VA home loans will undergo some major changes for 2020. The biggest news is the elimination of the long-standing loan limit, a big deal for those buying in hot markets. Another less popular change will be the increase of the VA funding fee.
VA loans are a great benefit available to both veterans and active military members. Since the use of these loans isn’t nearly as common as something like an FHA or Conventional loan, there is often confusion about how VA loans work. If you want to understand how the big picture mortgage process works, here is a deep dive into the mortgage process.
A VA loan is a mortgage that is guaranteed by the United States Department of Veteran Affairs. The program is available for active military members, retired members of the military, military reservists, and surviving spouses of deceased military veterans, so long as they do not remarry.
A VA loan can be used to purchase single-family homes, multi-family units, condominiums, and manufactured homes. What makes VA loans so beneficial is the fact that they allow eligible borrowers to purchase a home without a downpayment. Coming up with a downpayment is one of the primary obstacles that people run into when trying to buy a home since VA loans eliminate that obstacle they make the path to homeownership more attainable.
VA loans are government-backed loans, they are not loans that are offered by the government. That means that if a veteran is interested in getting a VA loan they are going to have to work with a private lender that works with the VA program. While VA loans don't have a minimum credit score, private lenders do, which means that in most cases a veteran applying for a loan will need a credit score of around 620 or higher. What is the application process like? You'll need to confirm your household income for the past 2 years, which means providing a copy of your W-2s. You'll need to provide proof that you are currently employed by supplying your most recent 2 paystubs. You'll need to document your other assets, property owned, checking account, savings, etc. You'll need a copy of your DD 214 and certificate of eligibility. If you happen to be self-employed you'll need a copy of your past two tax returns to show proof of income. Here's an even deeper dive into How VA Loans work.
To qualify for a VA loan there are a few requirements that a veteran or their surviving spouse has to meet. The first requirement is the minimum term of service. This gets a little tricky because the minimum term of service is going to vary depending on when a veteran served. Any veteran that served in World War II, the Korean War, or Vietnam war is required to have served continuously for 90 days. Any veteran who served between 1947 and 1980, during peacetime, is required to have served 181 days of continuous duty. Gulf War veterans who completed a 90-day deployment, or 24 months of continuous service. There is an exception here in those veterans who were involuntarily discharged due to a reduction in force still qualify, as long as they served a minimum of 90 days. Current members of the military are eligible to apply for a VA loan if they have 90 days of active duty. Reservists also qualify for VA loans if they have 6 years of service as a reservist. The VA also requires that any veteran applies for a VA loan be discharged honorably. Surviving spouses of veterans who died are also eligible for VA loan benefits as long as they do not remarry.
VA loan limits are the highest dollar amount that the Department of Veterans Affairs is allowed to guarantee without a downpayment. The average national loan limit is currently $484,350. However, in counties where the median home price is higher, the loan limits are raised up to $726,525. While loan limits are set to expire in 2020, if a veteran is trying to buy a home that surpasses the loan limit in the county they are looking at, it is still possible for them to purchase the property. But, purchasing a property with a higher than allowed loan limit will require a minimum 25% down payment.
As of January 1st, 2020 loan limits for VA loans will end. That means that veterans will have more buying power since they will no longer be restricted on how much they can borrow without putting down a down payment of 25% or more. That's a big change that is going to open a lot of doors for veterans that are interested in buying a home but lack the ability to come up with a sizeable down payment. One important thing to keep in mind is the fact that removing VA loan limits does not mean that veterans have unlimited buying power. Any veteran that applies for a VA loan will still have to show proof of income to show that they can afford the monthly mortgage payment they are about to take on. They'll also still have to have good credit to show that they are reliable, which reduces the risk of them defaulting on their loan.
Under the current VA loan program, there was no downpayment requirement as long as the property that was being purchased fell below the loan limit. If it exceeded the loan limit, then there was a minimum 25% downpayment required. Since the loan limits in most of the country was close to half a million dollars, exceeding that limit meant having to come up with over a hundred thousand dollars to put down on as a downpayment. Needless to say, this is a lot of money, which makes it a major obstacle for many would-be homeowners. Under the new program without loan limits, there is never a minimum downpayment that has to be made. It's important to remember that a lack of VA loan limits does not equate to unlimited buying power. Veterans interested in purchasing a home will still have to meet financial requirements that show they will be able to make their mortgage payments. Despite this, the elimination of VA loan limits is a huge win which should open the doors for more veterans than ever before to purchase a home of their own.
What is a VA funding fee and how is it going to change under the new program rules in 2020? The VA funding fee is a fee that is applied to every VA loan. The fee goes directly to the Department of Veterans Affairs, and is used to help cover losses, and guarantee that the program will remain available for future generations. When applying for a VA loan a veteran can either elect to pay the funding fee upfront or have it rolled into the cost of their loan. Under the current program, the VA loan funding fee is 2.15% for first time home buyers and 3.3% for repeat home buyers. Under the new program, the cost will increase to 2.3% for first time buyers, and 3.6% for repeat buyers. There is an exception to the funding fee for any veteran that received a Purple Heart due to being wounded in the line of duty.
While an increase in the funding fee for a VA loan isn't ideal, the benefits of eliminating VA loan limits more than makes up for the inconvenience of having to pay a slightly higher VA funding fee. For example, under the current program, a loan for a $200,000 home would have a VA funding fee of $4,300 for first-time homebuyers. Under the new program, the increased VA funding fee for the same loan would be $4,600. This increase should have a minimal impact and is definitely worth paying in exchange for the elimination of VA loan limits.
The problem with the current VA loan program is that the loan limits are often insufficient given the current cost of housing. Houses are expensive, and all signs point to their prices continuing to go up. If a veteran finds a home that is only slightly above the loan limits for the county that they live in, they will have to either come up with 25% to put down or choose a different home. That's a major obstacle and if a veteran finds a home they fall in love with that they can't get a loan for due to loan limits, it can be heartbreaking. Imagine finding your dream home, then finding out that the asking prices is $1,000 more than the VA loan limit for the county. You'd either have to come up with a huge downpayment or give up your dream home and settle for something else. The new rules governing VA loan limits will be very beneficial to many veterans, helping to repay them for the service that they provided to our country.
Joe Boylan is a Broker-Associate at Springs Homes Real Estate in Colorado Springs, Colorado. He writes about residential Real Estate issues faced by Home Buyers, Sellers, and investors.
The information here regarding the previous down payment size is incorrect. If a person bought a 500k home under the previous VA loan laws, they would not have to come up with over 100k. They would only need to come up with 25% of the difference between the upper limit for the VA loan in their area and the purchase price/appraisal value.
With 2019 limits being approximately $484k for 2019, this would amount 25% of $16k...or a down payment of $4k for a $500k purchase.
To be required to put a 100k+ down payment the purchase price would need to be over $848k.