Life in the service can be unpredictable. A PCS order can uproot you and potentially your family suddenly, even if you’ve just bought a home with a VA loan. In these moments, you may ask yourself what your options are for either selling your home or obtaining a second property with an additional VA loan. So what can you do? Should you sell your home or use a second VA loan to buy another house?
In the context of VA loans, the term "second home" is typically used to refer to a vacation home or investment property. VA loans require you to live in the property you buy as your primary residence, so using a VA loan to buy a second home for use as a vacation home or investment property is not permitted.
However, there are scenarios where you can purchase a second property using your VA home loan benefit.
If you’ve bought a house with a VA loan and then paid it off or sold it, your VA loan eligibility will be restored for additional use on another home purchase.
If you have an outstanding VA home loan and want another one to buy a new primary residence, you have three options.
1. If you can find a qualified Veteran to assume your current VA loan, their entitlement can act as a substitute for yours and restore your VA loan eligibility.
2. You can sell your current home in order to restore your full VA entitlement.
3. You may also be able to get a second VA loan if you have enough remaining VA entitlement available.
VA loans cannot be transferred from one property to another. However, they are assumable which means they can be transferred between borrowers. If you are selling a home with an outstanding VA loan, a buyer can assume the mortgage instead of bringing their own financing. That said, the buyer would have to pay the difference between the sale price and the outstanding balance as their down payment. Additionally, the buyer would have to qualify for a VA loan for the seller to have their entitlement restored.
When buying a second property with a VA loan, you'll need to apply with a VA lender and figure out if you'll run into limits with your entitlement.
Entitlement tells lenders how much the VA will pay them if you default on your loan. In line with most lender requirements, the VA will pay up to 25% of the amount on your first VA loan, with no maximum loan limit amount. However, on your second VA loan, the backing/entitlement is limited.
The VA will determine 25% of the conforming loan limit in the county where you're buying, then subtract any entitlement you've already used on your first home's loan. If lower than 25% of the loan amount you want, you'll often need to pay the difference as a down payment.
VA entitlement is the amount the Dept. of Veterans Affairs will guarantee in the event a borrower defaults on their home loan. You may have heard terms like basic and bonus entitlement, also referred to as second-tier entitlement.
In short, the VA's basic entitlement backs 25% of VA loans up to $144,000. Bonus entitlement is used for any amount above $144,000. Chances are, if you already have a VA loan, your basic entitlement is used so you'll be using your bonus entitlement for your second home.
The VA doesn't limit how many times you can use a VA loan, as long as you have entitlement available. For example, if you continue to buy primary residences, sell them or pay off your VA loans in full, you will continue to have your full entitlement reinstated. On the other hand, you could reach a wall if you try to keep the homes that still have VA-backed mortgages.
What else should you know before buying a second property with a VA loan? Here are a few things to keep in mind:
VA loans require you to occupy the property as your primary residence within 60 days of the loan closing. More than 60 days but less than a year is occasionally allowed if you aren't able to move in sooner due to certain qualifying events such as retirement or property renovations. If you can't occupy the home because you are on active duty or otherwise employed in a distant location, a spouse or dependent child may be able to satisfy the occupancy requirement. Further, if you are deployed, you'll meet the occupancy requirement automatically.
When buying a second VA property, the occupancy requirements would shift to the new home purchase. For example, if you have a PCS order and want to keep your first house while buying a second with a VA loan, you would need to meet the occupancy requirements for the second home. It's best to speak to your lender and the VA to learn how the occupancy requirements will change on your first house and what you're allowed to do as they can vary based on the situation.
While the VA doesn't set loan limits on first-time use of VA loans, you will run into limits when applying for a second VA loan. As explained above, the VA will only guarantee 25% of the county loan limit minus the entitlement you've already used. Many lenders want 25% backing as a minimum, which can lead to loan amount limits and/or down payment requirements.
Your debt-to-income ratio (DTI) shows how much debt you owe in comparison to how much money you earn on a monthly basis. Two house payments will cause your DTI to increase, which can limit your access to additional loans. Higher DTIs are associated with more risk because you have less income available for expenses. For perspective, most lenders like to see a DTI of less than 41%.
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