When you apply for a VA loan, one of the first documents a lender will ask you for is a Certificate of Eligibility. Your COE is an official document that comes directly from the VA. It states your eligibility for VA loan benefits along with the amount of your entitlement.
Often times, the quickest way to get your COE is to ask your lender to request it from the VA on your behalf. However, it’s relatively easy to get one directly from the eBenefits portal. You will need to provide some documentation, and what you need changes depending on your service status. If you are a Veteran, you’ll need a DD Form 214. If you are an Active Duty Service member, you’ll need a current statement of service. Surviving spouses are also able to obtain COE’s. The documents are different depending on whether you receive Dependency and Indemnity Compensation or not. You can find exactly what documents you’ll need for your specific circumstance on this chart provided by the VA.
As you look over your COE, you’ll find five key areas to pay attention to:
- Entitlement Code
- Funding Fee
- Prior Loans Charged to Entitlement
- Statement of Basic Entitlement
We’ll start with the Entitlement Code. The VA loan Certificate of Eligibility Entitlement code is assigned by the VA and represents the time period in which you served your military duty. It’s this code that states you are eligible for the VA home loan benefit.
The government came up with a series of time periods, or “Eras” to help determine a service member’s or veteran’s loan eligibility status. The codes start with World War II (01), and continue up to the present day. There are 11 codes in all. The chart below outlines what each code means.
|01||World War II|
|06||Un-remarried Surviving Spouse|
|07||Spouse of POW/MIA|
|08||Post-World War II|
|10||Persian Gulf War|
What is an Era? Merriam-Webster defines an era as “a fixed point in time from which a series of years is reckoned.” The VA set the time period of each era down to the day so there is no question about your home loan eligibility. Take a look at the chart below for the dates of each era:
|World War II||9/16/1940 – 7/25/1947||90 continuous days|
|Peacetime||7/26/1947 – 6/26/1950||181 days|
|Korean War||6/27/1950 – 1/31/1955||90 days|
|Post-Korean War||2/1/1955 – 8/4/1964||181 days|
|Vietnam War||8/5/1964 – 5/7/1975||90 days|
|Post-Vietnam War||5/8/1975 – 9/7/1980||181 days|
|Post-Vietnam War||9/8/1980 – 8/1/1990||2 years|
|Persian Gulf War||8/2/1990 – undetermined||2 years or period of active duty., not less than 90 days|
If you have a VA loan eligibility entitlement code of 10, that means your dates of service put you in the Persian Gulf War era, and you are eligible because you served 24 consecutive months.
There are also other ways you can be eligible for a VA mortgage loan. The table below summarizes some of these additional situations. These are especially helpful to know for spouses of service members.
|Other Eligibility||Minimum Service|
|Active Duty||90 continuous days (or 181 during peacetime)|
|Active Reserve or National Guard||6 years in Selected Reserves|
|Un-married Surviving Spouse||No time requirement|
|Spouse of a POW/MIA||Veteran must have been POW/MIA for 90 days|
VA FUNDING FEE EXEMPTION
This area on the COE will tell you whether or not you are exempt from having to pay a VA funding fee on your loan. This fee is charged to almost every VA loan that is approved and processed and is calculated using a percentage of the total amount of the loan. The funding fee goes directly to the Veterans Administration to help cover the costs of the VA loan program. Almost everyone pays the funding fee, but there are some who are exempt. For example, if you receive compensation for a service-connected disability, or if you are a surviving spouse of a Veteran who died in service or due to a disability you will be exempt. However, most people will see a “Non-Exempt” notation in this field.
Another thing that is important to note. While looking at the table of entitlement codes above, you may have noticed code 05. This is a code you’ll see if you have used your VA loan benefit previously. A code 05 tells the lender that your entitlement has been restored and you are able to use your benefit a second or third time. This typically happens when you have sold your previous home and paid off the mortgage completely. When you have an “Entitlement Restored” code on your COE, it signals the VA that your funding fee will move to the “subsequent use” tier, which is currently 3.3% as of this writing in late 2019.
PRIOR LOANS CHARGED TO ENTITLEMENT
This section states any active loans that you currently have, as well as the amount of entitlement currently in use. This information comes in handy if you want to get a second VA loan using entitlement you have leftover. This is known as a second tier entitlement.
A second tier entitlement works like this. The VA offers a basic entitlement of $36,000 to each Veteran. A lender is usually willing to loan you up to four times that amount – or $144,000. If something happens and you are unable to pay back the loan, the VA will pay 25% of your loan to the lender as a guarantee. However, in many places across the country, it’s difficult to find a suitable home for $144,000. To ease this problem, the VA offers a bonus entitlement, allowing a maximum loan amount of $484, 350, giving you an additional bonus entitlement of $85,087. If your current mortgage is $200,000 – you’ve only used $50,000 of your entitlement. This leaves you a little over $70,000 to use if you find yourself needing to buy a second home. The entitlement usage for this second loan is known as a second tier entitlement. If you receive a Permanent Change of Station Order, the second tier entitlement allows you to rent out your current house and buy a new house at your new location.
STATEMENT OF BASIC ENTITLEMENT
This is the section you’ll find how much entitlement you have available to you. Notice that it says “basic” entitlement. If you currently have an active loan listed on your COE, there is a good chance you may see this message in this section:
This Veteran’s basic entitlement is $0*
This sounds a little alarming at first doesn’t it? Especially if you’ve only used $50,000 of your entitlement and know that you should have more available. That is why there is an asterisk after the $0. Because this is a statement of BASIC entitlement, they are only referring to the $36,000 (your basic entitlement). The rest is considered bonus entitlement, and is still available to you. For a more detailed explanation on how to calculate your entitlement, click here to read the VA Guarantee Calculation Examples.
This section spells out information the lender will need to know, such as if are required to pay the higher funding fee, if you are exempt from the funding fee etc.
Of course, getting your COE is only part of the process. There are other VA loan requirements you’ll need to satisfy, both from the VA’s viewpoint and the lender.
Your VA home loan must be used for your primary residence. You can’t use your benefit toward an investment property or a second home. You’ll be required to move into the home within 60 days of the loan closing, and if there is work being done on the property you must be able to show that you will move into the home right after work is completed. If you are called to active duty, your spouse may meet the occupancy rule by living at the home full time. The same goes for adult children if both parents are called to active duty.
The first thing lenders tend to look at is your credit score. The VA doesn’t require a minimum credit score to qualify for a loan, but banks still use it as a measure of your credit risk. With a VA loan, lenders tend to be more lenient because the loan is partially guaranteed by the VA. In general, most lenders will need a minimum credit score of 620 to be considered.
You must show that you have a stable income, and that you have enough residual income left over to take proper care of your home. Lenders call this your debt-to-income ratio, or DTI. The VA recommends a DTI no greater than 41%. What expenses do lenders look at when determining your DTI? Your mortgage will be the biggest expense, followed by installment loans such as car loans, student loans. and financing of recreational vehicles. Credit card payments are also included, as well as any alimony payments or child support payments. For a VA loan, lenders may also look at child care costs and utility bills.
The VA also looks at what they call residual income. They want to make absolutely sure you have enough income left after paying your monthly bills to handle day to day expenses. The residual income is related to your debt-to-income ratio, but not the same. To find your residual income, you need to subtract the expenses used in figuring your DTI from your monthly income.
The VA bases how much residual income is needed based on the size of your family and where in the country you live. The country is broken down into four segments: Northeast, Midwest, South and West. For example, a family of 4 in Massachusetts has a residual income threshold of $1,025.00. That means that after your regular expenses are paid, you must have at least this amount left over to cover living expenses for the month. This system of using residual income as a qualifier is one of the reasons that VA loans have such a low default rate. The entire process is meant as a guide to get a clear picture of your finances. They want you to be successful in paying for and maintaining your home.
There you have it – you are now an expert at deciphering your Certificate of Eligibility, your Entitlement Code and some of the other requirements for using your VA Benefit. As always, we are here and ready to help you navigate your way through the process. Call us at 855-956-4040 and we can get you started. Thank you for reading!