VA Loans: What Does “Basic Entitlement” Mean?
When learning about the VA loan process, the new borrower discovers that the Department of Veterans Affairs does not lend money, it adds a government guarantee to the loan to make it more attractive to a participating lender.
Another thing a new borrower learns is that the VA does not insure the entire loan–it will insure a portion of the loan amount. Some borrowers get confused on this point, because they look at VA loan limits and assume that amount is how much the VA will insure the loan for. But a quick glance at the VA official site shows otherwise:
“Q: How much is my entitlement?
A: Your basic entitlement is $36,000. For loans in excess of $144,000 to purchase or construct a home, additional entitlement up to an amount equal to 25 percent of the VA county loan limit for a single family home may be available. VA county loan limits, which can change yearly, are available at this link. The loan limits are the amount a qualified veteran with full entitlement may be able to borrow without making a downpayment.”
It’s important for new borrowers to understand that for the basic entitlement of VA home loans, $36,000 is the amount of money the VA promises to the lender if the VA borrower defaults on the VA mortgage loan. This amount, or 25% of the VA county loan limit as stated above, is not the amount of the loan itself. The VA loan guaranty is designed to protect the lender and encourage lenders to issue VA loans. As such, it’s a safety net for the lender–not the borrower.
The reason for that is that in cases of default on VA loans, the borrower still owes money on the home, except money is owed to the VA instead of the lender.
A borrower who has the home foreclosed upon will owe money outstanding on the loan after the foreclosure sale–the amount of money the government lost on the loan is the amount the borrower owes to the VA. He or she cannot get a new VA loan until all indebtedness to the VA has been fully satisfied–unless the borrower has been officially released from liability in writing. That can happen in cases where the loan is not foreclosed upon but the VA loan is assumed by another borrower.