Each county has a VA loan limit. This is the maximum loan amount the VA will guarantee for a lender. In most cases, this means $453,100, as this is the national conforming limit for 2018. In certain counties, though, the limit may be higher. This is the case for high-cost counties.
Does this mean that as a veteran the most you can borrow is $453,100? In some cases it doesn’t mean that – you may be able to borrow more.
Borrowing More Than Your County Limit
According to the VA, the most you can borrow is your county limit. Let’s use $453,100 as the example. You can buy a home for $453,100 or less and get VA financing. What happens if you find a home for $500,000, though?
The VA will not guarantee a loan for $500,000. The max they will guaranty a lender is $453,100. This leaves $46,900 without a guaranty. Some lenders may still allow you to buy the more expensive house. In order to do so, though, you must make a down payment. Typically, you’ll need to make up the 25% guaranty that the VA isn’t providing on the $46,900. This means you may need to put down $11,725 in order to buy the $500,000 home.
The VA’s Guaranty
In order to understand why you need to put down 25% of the difference between the VA guaranty and the purchase price, it’s important to understand the VA guaranty.
The VA doesn’t fund loans. They also don’t underwrite them. They leave that up to the VA-approved lenders. What the VA does do is guaranty the loan for the lender as long as the VA lender follows the VA’s rules.
If a loan falls under the VA guidelines, the VA will guaranty the lender 25% of the loan amount up to the county limit. This means the VA will pay the lender 25% of the amount defaulted on if a veteran defaults on their loan. So in the case of a $453,100 loan, the lender would receive $113,275 if you defaulted. This is usually much more than any borrower would put down on a home, so lenders are willing to give the 100% financing with the VA guaranty.
Watch Your Debt Ratio
In order to qualify for the higher loan amount, though, it means more than putting money down on the home. It means you have to prove that you can make the higher loan payments.
The VA doesn’t have specific debt ratio guidelines in place. Instead, they focus on your disposable income. The money you have left after you pay your monthly bills is your disposable income. The VA wants to make sure you have enough money to cover the cost of living based on your location and your family size. They feel that if you have to sacrifice to make your mortgage payments that you are more likely to default on your loan. With their disposable income guidelines, veterans usually don’t have to sacrifice.
The VA does care about your total debt ratio, though. They would prefer if it didn’t exceed 43%. This means your total debts, which include the new mortgage payment, any credit cards, installment loans, or student loans, cannot be more than 43% of your gross monthly income.
Have a Good Credit Score
Since you need a loan that exceeds the VA’s guidelines, you may need a higher credit score than you would normally need for a VA loan. It’s up to the individual lender how much they require. Typically, VA lenders want a credit score of at least 620, but that’s for a loan with a full VA guaranty.
If you need a loan that exceeds the VA guaranty, you should work to keep your credit score as high as possible. The close your credit score is to 700, the better your chances of convincing a lender to give you the higher loan amount.
Of course, you’ll need to prove that you have the assets to make the down payment on the difference between the VA guaranty and the purchase price. Lenders usually need to see the last 2 months of bank statements to prove that the money is yours and it’s free to be used for a down payment.
You may have to shop around a little bit to find a willing VA lender to go above the VA’s county limits. Each lender has their own guidelines and rules, so don’t give up. There are plenty of VA lenders out there willing to loan more than the VA’s limits, you just have to find them.