What Is VA Second-Tier Entitlement?

People that serve in the military are accustomed to moving to a new location and changing homes on a rather frequent basis. This kind of constant change can play havoc on a person’s financial plans. For this reason, the Veterans Administration provided the VA Second-Tier Entitlement in order to alleviate some of the problems that come with moving from house to house in a short period of time.

Definition of VA Second-tier Entitlement

In plain terms, the VA second-tier entitlement allows a qualifying veteran to have two VA mortgage loans at the same time. Normally, this is not allowed by the VA guidelines for lending. However, a second loan is allowed in specific situations.

Most Common Scenario

In the case of a qualifying veteran or currently enlisted military member, if the person has a VA mortgage for their primary home and they receive word that they are being transferred to a new post, the most simple thing to do would be to sell the existing home and then buy a different property at their new post.

But the veteran may choose to keep their current home and rent it out. They could then use the VA mortgage to buy a 2nd home at their new primary residence.

Understanding How the Math Works

Throughout America, veterans that qualify for a VA loan based on their service receive $36,000 for the primary entitlement. They also receive $91,600 as a secondary entitlement. Those two numbers combined equal $127,600 in total entitlement.

When a veteran receives a VA mortgage loan, 25% of the loan’s balance is guaranteed by the federal government. This means that 25% of the entitlement is used for the mortgage.

So, for a loan amount of $180,000, the federal government would guarantee $45,000 (25% of 180,000). This would mean that the veteran still had $82,600 left over to use (total entitlement of $127,600 minus $45,000 equals $82,600).

The remaining entitlement amount gives the veteran the opportunity to buy another home, using the VA mortgage rules and guidelines.

The biggest obstacle for most veterans in this situation is meeting the debt to income ratio rules for the VA mortgage. Since the veteran is now obligated to pay both loans, whether they have a tenant in one home or not, it can be a financial strain on their budget.

Full Example

Here is a full example that should explain how the VA loan underwriters review the potential loans and how they determine the amounts used for entitlement.

Let’s imagine a soldier buys a home priced at $175,000 at their first post. three years later, they are asked to transfer to a different state. Here is how the VA would calculate their entitlement and determine their loan eligibility.

In this example, the veteran could potentially buy a 2nd home up to a price of $335,400 without being asked to pay a down payment. However, as mentioned earlier, the veteran would need to meet the debt to income guidelines for both homes in order to get approval for the VA mortgage.

Using Second-Tier Entitlement After a Foreclosure

Another example of how the second-tier entitlement is the case of a veteran buying a home after foreclosure.

When a veteran uses the VA mortgage to buy a home and the home is later foreclosed, a portion of their entitlement is earmarked for the foreclosed home. In some cases, the portion can be rather large. An approved VA mortgage lender can review the veteran’s situation and calculate how much entitlement is remaining to be used for another home loan.

The VA states that after foreclosure of a VA mortgage loan, veterans must wait two years before applying for another VA loan.

Using another fictitious example, suppose a veteran purchased a home priced at $200,000 using the VA home loan program. 25% of the $200,000 of the veteran’s entitlement would be used. This means that the veteran would have $77,600 in remaining entitlement using the following formula

Total entitlement offered to veteran $121,087.00 Less 25% of $200,000 -$50,000 Remaining entitlement $77,600.00

If the veteran’s credit score and income are now strong enough to meet the VA mortgage guidelines, the veteran could possibly qualify for a new mortgage of $310,400 (this is four times the $77,600 amount).

Summing Up What is VA Second-Tier Entitlement

Having options when moving to a new location under military orders can really help a veteran and their family to avoid the hassle of selling a home from a distance and also allow them a chance to build up their net worth through real estate investment. The second-tier entitlement is also a great way for a veteran to wipe the slate clean and start over with a new loan after struggling through a foreclosure.