It didn’t get a whole lot of publicity last week, but there was a major change for VA home loans. Over the years, the loan limit for VA loans has changed and the changes have always been favorable to the veteran. The most recent adjustment eliminates the loan cap completely. The Blue Water Navy Veterans Act of 2019 allows buyers to purchase and finance a home with a VA loan with no down payment. The so-called “Jumbo VA Loan” has always been a choice but not without a down payment from the veteran. Eliminating the cap will open up new housing opportunities for veterans across the country and will take effect on January 1 of next year.
Originally, the maximum VA loan limit was tied to the VA home loan guarantee. The VA guarantee applies to all VA loans and should a VA loan ever go into default the lender is compensated at 25 percent of the loss. This calculation is directly tied to the Entitlement amount awarded to the veteran. This amount has also changed over time and affected the maximum VA limit. Today, the entitlement is $36,000.
The VA will guarantee a loan at four times that amount, or $144,000. However, for loan amounts greater than $144,000, the guarantee applied to those loans, too, up to an amount matching the current conforming loan limit. The conforming loan limit today for most parts of the country is $484,350. In areas where real estate values are much higher compared to other parts of the country, the zero down conforming loan limit could be as high as $726,525. This guarantee is financed by the Funding Fee. The new bill signed into law last week by the President essentially scraps this process. Beginning next year, there is no such thing as a maximum VA loan accompanied with no down payment.
Instead, lenders will approve the loan based upon current underwriting guidelines based upon credit, income, employment and other factors. Debt ratios are expressed as a percentage of debt compared to gross monthly income. While the VA does not specifically state a qualifying debt ratio should be, most lenders use 41 percent. This means total monthly credit obligations, including the new mortgage payment, should be around 41 percent of gross monthly income, regardless of the amount of the loan.
And just like debt ratios, the VA also does not require a minimum credit score. Instead, that decision is left up to individual lenders to employ their own policies. A common minimum score is 620 but again the lender has some flexibility with this number. Employment and other guidelines are not changed as well. Lenders want to see a minimum of two years of employment and if self-employed, two years of self-employment verified by personal and business tax returns.
The approval process is the same as it ever was. The applicant submits an application, the loan officer collects the necessary documentation from the applicant and the loan is then forwarded to an underwriter who will ultimately evaluate the application. After the loan is approved, closing papers are drawn and delivered to the settlement agent who will oversee the closing process.
Eliminating these loan limits for a zero down loan will open up housing opportunities for thousands of veterans, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with six or more years of service and unremarried surviving spouses who have died while serving or as a result of a service-related injury.