VA Loan Reader Questions: VA Loan Entitlement Restoration
A reader asks, “We bought our first home on January 2014. Is a two story home and he has severe a back condition the stairs are making his situation worst to the point that is affecting our family. We are looking at a single level house that we want to purchase. What is our best solution rented or selled. We want to use the VA certificate again.”
A borrower who is paying on a new purchase VA home loan has three basic options in order to use VA loan entitlement on another VA mortgage. The first option is to pay the VA loan off in full, and apply for restoration of the VA loan entitlement used in the first purchase.
The second option is to refinance the property using a non-VA home loan. The original VA mortgage loan would be paid in full and, theoretically, the borrower could be eligible to apply for restoration of VA loan entitlement.
However, the problem with this option (aside from the grey area of having refinanced the home with a non-VA loan but not owning the property free and clear) is that the borrower still has a mortgage payment that would be counted in the debt-to-income ratio for any new loan.
That’s something to be aware of when choosing your options, because debt to income ratios that are too high can disqualify the borrower from a new VA home loan even if entitlement has been restored. In general the debt-to-income ratio cannot exceed 41% without “compensating factors” that a lender can explain to you if you find yourself in this circumstance.
The third option is to sell the property, get the record of the sale and the VA loan having been paid in full, and apply for restoration of your VA loan entitlement. Restoration is NOT automatic, the VA will not necessarily have a record of your home being sold and the loan paid in full when you apply for your restoration. It’s important to have all the documents needed–bill of sale, the pay off notice from your lender, etc.–ready to submit to the VA.
Never send originals of these documents to the VA–copies only unless specifically requested by the Department of Veterans Affairs.
Do you have questions about VA home loans? Ask us in the comments section.