The Department of Veterans Affairs helps active-duty service members, veterans and military families become homeowners through the VA home loan program. The VA doesn't actually lend money, however. The loans come from banks and other private lenders. What the VA does is guarantee a portion of the loan. The extent of that guarantee for any particular loan is called the borrower's VA loan entitlement.
VA Loan Guarantees
When the VA guarantees a loan, it is making a promise that if the borrower defaults -- that is, stops making payments -- the government will reimburse the lender a certain amount. This amount is the VA loan entitlement. In general, financial institutions participating in the VA loan program will lend a qualifying borrower up to four times his or her entitlement amount without requiring a down payment. In other words, if your entitlement is, say, $50,000, then you could borrow up to $200,000 without needing a down payment.
The VA does not limit how much anyone can borrow. The entitlement is simply the extent to which the government will repay the lender if a borrower defaults. You can borrow as much as the bank is willing to lend you, but if you borrow more than four times your entitlement, you may have to provide a down payment. In general, your entitlement plus your down payment must equal at least 25 percent of the purchase price.
As of 2015, the basic VA loan entitlement was $36,000, which translates into a loan of $144,000. That's not a lot when you consider that the median home price in 2015 was about twice as much. For that reason, the VA also has an additional "bonus" entitlement. As of 2015, the maximum bonus entitlement for most borrowers was $68,250. Combined, the basic and bonus entitlements come to $104,250, which would allow a VA borrower to take out a $417,000 loan without a down payment. This number is important: $417,000 is the limit for a "conforming loan" in most of the United States. A conforming loan is one that can be resold to government-backed housing finance agencies Fannie Mae and Freddie Mac; these loans generally qualify for better interest rates.
Conforming loan limits are higher in areas where housing is more expensive. Limits for bonus entitlements are generally higher in those areas, too. The Federal Housing Finance Agency maintains a county-by-county list of conforming loan limits; the VA loan limits are the same as the FHFA's.
Certificate of Eligibility
To get a VA loan from lender, you must first obtain a certificate of eligibility, or COE, from the Department of Veterans Affairs. This document declares that you meet the eligibility requirements for a VA-backed loan and identifies the amount of your entitlement. The process for getting a COE varies according to your situation. VA loans are available to:
- Active-duty troops
- Military veterans
- Members of the National Guard and Reserves
- Surviving spouses of military members who died in service
- Other individuals defined by law as having equivalent service.
The VA provides detailed instructions on how to go about applying for a COE, including the documentation you'll need to provide.
Reading the COE
Reading your certificate of eligibility can be somewhat tricky. The COE shows your basic entitlement in boldface. This would usually be the standard $36,000, but if you already have an outstanding VA loan, it may be less. Your bonus entitlement isn't directly identified on the COE. Instead, it's alluded to in the fine print below your basic entitlement: "Additional entitlement is available for most loans in excess of $144,000. In such cases, the entitlement amount is 25 (percent) of the VA loan limit for the county where the property is located." To know how much bonus entitlement you get, you'll have to check the loan limit for your county.