There are ample resources already out there that helps potential VA borrowers understand the eligibility requirements, but here we’re going to be taking the information directly out of the VA Lender’s Handbook (VA Pamphlet 26-7) to give you the insider perspective on what your lender is going to be looking for as they work with you to establish eligibility. This will give you an insight into what questions your VA lender can and will answer for you and which questions you should seek answers for with the VA itself. This article will follow very closely the beginning of the 2nd chapter in the VA Lender’s Handbook, and all the information provided is taken from there.
First, how does the VA define eligibility? In the Handbook, they distinguish between ‘eligibility’ and ‘entitlement’. They also distinguish the difference between being eligible for a VA loan and being approved for one. The answer addresses one of the most common questions about VA loans; how someone can be eligible for a VA loan and still not be able to get one. Below is their definition:
Certificate of Eligibility What is It and What Does It Tell the Lender
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
$144,000 may be available even if the veteran has no entitlement or partial
basic entitlement. However, in such cases, the lack of full entitlement may result in lenders receiving less than a 25 percent guaranty from VA. It is the lender’s responsibility to ensure they receive a sufficient amount of guaranty to satisfy secondary market requirements.
In other words, while only having partial entitlement won’t always stop a borrower from being able to get a VA loan, the loan may not be guaranteed to 25% by the VA; it could be less. If that is a risk the lender is willing to take, and the guaranty amount is enough to “satisfy secondary market requirements”, the lender is allowed to close on the loan. In the following article, we’ll be discussing the rest of the things that the COE tells the lender, focusing mostly on the Funding Fee and exempt status
Eligibility means the veteran meets the basic criteria of appropriate length and character of service to utilize the home loan benefit. Entitlement, which will be discussed later, is the amount a veteran may have available for a guaranty on a loan. An eligible veteran must still meet credit and income standards in order to qualify for a VA-guaranteed loan.
To sum up, simplify, elaborate, or otherwise clarify that definition, you can explain the main differences between the terms by explaining how they are measured; eligibility is measured by time spent in the service and nature of discharge, and is a simple “yes” or “no” value. Either you are eligible or you are not. Entitlement is measured in dollars ($) and can be anywhere between $417,000 and over $1 million, depending on where you live. If you are eligible for a VA loan, you are thus entitled to a certain amount. This is not money you receive, simply the maximum limit on the loan amount that the VA will guarantee to the lender on your behalf. Finally, being approved or “qualifying” for a VA loan is measured by similar standards as a conventional loan; credit report, income and employment, and debt-to-income ratio. Being eligible for a VA loan has zero bearing (other than being a prerequisite) on whether you will actually qualify for one.
The Handbook clearly outlines the Lender’s responsibility in regards to making sure the borrower is eligible for a VA loan. It states that even before processing and absolutely before closing on a VA loan, the lender needs to verify that the borrower is eligible. The only acceptable proof for a veteran’s eligibility is a Certificate of Eligibility or COE. Discharge papers or other DoD forms or VA forms will not be accepted; only the COE will. The COE can be provided to the lender by the borrower, and the lender is under no obligation to have it updated unless, “…the lender has reason to believe it is inaccurate.” Lenders are told that they are not to make judgement calls on who is eligible and who is not, and that they must have a COE on file for any person applying for a VA loan.
If the lender is obtaining the COE on behalf of the borrower or assisting the borrower in doing so, the Handbook provides clear instructions on how to obtain it online. Usually, the COE can be established in seconds, but in some special cases, additional supporting documentation is required to be submitted in order to verify eligibility. In this case, there will be a link to follow where an online eligibility application can be filled out and submitted. Borrowers can also apply for their COE on their own if they prefer. The only real advantage to doing it beforehand is that it saves time when you actually go to the lender. While there is a mail-in option to apply for the COE, it is strongly recommended by the VA that borrowers and especially lenders take advantage of the online system.
In the previous article, we began to cover exactly what the Certificate of Eligibility (COE) tells the lender and how the lender uses the information. We explained entitlement in detail and laid out how maximum entitlement is calculated. However, the COE contains a great deal more information than just the entitlement amount of the veteran. It also shows the veteran’s exemption status in regards to the funding fee, as well as any conditions that the veteran’s eligibility may rest upon. In this article, we’ll cover that information.
On the COE, near the top, there is a “FUNDING FEE” field and one of three phrases will appear next to it. These three phrases are EXEMPT, NON-EXEMPT, or CONTACT RLC. If the word “EXEMPT” appears, then the veteran in question is exempt from paying the funding fee. Some VA borrowers mistakenly believe that the lender is the one who makes the call on who is exempt and who is not. This is not the case; the VA sets the criteria for exemption and notifies the lender via the COE who fits the criteria. “NON-EXEMPT” means exactly what it sounds like; the veteran is not exempt. This is the most common scenario since not many borrowers meet the criteria to be exempt from paying the funding fee. The last one, “CONTACT RLC” means that, for whatever reason, the system is not able to establish whether the veteran is or is not exempt. This can happen if the veteran’s online file is not complete or there is conflicting information in the system.
Along with the funding fee (FF) status of either exempt, non-exempt, or contact RLC, there may be conditions to the exemption, and these conditions are very important for the lender to be familiar with. The possible conditions vary by status, so we’ll start with the conditions for exempt status. They may be any of the following:
- “Funding Fee – Veteran is exempt from Funding Fee due to receipt of service-connected disability compensation of $___ monthly.”
- “Funding Fee – Veteran is exempt from Funding Fee due to receipt of service-connected disability compensation. Monthly compensation rate has not been determined to date.”
- “Funding Fee – Please fax a copy of VA Form 26-8937 to the VA Regional Loan Center of jurisdiction.”
- “Funding Fee – Please have the lender contact VA Regional Loan Center for loan processing. Please fax a copy of VA Form 26-8937 to the RLC of jurisdiction.”
Those should be the only conditions that appear on a COE for an exempt veteran, but there are two possibilities for a non-exempt veteran. They are as follows:
- “Funding Fee – Veteran is not exempt from Funding Fee.”
- “Funding Fee – Veteran is not exempt from Funding Fee due to receipt of a non-service connected pension. LOAN APPLICATION WILL REQUIRE PRIOR APPROVAL PROCESSING BY VA.”
The first one seems redundant, but by having that condition appear rather than having it left blank eliminates a lot of needless questions by lenders simply doing their due diligence in making sure there wasn’t an error in generating the COE. It serves as confirmation that the COE was generated correctly. For the “CONTACT RLC” status, there is only one condition that will appear, and that is: “Funding Fee – Please fax a copy of the 26-8937 to the RLC of jurisdiction.” This simply serves as instructions to the lender on how to resolve the conflict.
There are other conditions that might appear on the COE that are not directly related to the funding fee. The can cover the veteran’s eligibility, entitlement, or any other information that the COE shows. The below table appears in the Handbook and quite clearly and succinctly explains the conditions:
|Conditions||What to Do|
|Valid unless discharged or released subsequent to the date of this certificate. A certificationof continuous active duty as of
the date of note is required.
|Ensure the veteran is still on active duty before closing the loan. If the veteran is discharged or released prior to loanclosing, request a new eligibility
the determination from VA.
|Excluded entitlement previously used for VA Loan IdentificationNumber (LIN) as shown hereinis available only for use in
connection with the property
that secured that loan.
|If the entitlement used for the prior loan identified in this condition is needed for the proposed loan, ensure the proposedthe loan will be secured by the same property
as the prior loan. (Cash-out refinance on
a prior VA loan.)
|Entitlement has been used for manufactured home purposes.Remaining entitlement foradditional manufactured home
use is: $ [amount].
|If the proposed loan involves a manufactured home, adhere to the entitlement limit indicated.|
|Not eligible for any loan to purchase a manufactured home unit until veteran disposes ofunit purchased with
manufactured home loan
number VA LIN [number].
|If the proposed loan involves a manufactured home, ensure that the veteran has disposed of the unit indicated.|
|Entitlement previously used forVA LIN [number] has been restored without disposal of theproperty, under a provision of 38
U.S.C. 3702b(4). Any future
restoration requires disposal of
all property obtained with a VA
|This is information for the veteran. The lender need not be concerned if this the condition is applicable, as long as theavailable entitlement is shown on the COE
is sufficient for the lender’s purposes.
Chapter 2 in the VA Lender’s Handbook is dedicated to explaining all the details regarding eligibility and entitlements. Therefore, it comes as no surprise that the last three articles in this series were almost exclusively about the Certificate of Eligibility, what appears on it, and how to get one. However, we’re going to delve into all the specifics of being eligible for a VA loan, and how the VA wants you to prove that you are eligible. In this article, we’re going to cover what the VA requires from you in order to prove that you served (or are serving) in the military and that you have served for the required amount of time. Since the requirements are different based on the situation the veteran is in, we’ll cover it piece by piece.
Discharged Veterans (Regular Military)
Generally speaking, all you should have to provide is the DD Form 214, Certificate of Release or Discharge From Active Duty. The DD-214 will typically provide any and all needed information to make a determination on whether you are eligible for the VA loan program. You do not need to provide the original; a copy will do as long as it is legible. The DD-214 should have been received by any veterans who were discharged after January 1, 1950. In the event that a person discharged from active duty before January 1, 1950, is applying for a home loan, the VA will accept any official documentation that indicates the length of service and the character of service rendered. For anyone separated from active duty after October 1, 1979, they should provide Member 4 copy of their DD-214 that includes the character of service and the narrative reason for separation.
Veterans Still on Active Duty
Active service members do not have a DD-214, so their requirements are a bit different. In order to establish proof of service, active service members must get a statement of service either signed directly by, or by the direction of, the adjutant, personnel officer, or commander of the unit or higher headquarters they are attached to. There is not a standard form currently used to be the statement of service. Most statements of service are typed on military letterhead, but that is not a requirement. The requirements on the statement of service are that it must clearly show: the veteran’s full name, the veteran’s SSN or at least the last 4 digits, the date active duty began, the duration of any lost time, and the name of the command providing the information.
Discharged Reserve/Guard Members
Neither the Reserves nor the National Guard has a form similar in purpose and syntax to the DD-214, so the requirements for them to prove their service are a bit different. For those discharged from either the Army or Air National Guard, they should have an NGB Form 22, Report of Separation and Record of Service, or at least a retirements points statement. Either of these will suffice for proof of service. All discharged members of the Reserve and Guard should have received a retirement points statement that indicates the level and length of participation. These statements, so long as the copies are legible, will be accepted by the VA.
Current Reserve/Guard Members
The requirements for Reservists and Guards who are still serving are actually quite similar to active service members serving in full-time capacities. The potential borrower must obtain a statement of service signed by, or at the direction of, the adjutant, personnel officer, or commander of the unit or higher headquarters they are attached to. The statement of service must show the following: the veteran’s full name, the SSN or last 4 digits of the SSN, the entry date of the applicant’s Reserve/Guard duty, and the name of the command providing the information. The statement must also specify that the applicant is an active reservist and not in a control group.
If a veteran cannot locate their respective proof of service, they can request to receive it through the VA benefits portal (http://www.ebenefits.va.gov), or by completing a Request Pertaining to Military Records (Form SF-180).
There is a good portion of Chapter 2 in the VA Lender’s Handbook that covers the number of days/years a veteran needs to have served in the military in order to be eligible for VA loan benefits. Below is a table that summarizes the information nicely:
|WW II||9/16/1940-7/25/1947||90 Days|
|Post-WW II||7/26/1947—6/26/1950||181 days|
|Post Korean||2/1/1955—8/4/1964||181 days|