower is using the program for the second time.
