Uncommon Examples of How Certificate of Entitlement Can Be Used in Real Life
COE: A Deeper Look at Your Entitlement
At VAFinances, we look to add to the national conversation, not just regurgitate it. So when it comes to writing about Entitlement, we took an “example-heavy” approach to illustrate how it works instead of just describing how to use it. As my High School English Teacher always said, “Show, don’t tell.” In that spirit, we hope you enjoy our Certificate of Entitlement examples we have laid out here.
If a person was trying to figure out how VA Entitlement works, he or she would probably Google it, or Bing it (is that a thing now?) or maybe even Yahoo it (is that still a thing?) and search online. Once you are finished scrolling past all the mortgage advertisements, there are some good pages that explain the formula in detail, outline basic entitlement ($36,000) and bonus entitlement ($68,000), explain that these numbers don’t actually mean anything to you directly but instead indicate that you may be eligible for a loan up to $417,000 (or more depending on where you live) without a down payment, and then end with a hard “sell” closing. There’s a bit more to it than that, so let’s dive a little deeper into what is typically left out of these posts, and skip the sales pitch entirely, shall we?
Two things that are often (though not always) missed, are the following:
1 – You can actually get a VA Loan for as much as you want, provided you are willing to kick in a down payment after running out of Entitlement. I’m not sure why so many of these explanations assume you aren’t willing to put any money down on your home, ever. Sometimes, and for some Veterans, it makes sense to do so.
2 – It is possible, and really not all that uncommon, to have multiple VA Loans at one time. You just have to do it the right way and for the right reason. First, the new purchase must be a new primary residence. Oftentimes, this means that you are relocating to another place. Otherwise, it is obvious and documentable that you are upgrading to bigger and/or higher priced home. Of course, if you are trying to do this without a down payment, you still need to make sure you have enough Entitlement left to cover the guaranty portion of the new loan.
If you are like me, seeing actual examples instead of generic calculations helps you understand the logic behind an idea. Seeing the logic behind Entitlement helps many people apply the basics to guide their own decision making.
I think it’s best to start with some basic examples that will illustrate the logic behind VA Entitlement.
Certificate of Entitlement Examples
Example 1: New Purchase–Under County Limit
Let’s say you want to purchase a home for $200,000 in Virginia Beach, Virginia. The county limit is $417,000. First off, good luck! But that’s beside the point…
Since you are under the county limit, there would be no down payment required. The base loan amount would be $200,000 on the $200,000 purchase price. The funding fee would be added to the balance, unless you happen to be Exempt (which means you are more than 10% disabled or an eligible surviving spouse).
The VA requires that all loans have 25% guaranty built into the loan. This means that if the loan is at the county limit or below, the VA will back 25% of the loan balance if there is a Default (i.e. you stop paying, which you would never do, right?). So any purchase at $417,000 or lower will not require a down payment, assuming that one has not used a VA loan before, or they fully restored their entitlement (completely paid off their original loan).
Ok, that was simple! Truly, none of this is that complicated, but as they say, “the devil is in the details”, so let’s continue weeding him out.
Example 2: New Purchase–Over County Limit
Now let’s take a similar example as above of purchasing a home in Virginia Beach, Virginia, where the county limit is $417,000. However, let’s say this time you wanted to purchase a home for $550,000 (much more likely in this particular area).
As mentioned before, you can have a VA loan over the county limit, but the lender would need to ensure that the 25% guaranty is met fully. Because the VA will only back 25% up to the county limit, this means that the remaining guaranty must be met in some way.
This additional guaranty is satisfied by the veteran providing a down payment to cover the remaining amount needed. Essentially, your ability to put money down supplements the VA Guaranty on loans that exceed the reach of your Entitlement.
In this example, the purchase price is $550,000. The required guarantee is 25%, which is a total of $137,500. The VA will handle the 25% guaranty up to the county limit of $417,000, meaning the VA will back $104,250. So, there is $33,250 of required guaranty still lacking. Consequently, in this situation the Veteran is asked to provide a down payment of $33,250 to satisfy the VA guaranty requirement.
There are different ways to arrive at this calculation of down payment, depending how you want to look at it. Another way is to take the purchase price (550k), minus the county limit (417k), to equal the gap of 137k. Then take that 137k times 25%, and that will also yield the required down payment of $33,250.
Above and Beyond: So what does this mean?
Some might say that since there is a down payment required, there are other loan options available that may make more sense. We disagree, most of the time.
In this situation, there wouldn’t be any alternatives that would appear to be more advantageous in my experience. In Example 2, $33,250 of down payment money is 6.09% of the total purchase price of $550,000. Any time the loan amount exceeds $417,000, there are fewer alternatives for low down payment loans. The most typical answer for the next best alternative would be a jumbo loan that would require 20% for a down payment. The majority of times, rates for VA loans are lower than the typical fixed rate Jumbo Loan (this can vary by overall market factors, but has a better chance of being true than false in any given year).
Furthermore: The VA Has no maximum loan amount. I have helped several individuals with home purchases over $1 Million. You just have to be prepared to have the correct amount of down payment to ensure the proper VA Guaranty is met.
Example 3: New Purchase—WAY Over County Limit
I worked with a long time client on one of his moves, a purchase price of $1,050,000, in Arlington, VA where the county limit is $625,500. The price was over the county limit by $424,500. The client needed to provide a down payment that is 25% of this gap of $424,500. The math comes out to $106,125 for the required down payment, or about 10% of the total purchase. Again, the next best option may be a 20% down payment jumbo loan. So, this is another example of how the VA Loan can provide a tremendous amount of value with the low down payment requirement, and of course the VA Loan has no Monthly PMI (mortgage insurance, required on most loans with less than 20% down) involved.
Example 4: New Purchase with Existing VA Loan Outstanding
The question of “how can one Military Family have two VA loans” is answered here, and the calculations are illustrated.
Again, in order to pull this off, the new purchase must be considered a primary residence (if you are active duty and PCS’ing, a relocation fits this requirement easily).
If you have an existing VA loan and are looking to purchase a new property, the most important factor is going to be the county limit for the new property. All of the calculations will rely on this. In most of the country, the limit is $417,000. You can find the 235 counties that are exceptions to that here.
For example, let’s say you own a home in Pensacola, FL and the home was originally purchased for $215,000 using a zero down payment VA loan. Now you are being asked to relocate to the Washington D.C. area, and specifically shopping in Alexandria County, VA which has a county limit of $625,500.
When you look in Virginia, you find a home for sale for $489,000. First things you’d want to know are how much of a VA Loan you can qualify for and how much you’d have to put down, right?
There is a formula that breaks down the entitlement used, and what’s available, and calculates the required down payment. The shortcut I use is to subtract the original loan amount from the new county limit (if you don’t know this then there is a different route to take). In this case, $625,500 minus $215,000 equals $410,500. This means that the VA would guarantee up to $410,500 of the loan amount with no down payment. Then take the purchase price minus the $410,500 calculation we just made. The veteran would need to provide the 25% guaranty on the gap between the purchase price $489,000 and the max guaranty amount of $410,500. This gap is $78,500, and contributing 25% of that gap means that the down payment is $19,625, or 4% of the total purchase.
Continuing the theme of comparing your options, in this case you just put a down payment of 4% of the total purchase price on a $489,000 house, something Conventional Mortgages typically do not allow, even with Mortgage Insurance. However, since this is a High Cost County, FHA would also be a low down payment option you could look at. The mortgage rates for FHA and VA are fairly similar from my experience. The down payment requirement for FHA is a little bit lower at 3.5%, but FHA would also have Up Front AND Monthly PMI so inherently a higher monthly payment. So in this example, the VA loan would still be a better option, more than likely.
“But Mike and Joel, you mentioned that sometimes it makes sense for a Veteran to use some cash for a down payment, and I happen to have some cash to spend. Also, I’m not sure I want to use my entitlement now, because what if I want to buy a bigger house later and I can’t sell this one and restore my Entitlement?”
Fair enough, my friend. But that leads me to our final example.
Example 5: Side by Side Comparison—VA vs. FHA vs. Conventional
In order to illustrate just how powerful of a benefit you really have with the VA Loan program, let me talk about another client that we helped in Maryland. This Marine pilot owned a home in Alabama that he had bought before moving back up north. Consequently, he had only enough Entitlement left to cover $217,000 worth of house without making any down payment. The home he wanted had a purchase price of $350,000. As we know by now, he can buy that house, he just needs a down payment of 25% of the difference between $350,000 and $217,000, which is a down payment $33,250. That would make his VA Loan amount $316,750, and represented a down payment percentage of 9.5% of the total purchase price. This was no problem, he had the cash to do so, but with that large of a down payment that he was committed to making, he wondered whether he should just go ahead and take an FHA or Conventional loan and avoid the funding fee altogether. Fair question. So, we made him this chart (literally, this is the actual chart, so forgive the hideous color scheme that my partner prefers):
Certificate of Entitlement Examples
As you can see, given the same down payment amounts and even after the funding fee was rolled in (which was lower than the FHA Up Front MIP) the monthly payment was still substantially lower than his other options. Quick note: this was an actual example, but it happened last year, so don’t make any correlation between the rates you see here and the rates that may be available on the day that you read this.
This post has been longer than most that you are probably accustomed to reading, but the point was to give you some clear illustrative Certificate of Entitlement examples, and to touch on the finer points that surface and sales articles do not typically expound on. And while VAFinances is run by two mortgage professionals, which is how we know all of this, we are not asking you to buy anything from us. If you like the information we provided and the way in which we explained Entitlement usage, we simply ask that you join the conversation! Share our resources with anyone you feel would truly benefit from our experience, and feel free to comment with thoughts and questions anywhere on our site. Other articles you may enjoy include Credit Education, a Rent vs. Buy discussion (including Active Duty), and a free eBook that we give away for joining our email list, “The Five Most Common VA Loan Mistakes”.
Mike and Joel