The Pre-Approval That Wasn't
A sergeant with 6 years of active service signs a purchase contract for a $415,000 home and puts down $8,000 earnest money. Her lender issues a pre-approval letter for $415,000 based on a VA entitlement she has never used. Two weeks before closing, underwriting discovers a prior VA loan from 2019 that was assumed by a buyer when she sold her first home; the VA guaranty was never restored. The Certificate of Eligibility shows partial entitlement remaining, not full. Her debt-to-income is 47 percent, and the lender's automated underwriting now requires a down payment to close the gap. The seller refuses an extension beyond the contractual closing date and has a backup offer. The buyer's agent had told her the assumption 'didn't count against her.'
1. Diagnose what went wrong and identify the two or three decision points where the transaction could still be saved.
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The core error is treating an assumed VA loan as if it freed the entitlement. When a VA loan is assumed by a non-veteran buyer, the original borrower's entitlement stays tied up unless the assumer is a veteran who substitutes their own entitlement, or the loan is otherwise paid off. A pre-approval built on 'full entitlement' is therefore unreliable until the COE is read line by line.
Decision points:
- Restoration. Ask whether the 2019 loan was assumed by a veteran who substituted entitlement. If not, the seller-buyer can pursue a one-time restoration only in narrow circumstances (the loan was paid in full and the property disposed of). Restoration is not a cure here if the loan is still live.
- Down payment sizing. With partial entitlement, the guaranty covers only a fraction of the loan. The lender must compute the required down payment against the remaining entitlement and the county loan limit. A realistic number, not a guess, tells everyone whether the deal can close.
- Renegotiation or exit. If the gap is bridgeable, the buyer can seek seller concessions, a price reduction, or a second lien. If not, the earnest money clause and financing contingency govern whether she can walk.
2. The buyer asks whether she can simply 'use her husband's entitlement' to solve the problem. What is the correct analysis?
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Only if the husband is himself an eligible veteran with unused entitlement, and only if the lender structures the loan as a joint VA loan with both borrowers. A non-veteran spouse cannot donate or lend entitlement. If the husband is a veteran with full entitlement intact, the couple's combined entitlement may cover the loan and eliminate the down payment gap, but the lender must re-underwrite with both incomes and both credit profiles, and the COE for the husband must be obtained.
If the husband is not a veteran, the answer is no, and the agent should not let the buyer proceed on that assumption. The practical next step is to get a written entitlement analysis from the lender within 48 hours, because the closing date is the binding constraint. Advise the buyer in writing, keep the financing contingency alive, and do not waive it based on a verbal workaround.