How to Restore Your VA Loan Entitlement After Selling a Home

In a previous article, we discussed the fact that eligible borrowers can use the VA home loan program more than once. This is one of the program’s significant benefits. 

Before using another VA loan to purchase a home, you must restore your entitlement to the program. But it doesn’t happen automatically. You have to take specific steps to achieve “restoration of entitlement.” 

This article explains why it’s necessary and how to go about it.

Restoration of Entitlement for VA Loans

The federal government backs VA loans through the U.S. Department of Veterans Affairs. This government department gives participating mortgage lenders a partial guarantee that reduces risk. 

If a homeowner with a VA loan default (or stops making payments), the VA compensates the lender for a portion of their losses. This compensation is provided through the VA’s guaranty on the loan, which promises to repay a portion of the loan balance to the lender in the event of default. 

And this is where entitlement comes into the picture. 

In the context of a VA-guaranteed mortgage loan, “entitlement” refers to the amount of money the Department of Veterans Affairs (VA) guarantees to repay a lender if a borrower defaults on their mortgage loan. It’s like a promise from the VA to the lender that they will cover a portion of the loan if the borrower cannot repay it. 

It is vital to understand that the VA entitlement amount refers to the maximum amount the VA will guarantee on your loan, not the loan ceiling. In most cases, lenders will give up to four times this amount in loans without demanding a down payment, with the baseline entitlement for qualified applicants being $36,000. 

This guarantee encourages lenders to offer favorable loan terms to eligible veterans, making it easier for them to buy homes with little or no down payment. 

Selling Your Home and VA Loan Entitlement

When you sell a house you bought with a VA loan, you lose access to your entitlement unless specific requirements are satisfied.  

This is so that the property can be used as collateral for a VA loan entitlement until the loan is repaid or the property is correctly disposed of in compliance with VA guidelines.  

Your entitlement is connected to the property until the loan is repaid or another qualified veteran takes over the loan; it is not released when you sell your house. 

Entitlement vs. Eligibility: Two Different Things

Home buyers and borrowers sometimes confuse the terms “eligibility” and” entitlement” as they relate to the VA loan program. While some overlap here, these terms refer to two different things. 

Here’s how the Department of Veterans Affairs explains it: 

“Eligibility means the [borrower] meets the basic criteria of appropriate length and character of service to utilize the home loan benefit. Entitlement, which will be discussed later, is the amount a veteran may have available for a guaranty on a loan.” 

Buying, Selling, and Buying Again… 

When you use a VA loan to buy a house, you also use up your entitlement. If you later sell the house and pay off the entire balance of your mortgage loan, you can restore your entitlement within the program. 

This allows you to use another VA loan to purchase another home. And there’s no limit to how many times you can do this, as long as you maintain basic eligibility and meet the lender’s requirements. The eligibility requirements are calculated in VA entitlement calculator. 

Restoration of VA loan entitlement only occurs after you sell your home, as was previously mentioned. After all, the Department of Veterans Affairs has no way of knowing that you sold the home. You have to tell them about it by filing specific paperwork or through VA home loan calculator. 

So, let’s talk about that process next. 

How to Restore Entitlement After Selling a Home 

First, you should know that there are different scenarios for restoring entitlement in the VA loan program. And the steps in the process can vary based on the situation. 

For example: 

• A person who pays off their VA loan but keeps the home (perhaps to rent it out) can apply for a one-time restoration of entitlement to use another VA loan. 
• In contrast, a person who pays off their loan by selling the house can use the program repeatedly throughout the years by fully restoring their entitlement. 
• There is also a situation where the homeowner can restore their entitlement for cash-out refinancing purposes. But that’s another article entirely. 

The second scenario—selling the house—is the most common one. It also tends to be the quickest and easiest path to entitlement restoration. So, let’s focus on that for now. 

Here are the basic steps you need to take to restore your entitlement after paying off a VA loan through the sale of your home. 

1. Pay Off the Existing VA Loan 

Your first task is to settle the remaining VA loan you issued for the sold property. This process helps you re-earn your entitlement. Generally, the method reverses the purchase because you sell the property and use the funds to fulfill your loan obligations.  

You must satisfy all outstanding payments, including the principal, interest, and any fees due as part of the loan requirements. You can use a VA loan calculator to check all the due payments.  

Whenever the loan is paid, the VA will make the attachment of the property to be released, consequently removing it from future attachment of those properties for new FHA vs VA loan. 

2. Request Restoration With VA Form 26-1880 

Once the previous VA loan is paid off through the home’s sale, the borrower can request restoration of their entitlement from the Department of Veterans Affairs. This is typically done by submitting VA Form 26-1880, “Request for a Certificate of Eligibility.” 

When you submit this form and check the appropriate boxes, you are doing two things. As the form title indicates, you request a new Certificate of Eligibility (COE). You’re also telling the VA you have used the program before but no longer own the home you initially purchased. 

Section 13A of the form asks: “Have you used the VA home loan program before?” 

The borrower would check this box and then move on to section 13B, which asks: “Do you still own any of the homes you used the VA home loan program for?” 

Checking “no” on this second box will allow you to restore your entitlement. 

3. Request Restoration of Entitlement 

After closing the existing VA loan, legally ask for the restoration of your entitlement before applying again. This refers to making a complete request form, which should be accompanied by the papers proving that the loan has been fully repaid.  

The process will be faster if concise and understandable documents are used as a guidepost. VA will check your application attentively to make sure that everything is done in accordance with the requirements.  

Upon approval, your entitlement will be released; thus, you will be able to utilize it for your VA loan assumption that will be carried out in the future. Keeping the channels of communication with the VA and sticking to their systems guarantee an effective restoration process. 

4. Wait for Processing 

After submitting the request for restoration, the VA will process the application. This may take some time, so it’s essential to plan accordingly if you intend to use the VA loan program again. 

You can submit your form by mail or online through the va.gov website. The online method offers several advantages. In addition to expediting the process, it also enables you to log in and check the status of your COE request. 

5. Receive Your new Certificate of Eligibility 

Once the VA approves the request for entitlement restoration, they will issue a new COE reflecting the restored entitlement. This tells the mortgage lender that you’re good to go. 

With the restored entitlement and the COE in hand, you can now apply for a new VA loan to purchase another property! 

6. Apply for a New VA Loan 

Having completed restoring your eligibility and met the VA’s criteria of eligibility, you can proceed with a new VA loan. Work with the lender whose profile is approved in a VA loan policy and make the procedure straightforward by channeling through the screening process.  

Submit the relevant documents, including proof of income, employment history, and assets, to authenticate an application for a VA home loan entitlement. The mortgage company representative will guide you through the process, help you with the paperwork, and ensure everything is in accordance with the VA regulations.   

The lengthy loan approval process is daunting; therefore, it’s essential to be engaged by following the instructions carefully. This will ensure quick loan approval and help to arrange the funds to buy your new home. 

Conclusion 

Loan entitlement is a simple process that needs careful preparation and attention to detail to get your VA loan entitlement back after selling your house.  

You may effectively recover your entitlement and benefit from the VA loan program for your future home purchase by following the processes specified in this article, working closely with the VA, and working with an experienced lender.  

Remember to be proactive, be informed, and ask for help if you encounter any difficulties.