Curve

VA loan limits repealed: Veterans now get jumbo loans with zero down

Peter Miller
The Mortgage Reports contributor

No more VA loan limits

VA loan limits have been repealed and here’s what it means. The VA mortgage program – arguably the best financing available – is now better.

VA loans have a very important role in the housing market. They’re designed to recognize the very real risks that military service represents. An end to VA loan limits effectively increases the value of VA benefits, especially for vets who live in high-cost metro cores.

Check your VA home loan eligibility with a loan expert. (Dec 8th, 2019)

How VA loan limits ended

As usual with things in Washington, the VA loan limit repeal is a strangely complicated story. The short version looks like this:

The amount a vet can borrow has long been dependent on the available entitlement, a form of government guarantee.

This guarantee, up until recently, equaled $121,087.

VA loans will pay back lenders 25% of a VA loan balance in the case of default. That means lenders let veterans borrow up to $484,350 (because $121,087 is 25% of that number). This amount matches the Fannie Mae loan limit.

For most borrowers $484,350 is far more mortgage borrowing then they need – in May the typical existing home sold for $277,700 according to the National Association of Realtors. However, the median home price nationwide is not necessarily typical in high-cost markets. In many areas, it costs a lot more than $484,350 to buy a home.

In many metros like San Francisco, Seattle, and New York, VA loan limits are higher. But perhaps not high enough to purchase a home in these ultra-expensive areas.

The loan limit cap was lifted in late June as part of the Blue Water Navy Vietnam Veterans Act. The legislation is designed to help Navy veterans from the Vietnam war receive certain benefits long available to other members of the military.

This was a thoroughly bi-partisan effort. The bill passed in the House by a vote of 410 to 0. The Senate passed the bill on a voice vote. The bill was signed by President Trump on June 25th.

How the new law helps veterans

The new law repealed loan limits on VA loans. That means veterans buying in pricey metros can get a large loan amount with no down payment.

Before the law went into effect, a loan over the limit required a down payment equal to 25% of the amount over the limit.

For example, a veteran buying a $600,000 in a location where the limit is $500,000 would need to make a down payment of 25% of the $100,000 overage. In this case, $25,000.

The new bill says the veteran can get that same house with zero down, saving significant out-of-pocket expense.

Now, veterans can shop for more expensive homes, especially in high-priced cities, without worrying about upfront costs.

Check your VA loan eligibility. (Dec 8th, 2019)

Will we see $25 million VA loans?

If there is now no VA loan limit does that mean a vet can borrow $2 million? How about $25 million? A qualified vet with sufficient income and credit could qualify, in theory. And the property actually has to be worth the loan amount issued.

But assuming they qualify, the lender still doesn’t have to issue the loan.

Lenders can make their own rules that are more stringent than required by the official rule book. For example, VA loan rules don’t require a minimum credit score, but most VA lenders do.

Similarly, we will see lenders impose some sort of cap on VA loans even if the government doesn’t. That could be $750,000, $1 million, $5 million — it will vary greatly by lender.

No lender wants to explain what happened if a $25 million VA loan goes bad and the government is on the hook for more than $6 million (25%) of it. So lenders will limit their exposure to such a scenario.

VA loans are sold to investors through the secondary market, and those markets may not be sure yet how super-jumbo VA loans will perform. That’s another reason for lenders to limit loan amounts.

The VA loan handbook mentions that there are limits when a VA loan is sold to the Government National Mortgage Association (GNMA), but doesn’t specify what those limits are. So, much interpretation will be left to the lender.

Why VA mortgages are so good

Why would we argue that VA financing is the best available mortgage? Because it offers a combination of benefits unavailable elsewhere.

1. No money down

VA financing allows zero down financing. If you’re a qualified vet and buying a $300,000 home you can get a full $300,000 in financing. In comparison, a conventional loan with 3% down requires $9,000 up front, an FHA mortgage demands at least 3.5% down or $10,500, and financing with 5% down means you must have $15,000. These cash requirements are in addition to closing costs.

2. The VA is a loan guarantee program

VA borrowers generally pay an up-front funding fee. In return, they get a zero-down loan with low rates and lenient guidelines. The amount of the fee – if any – depends on the service status of the vet, the amount down, and whether the borrower is a first-time or repeat user of the benefit.

Home purchase:

 

Cash-out refinances:

Other transactions:

 

Not all borrowers pay the funding fee.

  • Veterans receiving VA compensation for service-connected disabilities.
  • Individual vets entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
  • Veterans rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating or on the basis of a pre-discharge review of existing medical evidence (including service medical and treatment records) that results in a memorandum rating.
  • Individual vets entitled to receive compensation, but who are not presently in receipt because they are on active duty.
  • Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are veterans with their own entitlement and whether or not they are using their own entitlement on the loan).

3. VA is better than FHA

If you compare the VA and FHA programs you can see the VA advantage. An FHA borrower must pay 1.75% of the loan amount up-front. This is the FHA up-front mortgage insurance premium (upfront MIP). A regular military VA borrower is likely to pay 2.15%.

Since the FHA borrower faces a lower up-front fee that program seems more attractive. For a $300,000 mortgage, the FHA upfront MIP is $5,250. The vet will pay $6,450 for the upfront VA funding fee.

But the FHA borrower also has an annual mortgage insurance payment – the annual MIP. For a 30-year, $300,000 loan the fee is $212.50 per month. That’s $2,550 per year or $25,500 over ten years.

And what about the VA annual charge? There is none. It’s not an insurance plan. The VA borrower is ahead by several thousand dollars per year.

Use your VA home loan benefit

Veterans have a homeownership rate in excess of 75% – far above the national average. How come? Well, a lot has to do with how advantageous VA loans are.

Now, with VA loan limits repealed, veterans can afford more home with zero down payment.

Take advantage of your VA loan benefit by checking rates and your eligibility below.

Verify your new rate (Dec 8th, 2019)