With VA home loans as with other mortgage programs, there are guidelines and there are requirements. Guidelines are issued by the VA that approved VA lenders follow but do have some flexibility. A good example of a VA guideline relates to debt to income ratios, or simply “debt ratios.” Debt ratios are expressed as a percentage and compare mortgage costs including principal and interest payment, property taxes and insurance in addition to other monthly credit obligations like credit card payments, car loans, and student loans.
By adding up this total monthly debt, it is then compared with gross monthly income of all those on the VA home loan application. The VA guideline for debt ratios is 41. If total monthly debt adds up to $4,100 and gross monthly income is $10,000, the debt ratio is 41, for instance. But if the debt ratio were higher, say at 43 or 44, that doesn’t automatically disqualify the borrower.
The lender or bank may still approve the loan based upon other positive factors in the loan file. However, core requirements do not have such a variance. VA loans require the borrowers to keep the property insured and taxes paid. VA loans require the borrowers to occupy the property as a primary residence. There are other requirements as well, including the maximum amount the VA will guarantee with a no down payment.
VA loans do come with a guarantee to the mortgage company. Should a VA loan ever go into default and the lender used proper VA guidelines when approving the loan, the lender is compensated at 25% of the loss. VA loans however rarely go into default and are some of the highest performing loan types in the marketplace today. This guarantee is funded by whats called a Funding Fee. For most Veterans, the funding fee is 2.15% of the loan amount of the home using a 30 year, 100% financing. The funding fee is not paid for out of pocket however but is rolled into the loan amount.
2019 VA Loan Limits – High Balance Jumbo
The VA maximum loan limit is set each year by mortgage giants Fannie Mae and Freddie Mac. The current conforming loan limit in 2019 is $510,400 for most U.S. locations, expect the high-cost locations detailed below. Any loan amount above that figure is labeled a “jumbo” loan and can carry slightly higher rates compared to conforming ones.
Okay, so if the VA mirrors Fannie Mae and Freddie Mac, how do Fannie and Freddie set loan limits each year? Back in 2008, Congress passed the Home Equity Recovery Act, or HERA, which among other important changes to the housing industry established a system whereby the Federal Housing Finance Agency, also as a result of HERA passing, would establish conforming loan limits each year. Under the new guidelines, FHFA compares the median home values in October and compares them with median home values for the same period one year ago.
If home values increase by a certain percentage, the conforming loan limit would increase by the same amount. HERA also established there would be no decreases in the conforming loan limit should median home values fall. That’s why the previous loan limits stayed where it did for so long. When Fannie and Freddie limits increase, VA loan limits follow in lockstep.
High Balance Limits
What about in areas where the median home values are much higher compared to the rest of the country? Doesn’t that harm the housing market when interest rates are higher because they’re jumbo loans simply due to the fact the area is deemed “high cost?” Actually, the VA does address this issue of higher cost housing areas and again, follows Fannie and Freddie.
There are higher cost areas in various spots around the country and today the high balance VA loan is set at $765,600 which is the high balance limit established for Fannie and Freddie loans. Counties in Florida, California, Colorado, Virginia, DC, and others where home values are much higher compared to other parts of the country have conforming loan limits higher than the $510,400 mark and can vary county by county. This means VA eligible borrowers in these areas can still obtain a zero down VA home loan and borrow up to $765,600 in these areas. High balance loans can have slightly higher rates compared to a conforming limit of $510,400 in other parts of the country but still be more competitive than what a jumbo loan would require.
VA Jumbo Loan
Okay, let’s now do a little math. Borrowers can still use the VA home loan benefit to buy and finance a home even if the sales price is much more than what the VA limits allow for both conforming and high balance. The lender approving a VA jumbo loan still receives a guarantee on the approved mortgage but the zero down option doesn’t apply. Still, it’s more competitive than a regular jumbo loan with a minimum 10% down payment. How does it work?
Let’s say a borrower is purchasing a home for $550,000 where the local VA home loan limit is $510,400, as it is in most parts of the country. In this situation, the lender subtracts the $510,400 limit from the sales price of $550,000 arriving at $65,650. Now, remember the VA home loan is 25% of the defaulted amount. With a VA jumbo loan, the borrower must then come to the settlement table with a down payment equal to 25% of $65,650, or $16,125, plus any closing costs associated with the loan.
Another example. A home is listed at $800,000 and the home is located in an area deemed “high cost” where the maximum VA loan is $765,600. The difference between these two figures is $73,475. 25% of that amount is $18,369 which represents the required down payment from the borrower and represents just over 2% of the sales price.
VA Jumbo limits are set at $1,500,000, please see the Jumbo Purchase page to learn more about all the down payment and credit requirement.
There is only one form of mortgage insurance associated with the VA loan program, the funding fee, and it is rolled into the final loan amount. There is no monthly mortgage insurance (PMI) payment which keeps the payments as low as possible, increasing the veteran’s borrowing power. VA mortgage rates are also extremely competitive as well. If you’re considering a property located in an area considered high cost or you want to use your VA home loan benefit to finance a home that needs jumbo financing, there really isn’t anything in the mortgage marketplace that can compete with the VA high balance and jumbo option.
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