A new law eliminated VA loan limits. But, what does that mean?
Posted on: August 8, 2019
Under the recently enacted Blue Water Navy Vietnam Veterans Act of 2019, the existing caps on the value of all VA loans nationwide will be scrapped as soon as Jan. 1, 2020. This new law means that those eligible for VA loans may soon be able to buy even the most expensive homes with no down payment.
That said, even if the VA has said good-bye to loan limits that doesn’t mean that lenders are required to follow suit. Borrowers will still have to prove:
- They reach minimum credit score thresholds
- They can comfortably afford the monthly payments
- The home’s market value is at least as high as the loan amount
Until then, the current loan limits remain: $0 in most places and up to $0 in cities with above average home prices (for eligible Veterans who want to borrow with zero down payment). A loan look-up tool on a government website lets you check the current loan limits where you want to buy. (VA limits are for now the same as FHA ones, so don’t worry that tool refers only to the latter.)
What really changed with VA loan limits?
Veterans and active-duty servicemembers have always been able to use VA home loans to buy homes over the $0 loan limit. These “jumbo VA loans” have different rules, however — they require a down payment of 25% of the difference between the purchase price and the relevant loan limit.
For example, if you want to purchase a home for $584,350 in a county where the loan limit is $0, then you’d be borrowing $100,000 more than the cap. You’d be responsible for 25% of that difference as a down payment. That’s $25,000.
Once the new law’s provisions are implemented, these “jumbo loans” won’t carry the same down payment requirement from the VA. In theory, a homebuyer that can meet the eligibility, income, and credit requirements can get a million dollar home with zero money down, for example.
This likely means that the new rules will benefit only a small proportion of Veterans and fewer of those who are still serving. A $750,000 home loan with zero down payment and 3.4% interest rate has an estimated monthly mortgage payment of $4,100 — that’s a lot more than the average homebuyer can afford.
An exception to the new loan limit rules
The only exception to the new “no cap” rule applies if you have “diminished VA loan entitlement.” That can arise if you’ve previously defaulted on a VA loan or if you’re already using some of your entitlement on another home loan. For these borrowers, qualifying for a zero down payment loan will still be based on established county loan limits, plus their remaining entitlement.
What does this new legislation mean for homebuyers?
To pay for the new benefits enacted with the Blue Water Navy Vietnam Veterans Act of 2019, the VA funding fee, which most non-disabled borrowers pay on closing a VA home loan, will increase slightly in some cases.
For example, Veterans and active-duty servicemembers who currently have a VA home loan and want another VA home loan to move to a new home, currently pay a VA funding fee of 3.3% of the loan amount. Starting Jan. 1, 2020, they’ll pay 3.6%.
The Act promises to reverse some of the funding fee increases by 2022 and to reduce some even further by 2030. An early draft of the bill envisioned raising the funding fee more significantly and in more scenarios, but that was defeated. These smaller increases were finally agreed upon — and only on some loans.
If you’re interested in the details, see section 6 (b) of the Act for a full table of the funding fee adjustments.
Why pay VA funding fees at all?
The VA home loan program is self-sustaining meaning it doesn’t use taxpayer dollars or funds from other VA benefit programs. Charging the VA funding fee ensures that the program is maintained for future Veterans and active-duty servicemembers to take advantage of a zero down payment home loan.
This one-time, upfront fee is also relatively small when compared to other zero-down or low-down payment home loans. Those other loan types require mortgage insurance premiums every month — for some over the entire life of the loan. This route costs borrowers thousands of dollars more than the typical VA funding fee amount.
So that’s the theory…
The VA doesn’t lend money directly for your home loan. You get that from a private lender. Subject to certain conditions, the United States Department of Veterans Affairs promises to pay your lender up to 25% of the loan amount you borrow if you default. That removes a lot of risk lenders carry with all mortgages. And, it’s also why you get lower rates, no down payment requirements, easier credit standards among others.
…What about the practice?
But, the lender is still a private company and it retains its right to impose its own underwriting conditions above and beyond the VA’s requirements. Which raises the question: Will some, most, or all lenders balk at providing large mortgages with zero down payment, even with that cushioning of risk? Only time will tell.
Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.