VA home loans after foreclosure - it is possible with second tier or bonus entitlement

Sometimes mortgage professionals don't know their trade as well as they think they do. I answer questions for borrowers on several mortgage industry websites to help them better understand mortgages. On more than one occasion, I have seen this question:

Can I get a new VA loan to purchase a home if I have had a foreclosure with a VA loan in the past?

Most answers from mortgage professionals are flat out - "no". That is simply not the case. The actual answer is that a veteran will likely qualify for a new home purchase loan as long as they have enough remaining entitlement, the new loan amount is over $144,000.01 and they are otherwise qualified (call VA and verify this for yourself). Let's break down this down further with a few simple questions and somewhat complicated answers.

Do I have to pay back the foreclosure loss before I can get a new loan?

No, you do not. As long as you have enough entitlement left for a new loan on the home you are looking to purchase. If the entitlement is not enough, you are able to restore the amount wrapped up in a previous foreclosure by paying the VA back some or all of the loss (contact VA directly to determine this number). Once the loss is satisfied, you will have the entire entitlement available to you for a new VA home loan.

How much entitlement do I have remaining after my foreclosure?

Entitlement for veterans comes in two forms, basic entitlement and bonus entitlement.

• Basic entitlement allowed to each eligible veteran is $36,000. Since VA guaranteed loans are made based on 25% entitlement, you would take the entitlement and multiply it by 4 for the maximum loan amount (4 x $36,000 = $144,000 loan amount available for basic entitlement).
• Bonus entitlement is the difference between the basic entitlement and 25% of the current conforming loan limits in the county where the property is located. For example, all the counties in the state of Arizona, including my home county, Maricopa, have a conforming loan limit of $417,000. Most counties will have this limit, but there are a few exceptions in high cost areas. If the loan limit in your area is $417,000, 25% of that is $104,250. If bonus entitlement is the difference between the basic entitlement and 25% of the loan limit, the math would be $104,250 - $36,000 = $68,250 for bonus entitlement.

Even if you have some of your entitlement wrapped up in another property or a previous foreclosure, the VA will allow you to get another loan. 

It is important to know how much entitlement is tied up with the foreclosure when calculating whether or not a veteran has enough left over to purchase a new home. This type of loan is called second tier entitlement. The quick math to determining remaining entitlement is to take the $104,250 (for Maricopa county, Arizona) and subtract the amount charged in the previous VA loan and the amount you are left with is your remaining entitlement.

Quick example: Timothy & Susan Jones bought a house in Phoenix for $160,000 in 2002 with a VA loan and no down payment. Circumstances forced the the home to be foreclosed in 2004. Since the VA guaranty is 25% of the loan amount, $40,000 of the couple's total VA entitlement is tied up in that lost home. They would have $64,250 in remaining entitlement to purchase a new home. This means the new VA loan could be as much as $257,000 (remaining entitlement x 4).

So where does the $144,000.01 for a minimum loan amount come from?

A veteran's basic entitlement is $36,000, which allows for a guaranteed loan amount of $144,000. Since a veteran obtaining a loan after foreclosure will be using bonus or second tier entitlement, the minimum loan amount must be over that number by at least one cent. I'm not sure why this rule is in place and my answer is based upon the answer provided to me by the VA.

Are we finished yet?

Almost. It is important to note that it is possible to purchase a home for higher than the remaining entitlement allows, if the veteran adds some down payment money of his/her own. For instance, a veteran has $50,000 of entitlement available to them, which allows a $200,000 loan. If the veteran finds a home for purchase for $220,000, they are able to bring in $5,000 as a down payment to bridge the difference between the maximum available loan amount and the purchase price ($20,000 difference x 25% = $5,000 down payment).

I know this can be a complicated subject and there's a whole lot of math involved. The good news is that I am here to help. Even if you don't live in Arizona, where I am licensed, and just want someone to help you with the calculations, call me at 480-368-7715 and I'll be glad to help.

Thanks for reading my blog!

Website: Arizona Mortgage Pro

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