Having Zero Entitlement on your Certificate of Eligibility doesn’t mean you can’t buy home with Zero down payment using a VA loan. Earlier this year, an Air Force Veteran and his wife were considering the purchase of a new home. Being experienced homeowners, they began the mortgage pre-qualification process with a local mortgage professional. At the conclusion of the pre-qualification process, the mortgage professional determined that they were not eligible for a VA loan. The basis for the conclusion was that the Certificate of Eligibility (COE) showed the Veteran had ZERO entitlement available. Eventually they were offered an FHA home loan to buy the house and they successfully bought the home they had fallen in love with. But, that’s not the end of the story. (Read about VA Entitlement Codes.)
In order to close escrow and successfully purchase this home using an FHA loan, they were required to come up with a down payment of 3.5%, which they had not been expecting. Additionally, they were required to come up with pay the FHA Up Front Mortgage Insurance Premium (UFMIP) of more than $6,200. To put a little more salt in the financial wound, they were also required to pay a monthly Mortgage Insurance Premium (MIP) of $255. And, in case you weren’t aware, FHA MIP never goes away on its own. There are only a few ways to get rid of that monthly expense, including a refinance out of the FHA loan into either a VA loan at any LTV, or some other type of loan at 80% LTV or less.
Not All Mortgage Professionals Are Created Equal
A few months after the couple moved into their new home, they wondered if they could have used a VA loan to buy the home. They searched the internet for a California VA loan specialist who they could call to discuss their situation. After only a brief conversation and a few pointed questions, we determined they most likely could use a VA loan to finance their home. Additional good news was that it wasn’t too late to save a lot of money. The difference between the response they got before and the results we came up with together, have to do with something called Bonus Entitlement. Most Loan Officers do not understand how Bonus Entitlement works, or that it even exists. This is one of the reasons why Veterans should always work with a Loan Officer who lives and breathes VA loans.
Bonus Entitlement – What is it?
Before discussing Bonus Entitlement, it’s important to clearly understand the VA Guaranty. The VA guarantees the mortgage lender up to 25% of the loan amount, in the event the buyer defaults on the loan. This VA Guaranty is called the Veteran’s Basic Entitlement, and it amounts to $36,000. So if you’re buying a home that costs no more than $144,000, you can buy the home with no down payment. That’s right, the math is pretty simple: $144,000 / 4 = $36,000.
While that may be great news in some parts of the U.S., it doesn’t get Veteran’s into homes in most of California. This is where Bonus Entitlement comes in. This is also where the other mortgage professional let our Veteran down. The fact of the matter is that Eligible Veterans have a combined entitlement of Basic + Bonus, which can be used together to finance a home.
Your Bonus Entitlement is calculated in the same way your Basic Entitlement is calculated. However, instead of using the Basic purchase price of $144,000, we use the maximum VA Loan Limits by County in which you intend to live. In the case of our clients above, they were buying in a county where the limit was $636,150.
And again, using the same math to derive the Basic Entitlement, we see the following: $679,650 / 4 = $169,912.
Before we can calculate the correct Combined Entitlement for our clients, we need to keep in mind that the COE showed they had ZERO Basic Entitlement remaining. So their combined entitlement would be calculated by reducing their Bonus Entitlement by the amount of their Basic Entitlement previously used and not restored, as follows:
- Bonus Entitlement: $169,912
- Less Basic Entitlement: $36,000
- Combined Entitlement $133,912
Now it’s time to remember the VA Guaranty, that says they’ll cover 25% of the Loan Amount. That means that we now know the maximum Loan Amount for our clients to finance a home with a VA loan using no down payment or equity. All we have to do is take the Combined Entitlement and multiply it by 4, giving us the maximum loan amount for this particular county for our Veteran of $535,650. Once we knew the current loan amount was only $360,000, we were able to confidently lock in a significantly lower interest rate than their FHA loan. Additionally, we removed the monthly Mortgage Insurance with their new VA loan. Even better, the COE showed the Veteran was disabled and was to required to pay ZERO Funding Fee.
In the end, it worked out for this couple. But the difference between an experienced Mortgage Professional and an experienced VA Mortgage Professional, can sometimes make or break your deal. And even though this couple got their home, they paid thousands of dollars needlessly and had to go find a true VA loan Expert to help them get the loan they deserved.
Authored by Tim Storm, a California Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.