Most Lenders are Wrong! get 100% VA financing even with your eligibility tied up.
You are about to read a story about a travesty of justice with VA Homebuyers. Too dramatic? I don’t think so. Credit unions along with other inexperienced underwriters and loan officers around the country are giving out wrong information and bad advice to our Service-members and Veterans. These have cost our military families more money than I can even fathom.
There is so much bad Intel, but I’m here to talk about the Coup-De-Gras… the brutality of brutalities which is:
The misuse of your VA Home Loan benefits if they are currently “in use”.
Contrary to popular belief, in most cases you CAN use your VA benefits again EVEN IF your VA loan is tied up, and you CAN structure financing up to 100%.
100% VA Loans using a second mortgage
A Veteran is buying a home, but he used his VA loan eligibility to buy the home his family lives in now. I tell him that he can use the VA loan again and we can structure “no money down” financing for his new purchase. In many cases, the veteran or active-duty member could have enough ‘entitlement’ remaining to do a new VA loan up to 100% (see below) but in this case it was done using a second mortgage to bridge the gap between the maximum VA loan and 100% of the purchase price.
So, for the purposes of this article, I’ll be addressing the ways to get 100% financing while having your eligibility “tied up” and I’m going to start with how the VA feels about 2nd mortgages.
Here is an excerpt from the VA guidelines.
“From an underwriting standpoint, the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.”
100% VA Loans without a second mortgage
For many years, military personnel and veterans alike have been told that they cannot use their VA loan to purchase a new home with no down-payment if they’ve already done so. WRONG. The only time you can’t use your VA loan again is if you have ZERO entitlement, which in my experience, is rarely the case. Not to side-track but the reason for this is the standard increase to the conforming loan balance. More on that another time.
When you use your VA benefits for a loan, you use entitlement. The entitlement “charged” is 25% of the base loan amount you get. So, if you previously financed $200,000, you used $50,000 of entitlement. The maximum entitlement available to you for another VA Loan is based on the county loan limit where you are buying. For example, if you buy in Fairfax, Virginia, your max entitlement is based off the high-cost conforming limit of $1,149,825 (the county limit as of 31 July 2024) x 25% = $287,456. Subtract out the $50,000 you have “tied up” and the remainder can be used towards a purchase in that county. In other words, you have $237,456 of entitlement remaining.
The new max VA Loan is the Sales Price x 75% + remaining entitlement not to exceed 100% of the sales price. If you would like a calculator that calculates all that for you, check out this video and download the free spreadsheet.
Special Note: This “calculation” is only relevant if you have entitlement tied up in another home. If you have full entitlement, you can use your VA loan for as much house as you want, up to 100%. Yes, the VA would allow no money down on a $3,000,000 home with full entitlement!
So that covers the most common way to finance with 100% financing again but allow me to point out a common challenge with regards to your VA Loan and second mortgages.
Why not just use a Second Mortgage?!
A second mortgage would come into play where the maximum VA Loan won’t get you to where you need to be, and you need other financing to fill the gap. In those cases, the borrower may get a 2nd Mortgage to make up the difference. This is where most lenders start giving bad advice or intel.
We will get more into this shorty, but in my experience, most lenders just say NO, my underwriter said we can’t do a second mortgage with a VA First Mortgage. And because the loan officer believes they advise borrowers with some really, really bad advice. Either:
The Lender asks the borrower to refinance an existing VA loan to “free up” their VA eligibility
This is so unfortunate when it happens. I get into this a bit later in this article, but it’s safe to say that it is never a smart decision to refinance your existing VA loan unless you are getting better terms. (See below for a warning about loan sharks telling you to call a soon-to-be investment property a primary residence!
Recommending that borrowers liquidate savings or retirement assets
It’s commonly recommended to borrower that in order to afford a large down payment to “make up the delta” between the max VA loan and the sales price, they should liquidate assets. This is no bueno. Keep reading and I get into this more.
The Supposed Issues with using a Second Mortgage
The main stumbling block with lenders and loan officers who don’t know VA loans well is their interpretation of the VA guidelines surrounding assumability.
Spoiler: An Assumable Second Mortgage is NOT required!
An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and all its terms are transferred from the current borrower to a new borrower. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain a new mortgage and simple take over one that is already in place. This has become very popular with many homes still having VA loans with rates less than 4%.
The VA Guideline
The VA Guidelines read: “The second mortgage should not restrict the veteran’s ability to sell the property any more than the VA first mortgage. That is, it should be assumable by creditworthy purchasers.”
This is the statement that lenders hang their hat on and why they say “NO”. VA loans are errantly being denied across the country because the proposed second mortgage is not assumable.
Let me let you in on a little secret… in almost 30 years of mortgage banking, I have never seen an assumable second mortgage. So why is this guideline written like that?
Why was this written
My father always told me to question everything, which is why when I see a statement or guideline like this, I ask, “why was this written?” Or, better yet, what was the purpose of this statement?
The answer lies in the preceding statement, specifically, “the second mortgage should not restrict the veteran’s ability to sell more than the first mortgage.” Those two words “That is…” appears to state that a second mortgage is not viable or beneficial to the borrower because it is not assumable.
This is NOT what the VA is trying to say.
My Substantial Research
I have done quite a bit of research on this, and the VA has never gotten around to updating their guidance; however, I have confirmed with action and hundreds of 1st and 2nd mortgage combos later, that a 2nd mortgage is acceptable to the VA, and it doesn’t need to be assumable.
Second mortgages do NOT put the veteran in a worse financial position!
If my main goal as a lender is to not make it more difficult for the veteran to sell (i.e. to not put the veteran in a substantially worse financial position), then I must first consider whether having a non-assumable second mortgage hurts or hinders the veteran in any way.
Let’s take a look at the guidelines once again:
“The second mortgage should not restrict the veteran’s ability to sell any more than the VA first mortgage.”
Rick Translation: If a non-assumable second mortgage makes it more difficult for a veteran to sell than if he only had one mortgage, then using a VA loan with a second mortgage should not be allowed.
There’s no scenario in which a veteran is put into a substantially worse financial position by acquiring a second mortgage. To prove my point, let’s consider the following questions.
1 – Will having a non-assumable second mortgage hinder the veteran from selling their home?
Of course not.
When a buyer submits an offer on a home, they typically come with new financing options (such as a full pre-approval on a new mortgage) or, if possible, they pay cash. Because of this, all liens (loans) on the home are paid off as a part of the purchasing transaction, with the veteran (seller) keeping any net proceeds after all expenses are settled. So, to answer the above question: NO, the second mortgage would play no part in hindering the sale.
2 – What if a buyer was trying to assume the Existing VA Loan? Wouldn’t the non-assumability of the second mortgage hinder the sale of that home?
I did a video on VA Assumable Loans and why they aren’t closing, so please take a look!
I won’t get deep into VA loan assumptions, but one salient point is this: If you have a VA first mortgage (which can be assumed) and even if you did have a 2nd lien on the property that was assumable, the first mortgage lien holder would STILL require the 2nd mortgage to be paid off with the existing VA loan in sole first position.
Meaning, the new borrower would be forced to bring the delta in cash of the sales price and the balance of the VA Loan being assumed. This is no different than if there was no secondary financing. The new buyer would still need to make up the difference.
A VA Loan Assumption will NEVER allow a second mortgage anyways, so the necessity of a 2nd mortgage being assumable is a moot point and the VA knows it.
3 – Doesn’t a 2nd Mortgage (assumable or non-assumable) put the Seller in a potentially negative equity position and hinder the ability to sell?
Absolutely not.
If the borrower had full entitlement, he would have financed 100% (plus the funding fee if applicable) and be in the same boat as with two mortgages. Having a second to 100% does not put the veteran in a substantially worse financial position.
And remember, we are talking about the requirement of the 2nd being assumable, right?! It’s still a lien that needs to be paid off regardless of whether it’s assumable or not.
From an Underwriting Standpoint
Remember earlier on I called your attention to this statement:
From an underwriting standpoint, the veteran must (not) be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.
The key phrase here is “From an underwriting standpoint.” In short, it is left to the judgement and discretion of the lender as to whether having a non-assumable second mortgage will put the veteran in a substantially worse position. I can’t find one way it could and not a single underwriter when asked this question has ever been able to answer it.
Watch out for Bad Ideas!
I take the position that NOT allowing a second mortgage is more likely to have a negative impact on the veteran’s financial situation.
Unless there is sufficient (or full) entitlement available, there are only two ways to make a new VA loan happen. The veteran either needs to get their eligibility back or scrounge up the cash to make up the difference between the sales price and the maximum VA loan.
Let’s examine why both of these options aren’t ideal.
Bad Idea #1 — Freeing up entitlement with a refinance
It really jerks my chain when borrower is advised to refinance their current VA loan to free up their VA eligibility. This is in most cases terrible advice because the loan they are refinancing is probably at a much lower rate than the new mortgage would be.
Also, any conventional refinance on a departing residence should be handled as an investment loan (which means higher rates) because the borrower does not intend to occupy for at least 1 year.
BE CAREFUL! Many loan officers have advised borrowers to refinance their current home as a primary residence in order to switch out the loan. They recommend doing this before the home is put on the market. They want to refinance it as a “primary residence” because rates are better, and you can finance a higher percentage of the value of your home. Don’t ever fall for this one! It’s pure fraud to call a home that you do not intend to occupy for one year a primary residence.
Bad Idea #2 — Scrounging up the Cash
Let’s say you don’t choose to free up your VA entitlement (smart choice) and you instead try to pull together the money for down payment. From experience, I know that the average borrower doesn’t have these down payment funds just sitting in a checking or savings account. It’s tied up in investments, or worse yet, in their IRA.
Unless these funds are coming from a TSP or 401k, pulling money from these typical investment sources for a down payment are a taxable event and could even carry severe financial penalties. In addition, you will lose the growth potential on their investment.
Final Thoughts
Providing more financing opportunities for our borrowers using their VA benefits is a good thing. I’m not trying to bad-mouth institutions who aren’t allowing this financing option; rather on the contrary, I’m hoping to encourage our industry—those who have taken the “we won’t do this” stance to reconsider.
Approving 100% VA financing with a non-assumable second mortgage to make up the delta will not put veterans in a worse financial situation than denying the loan outright and forcing them to pursue other more financially-taxing options.
For more information or questions, please email rick@loanwithrick.com
