Many loan programs have loan limits. It’s how the lenders and supporting agencies control the market. It makes sense. It can be frustrating at the same time. The good news, though, is VA loan limits increased for 2017. This is the first time in over 10 years the limit changed. This year, veterans can borrow up to $424,100. You may even be able to borrow more. We discuss how below.
The Different Counties
First, you must understand the VA loan limits vary by county. They have always varied this way. They base the limits on the median home values within the county. They measure this using reports created by the FHA. This year saw some increases and a few decreases. The highest county has a limit of $636,150.
Loan Limits are not a Guarantee
Something to keep in mind, loan limits are not a guarantee of what you can borrow. You still have to qualify for the loan. This means you must show that you can afford the loan. In some cases, if you qualify, you can borrow more than the county limit. This comes with a condition, though. You will need to put money down on the home. This takes away some of the advantages of a VA loan. If you borrow less than the county limit for your area, you don’t need a down payment.
If you qualify to borrow more than the county limit, you will need a small down payment. Here’s how to calculate it.
First, determine the difference between your purchase price and the county limit. Let’s say you live in a county with the standard limit of $424,100. You want to buy a home for $500,000. The difference is $75,900. Now you must figure out 25% of that amount. In our example, this means $18,975. This is the amount of your down payment.
While this number seems high, compare it to any other loan program. On a conventional loan, you might need as much as 20% down on a $500,000 home. This means $100,000. Suddenly, $18,975 doesn’t seem so high!
In most cases, $424,100 is enough for veterans to purchase a decent home. The fact that you don’t need a down payment is an added bonus!
Qualifying for a VA Loan
The good news is, VA loans are very liberal with their guidelines. You don’t need perfect credit or low debt ratios. Many lenders require a credit score of at least 620 in order to secure a VA loan. Compared to the usual 680 minimum for conventional loans and this seems liberal. In addition, the VA does not focus on debt ratios. Instead, they watch your residual income. This is the money left over after you pay your mortgage and other debts.
The VA has strict guidelines in regards to residual income. The amount you need depends on where you live and your family size. For example, a family of 4 in the Northeast must have at least $1,025 left over. A family of 4 in the Midwest must have $1,003 left over. The amount required depends on the cost of living in your area.
In addition to your financial qualifications, you must be a veteran of the military. Not every veteran will qualify for a loan, though. You must serve enough time in the military to gain entitlement. This means at least 90 days during wartime or 180 days during peacetime. The time served must be consecutive. You must also have an honorable discharge in order to qualify.
The VA Funding Fee
VA loans are unique because they don’t have annual mortgage insurance. Many other government-backed programs require annual mortgage insurance. The VA however, in line with their mission to keep home ownership affordable does not. They do charge a funding fee, though. This is a fee you pay at the closing. If you don’t have the funds, some lenders allow you to roll it into the loan.
Right now the VA funding fee equals 2.15% of the loan amount. On a $100,000 loan, this means $2,150. For a loan with no down payment, low closing costs, and low interest rates, it’s not bad. Keep in mind, if you refinance your VA loan in the future, you will pay the funding fee again. But, the second time around it’s not as bad. This is especially true if you use the VA IRRRL refinance program. You would only pay 0.5%. The VA IRRRL program even allows for a refinance with very little verification. You don’t need to verify your income, credit, or the value of your home. Again, 0.5% is a small price to pay!
The VA sets their loan limits to be fair for veterans, but also to provide for adequate housing. The limits are not there to make VA loans impossible to get. In fact, the limits are rather liberal. They allow you to secure the same amount of financing you would likely get with many other programs. The VA is just careful to make sure you can afford the loan. They don’t want anyone to get in over their heads. They claim their low default rate is due to their monitoring of residual income.
If you are a veteran, it pays to look into VA loans. They offer affordable financing with easy to manage guidelines. The loan limits are nothing to fear. In fact, this year has the highest limits available thus far. The fact that limits did not change for more than 10 years says something about today’s housing industry. Things are starting to look up and more people are able to become homeowners.