By Joe Gladden, Veteran Realty Serving America’s Military, and Susan Wallace, Senior Loan Officer, Access National Bank
If you weren’t aware of this, you certainly aren’t alone. In fact, many lenders experienced with VA loans, and Realtors, are not aware of this very powerful financial tool.
Clearly, purchasing a second home is not for everyone. Occupational required moves, financial goals and planning are very individual in nature. But when purchasing a second home is a consideration, with a first home financed with a VA loan, a 2nd Tier VA Loan should be considered. Generally speaking a 2nd Tier VA Loan is a good option when the first home was purchased in an area with a lower entitlement than the area where the second home would be purchased. The entitlement amount for the 2nd Tier VA Loan will be based on the current maximum entitlement in the county where the second home is to be purchased. Otherwise stated, generally, when the first VA financed home is in a lower cost area than where the second home is located, the 2nd Tier Loan is more likely to be an excellent option.
Confused? Consider this example with our fictitious military family:
Colonel Smith and his wife purchased a home with a VA loan during an early career tour in Florida for $200,000. After transferring, they kept the home and VA loan for 20 years hoping to retire in the home, renting it out much of the time. Since there is only a modest balance on this loan that will be paid off in a few years, they would like to keep the home and financing in place.
Colonel Smith recently received orders to the Pentagon for his final tour and expects to work in the DC area in defense contracting after retirement from the Air Force for at least five years. They have two children in college and have used most of their cash reserves for tuition and expenses. They both have excellent incomes and credit, and have found the perfect home in Fairfax County for $700,000. They initially assumed that since their VA loan was tied up in the Florida home, they would have to get a conventional mortgage by putting 10% ($70,000) down, which would be a stretch.
On a whim the Smith’s Googled “VA Loans” and came across an article about a little known VA Loan option called the 2nd Tier VA Loan. Upon further research, here’s what he discovered:
He could in fact have two VA loans at the same time. Using what is called 2nd Tier or Bonus entitlement, Col Smith found that in his situation he had $492,500 available at 100% financing for a 2nd tier VA loan. With the purchase price at $700,000 his loan officer explained that he would need a down payment, but it was only $51,875 vs $70,000 for a conventional loan and since private mortgage insurance (PMI) isn’t required with VA loans, their monthly payment was over $300 less with a VA loan, compared to a conventional loan.
Purchase Price 700,000
Down Payment 70,000 (10%)
Loan Amount 630,000
Interest Rate 4.375%
Principal and Interest 3145.50
Mortgage Insurance (90% loan to value) 362.25
Total Payment 3507.75
Purchase Price 700,000
Down Payment 51,875 (7.41%) ($700,000 – $492,500) x .25
Loan Amount 648,125
Interest Rate 4.0% (VA rates are typically .25% to .375% lower than conventional)
Principal and Interest 3094.25
Mortgage Insurance (90% loan to value) none – VA loans to not charge mortgage insurance
Total Payment 3094.25
By financing with a 2nd tier VA loan, the Smiths enjoyed both a significant advantage in monthly cash flow and cash reserve. Like their first VA loan, the 2nd Tier VA Loan is assumable, and the funding fee may be rolled into the loan or, is waved entirely with any documented VA disability.
The background math for determining entitlements was not presented in this article. For interested parties, it can be viewed by going to the following link: http://www.moresam.net/Forum/aft/1062
Note: All applications for VA loan require a declaration by the applicant that they intend to use the home as their primary residence. Also, applicants must meet all lender underwriting credit, income and debt ration requirements.
We hope this helpful, and as always, sincerely thank you for your service. We are always happy to answer questions regarding our articles.