How to Restore Your VA Loan Entitlement After Selling a Home

Marcus Marion, CMA™ 1 month ago 0 15

In a previous article, we talked about the fact that eligible borrowers can use the VA home loan program more than once. It’s one of the major benefits this program offers.

Before you can use another VA loan to purchase a home, you have to restore your entitlement in 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

VA loans are backed by the federal government, through the U.S. Department of Veterans Affairs. This government department gives participating mortgage lenders a partial guarantee that reduces their risk.

If a homeowner with a VA loan defaults (or stops making payments), the VA steps in to compensate the lender for a portion of their losses. This compensation is provided through the VA’s guaranty on the loan, which is a promise 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.

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.

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 there is 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’re also using up your entitlement. If you later sell the house and pay off the full 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 down the road. 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.

As mentioned earlier, VA loan entitlement restoration does not happen automatically when you sell your house. 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 certain paperwork.

So let’s talk about that process next.

How to Restore Entitlement After Selling a Home

First of all, 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 over and over again 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. Request restoration with VA Form 26-1880.

Once the previous VA loan is paid off through the sale of the home, 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 are requesting 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 originally 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.

2. 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 through the mail or online through the VA.gov website. The online method offers several advantages. In addition to expediting the process, it also allows you to log in and check the status of your COE request.

3. 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!

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