If you’re eligible for a VA loan and want to come to the closing table with as little money as possible, a VA loan is going to be hard to beat and for several reasons. The most popular is probably not requiring a down payment. That is at least up to the maximum VA loan amount without a down payment. And as you may have heard, the Federal Housing Finance Agency, or FHFA, recently announced the new conforming loan limit for 2019. The conforming loan limit for 2018 is $453,100 and the limit next year is $484,350. Why is that important? Because the maximum VA loan limit mimics the conforming one, so the maximum VA loan going into 2019 will also rise to $484,350. Note, these numbers are for a single family home, 2-4 unit properties will have a higher loan limit.
There are also parts of the country where the median home values are much higher compared to other regions. In these “high cost” areas the maximum limit for the area will be 115 percent of the median home value of the area but not to exceed the highest possible limit of $726,525. This number is found by taking 150 percent of the conforming limit. These are all calculations mandated by the Home Equity Recovery Act (HERA) of 2008. But how can someone use their VA eligibility to finance a home whose sales price exceeds the maximum VA limit? There are calculations for that as well.
You can still take out a VA loan and come to the closing table with less money compared to a conventional loan, but you will need to be prepared to come to your closing with some down payment funds. Let’s say you found a home listed at $600,000 and you want to use your VA eligibility to buy and finance the property. First, you’ll subtract the conforming loan limit from the $600,000 price. This figure is $115,650. Now, because the VA loan carries a guarantee of 25 percent of any loss should the property go into default, multiply $115,650 by 25 percent to arrive at $28,912 rounded to $28,900. This is the amount of down payment you’ll need. Not a zero down VA loan but very close to it. More like 5.0 percent down.
Let’s compare this structure with a 5.0 conventional loan. Any conventional, conforming loan with a down payment of less than 20 percent and no other subordinate financing will require an additional private mortgage insurance premium, or PMI. This raises the monthly payments and decreases borrowing power due to higher payments.
With a VA loan, there are no additional monthly PMI payments, only the Funding Fee which is used to finance the loan guarantee. This figure will vary slightly based upon the nature of the loan and subsequent use but for a standard 30 year fixed rate loan with zero down, the funding fee is 2.15 percent and rolled into the loan amount.
Financing a jumbo purchase with a VA loan isn’t very well known in the industry and even some loan officers aren’t aware of the VA jumbo calculation. Other borrowers may simply assume their VA eligibility only applies to smaller loan amounts and isn’t even a consideration when financing a higher end home. It’s also not uncommon for someone to be eligible for this program and not know about it. Our VA jumbo loan limit is much higher than most, at $2 million.
The original G.I. Bill was introduced back in 1944 to help returning soldiers more easily assimilate into civilian life. A very important entitlement was the VA home loan. Back then, banks would require a sizable down payment before issuing most any mortgage, but soldiers were too busy fighting for our country and had little time or resources to save up enough funds for a down payment plus closing costs. The VA loan program does not require a down payment and in addition restricts the borrowers from paying certain types of closing costs, even for jumbo VA loans. Borrowers can only pay for an appraisal, credit report, title insurance and title related charges, origination and recording fees. If the borrowers want to buy down the interest rate for the mortgage, they can elect to pay additional discount points for the lower rate.
But as it relates to who is eligible for the jumbo VA program, they are veterans, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and unremarried surviving spouses of those who have died while serving or as a result of a service related in jury.
And another feature for jumbo VA buyers is the program can be used more than once. Let’s say a couple buys a home and uses a VA loan to finance the purchase. A few years later, they decide to sell and buy an even larger home using their VA eligibility. As long as the original home was sold, and the existing VA loan paid off, eligibility for a VA loan is restored and they can take advantage of the program once again.
The VA jumbo loan is an excellent choice for the right situation but it’s not always the VA loan is the best choice. For example, if someone has a down payment of 20 percent or more, it probably makes sense to seek other conventional options because even with a 20 percent down payment there will also be the funding fee to consider.
If you’re VA eligible and you’re looking at higher end homes, let’s explore the VA jumbo option together to see if you can not just get a competitive rate but save a lot of money at the closing table.