Restoration of Entitlement and Simultaneous Closings
Sorry for the perhaps confusing headline. We too are all aware of the lingo the military uses that’s specific to service but as it relates to home loans and being VA home loan eligible, both terms deserve some explanation. Restoration of Entitlement isn’t exactly an everyday term but you will use and hear that term maybe two or three times during your years of home ownership and is used in relation with the VA home loan approval process. At the same time, the usage of a Simultaneous Closing is also relatively rare but is not reserved just for a VA loan but can be an occurrence with any mortgage used to purchase a home. Let’s look together a little further and see what these terms mean and what you can expect.
VA approved mortgage companies determine whether or not you’re eligible for a VA home loan by reviewing your Certificate of Entitlement. This certificate is provided by the Department of Veteran’s Affairs and can be retrieved by completing form 26-1880 along with a copy of your DD-214. The entitlement will not only state whether or not your VA eligible for a home loan but the amount of entitlement you have.
Currently, the amount of entitlement is $36,000 for those who have never used a VA home loan to buy and finance a home. This next part involves a little math and refers to both the entitlement amount listed on the certificate along with the government guarantee. You can get this certificate directly from the VA or let your lender get it for you. What is the $36,000 for?
The VA provides the lender who approves your VA loan a guarantee. This guarantee represents 25% of the loan amount. For example, if the sales price is $200,000 the VA will guarantee $50,000 to the lender should ever go into default. This default is rare however for VA loans as VA loans have the lowest default rate of any mortgage in today’s marketplace and always have been.
The entitlement amount represents one-fourth of the loan and is factored by multiplying the $36,000 by four to arrive at a loan amount of $144,000. For loan amounts higher than $144,000, the lender will still guarantee 25% of the loan up to the current conforming maximum loan limit of $424,100. Should the borrower later request an updated copy of the certificate after a VA home loan has been used the original entitlement amount of $36,000 will show zero entitlement.
If the veteran later sold the home and paid off the VA mortgage, the entitlement amount will not be restored until the VA is notified the property has been sold and the VA loan paid off.
One note to make here and it concerns VA assumability. VA loans are assumable by buyers even though they are not VA eligible. When a loan is assumed and the buyers don’t provide their own financing, entitlement cannot be restored and the veteran cannot use the VA home loan program again.
In order to have the entitlement restored, the veteran must provide a copy of the final, signed settlement statement to the Department of Veteran’s Affairs. This process can take time as you might imagine as the documentation works its way through the bureaucracy of the VA. But if you recall when your lender requested your original certificate of eligibility for you, your lender can also facilitate the restoration of your entitlement.
Without lender assistance, you might have to wait weeks or even longer to use your zero down home loan benefit once again. If you’re selling your home with your eyes on a new one that could mean your entitlement amount would still be listed as zero even though the buyers of your home came to the closing table with their own financing.
To fix this paperwork problem, your lender for the new home will include a copy of the settlement statement in the loan file used to buy your next home, even though your closing of both the sale and purchase occur on the same day.
Most homeowners who sell their first home also buy their next at the same time. But how can they use their VA home loan benefit yet again even if the VA doesn’t know the previous VA loan has been paid off? By the copy of your settlement statement showing your home has sold and the VA loan retired. This takes a bit of advance preparation knowing what the lender needs to see before approving your new loan.
If for example you need some of the proceeds of the sale of your existing home to pay for closing costs and fees but the proceeds from the sale aren’t in your bank account, there are other ways to verify you have those funds. This is done by the copy of your settlement from the first home. Even though it might take weeks if you tried to get the entitlement restored on your own your lender can provide evidence of the sale and the VA will assume your entitlement has been restored at the closing.
When you’re closing on both the sale and purchase essentially at the same time, that’s a simultaneous close. You will first sign the closing papers from the sale of your existing property and then sign the papers for your new home right after. As you can imagine there’s quite a bit of preparation needed but your settlement agent knows what to do and how to do it. Your lender, knowing you’re going to use your VA home loan benefit yet once again, also knows how to take care of the entitlement restoration issue and provide the funds for the new mortgage as well.
You’ll want to make sure you have enough time to properly review your final settlement statement from both the sale and purchase and make sure you understand the process and fees involved. Right after the closing of your property, the settlement agent will transfer the necessary funds from your sale to the closing for your purchase. Whatever proceeds are then left over will be wired into your bank account directly. With a proper review of all documents prior to your scheduled closing date, both closings will be a smooth process.