In the last article, we talked in depth about eligibility for a VA loan. We explained the differences between eligibility, entitlement, and loan approval. We also discussed how to obtain a Certificate of Eligibility (COE), and the lender’s role in obtaining it and making sure that the borrower is eligible for the VA loan before even beginning to process it. In this article, we’re going to go into detail on what information the COE provides the lender and what the lender does with that information. The COE is a veritable treasure-trove of useful information.
First and foremost, the COE tells the lender that the borrower is eligible for a VA loan. A COE is never issued to an ineligible borrower. Here, the Handbook reiterates that eligibility does not mean that the borrower will qualify for a VA loan. Qualifying is something entirely different from being eligible. The COE will also have an explanation of how much the veteran is entitled to. The basic amount of entitlement is $36,000 and doesn’t change very often. It can sometimes be less if the veteran has used his or her VA loan entitlement before and has not paid it completely back. This can happen on a short sale or foreclosure on a previous home. The amount of entitlement available is one of the most important things the COE tells the lender, and as such it is shown close to the center of the COE in bolded, all-caps font.
Let’s talk about how entitlement works. I’m not sure there’s a livable house anywhere in the country that’s currently selling for $36,000, so what good does that do? The VA guarantees 25% of a home loan, up to $36,000. This means that with nothing but basic entitlement, a VA borrower can get a loan for $144,000. While much better than $36k, that’s still awfully low for a decent house in most areas. Additional entitlement is generally available depending on the county in which the borrower will be buying a home. In the great majority of countries, the additional entitlement gets the borrower’s maximum loan amount up to $417,000, which is adequate for decent housing in most areas. Areas that have particularly high home prices (e.g. Hawaii) will have higher maximum loan limits. The VA will guarantee up to 25% of a the county maximum loan amount.
Now that that’s cleared up, we can move on. The COE will never reflect potential additional entitlement, since that varies county by county, but will only show the basic entitlement available to the veteran. For the lender, if the borrower is showing less than full entitlement, indicating that it’s been previously used and not restored, he or she has two options available to them. They can either “make the loan knowing that the VA’s guaranty is limited to the amount of available entitlement,” or they can work with the veteran to apply to have their entitlement restored. Entitlement will almost never be restored unless the money has been paid back to the VA.
The Handbook offers a very important note, which is so chock full of information that I deem it imprudent to try to paraphrase it. Here it is:
Note: The possible additional entitlement for certain loans in excess of
$144,000 may be available even if the veteran has no entitlement or partial
basic entitlement. However, in such cases, the lack of full entitlement may result in lenders receiving less than a 25 percent guaranty from VA. It is the lender’s responsibility to ensure they receive a sufficient amount of guaranty to satisfy secondary market requirements.
In other words, while only having partial entitlement won’t always stop a borrower from being able to get a VA loan, the loan may not be guaranteed to 25% by the VA; it could be less. If that is a risk the lender is willing to take, and the guaranty amount is enough to “satisfy secondary market requirements”, the lender is allowed to close on the loan. In the following article, we’ll be discussing the rest of the things that the COE tells the lender, focusing mostly on the Funding Fee and exempt status