You’ve decided to utilize your VA home loan benefit to finance your new home. Whether you are looking for a single-family home, a condo or a fixer-upper, you know that this is one VA benefit you’ve been looking forward to taking advantage of. One of your first questions is probably: How much can I borrow? A simple question with multiple answers depending on a myriad of situations. In this article, we will walk you through what the VA loan limits are for 2019, and how they can impact your choices. We’ll also give you a sneak peek into some changes coming starting in 2020.
The VA established the Home Loan Guarantee Program back in 1944. It was started in response to the challenging after-effects associated with returning home from war. The goal was to minimize the economic and sociological challenges service members faced during the post-war readjustment to civilian life. The Government felt that Veterans had missed out on the chance to establish a credit rating that could be used to borrow money to buy a home. They hoped the loan program would help the veteran catch up to his or her non-veteran counterparts with regards to credit worthiness.
Over the years, the Government has consistently updated the program based on political climate, housing market and military service requirements. Then in 2008, the bottom fell out of the housing market, and took a long time to recover. During this time, the VA held its loan limits steady at $417,000, with no increases for almost 10 years. In 2016, home prices began to rise steadily. In answer to this, the VA increased its baseline loan limit in 2017, and again for 2018. It rose again for the third year in a row for 2019, rising almost 7% higher than 2018 loan limits. :
For 2019, the max VA loan amount for most counties in the United States is $484,351. Of course, calling it a limit is a little misleading. Technically there is no maximum VA loan amount. The VA loan limit is simply the most you, as a qualified Service Member or Veteran, are allowed to borrow with zero money down. Assuming you meet the other lending requirements set by the lender, you may qualify for a larger loan. This is known as a VA jumbo loan. A VA jumbo loan is any loan that exceeds the limit set by the VA for your county.
So how does a jumbo loan work? Time to get into some math. The VA guarantees 25% of your home loan up to the max limit of $484,351. If you finance more than that, a lender will usually ask for a down payment equal to 25% of the amount above the VA loan limit. For example, say you need $525,000 to finance your home. The VA county loan limit for your area is $484,351. That leaves $40,649, which will require a down payment. 25% of $40,649 is $10,162.25. This is the amount you can expect to pay as a down payment on your $525,000 loan. As you can see, you’re still saving a ton of money on your down payment using your VA benefit.
$484,000 can get you a nice house in a lot of places across the US. But what if you live in New York, California or Hawaii? Certain areas across the country are considered high-cost housing areas by the FHFA. These are places where the median home values are at least 115% above the baseline loan limit. But what do we mean by the median home values, and how does that differ from the average home value?
The median home value uses the price smack in the middle of a data set, whereas the average is the sum of the data set and divided by the whole. In other words, imagine that 10 houses have sold in the past month. To find the average sale price, you add them all together and divide by 10. To find the median selling price, however, you simply choose the one in the middle. The housing market tends to use the median instead of an average because one house that has an extreme selling price in either direction can skew the average. Median is generally considered a better gauge with regards to home value.
In these high-cost counties, the max VA home loan amount tops out at $726,525, although the amount may be less since it’s based on the local housing market of those particular counties. Expanding the limits for areas with higher-than-average home values is hugely helpful for the people who live there. Most people looking to buy their first home spend an average of 12-15 years saving for their down payment. The higher VA guarantee limits in expensive housing markets allow you to finance more house with no down payment. This saves you years of waiting and gives you much more flexibility when searching for a new home.
The following are a list of states and territories that have at least one county where the loan limit is above $484,351:
District of Columbia
If you live in one of the states listed above, be sure to investigate where your future home is located. You might be eligible to take advantage of the high-cost loan limit. The FHFA website has a great interactive map showing which counties have the higher limits. Click Here.
Keep in mind that loan limits are just that, limits. They do not guarantee that you will qualify for a mortgage of that amount. The VA does not give the money to lenders, they just back the loan on your behalf. It gives the lender some assurance in case you fail to pay back the loan down the road. The VA home loan amount is decided solely at the discretion of the lender. If you happen to live in a high-cost area, your loan limit may be the maximum allowable of $726,525. If you are at the low end of the military pay scale, you may not meet the income and/or other requirements of the lender to qualify for that amount.
Assuming you meet the minimum service requirements for eligibility, what other requirements do you have to worry about? The biggest are your credit score, debt-to-income ratio and residual income.
The VA doesn’t require a minimum credit score to qualify for a VA loan. However, they do still use it as a measure of your overall credit risk. Ideally you need a credit score of at least 620, although some lenders will consider you with a score as low as 580. It’s always a good idea to check your credit score before applying for a VA home loan. If your score is below 580, it’s best to take the steps necessary to increase your score before applying.
You will also need to prove you have a stable income that allows for proper care of the home. This is your debt-to-income ratio, or DTI. The VA recommends a DTI no higher than 41%. Most of your major expenses count toward determining your DTI. Your mortgage will probably be the largest expense, followed by installment loans for cars and education. Credit cards, alimony and child support payments are also included. The VA wants to get a well-rounded picture of your financial health, so lenders may also look at child care costs and utility bills.
In addition to DTI, the VA looks at residual income. They want to make sure you have enough income left after paying your monthly bills to handle regular monthly expenses. The residual income is related to your debt-to-income ratio, but not the same. To find your residual income, subtract the expenses used in figuring your DTI from your monthly income. The VA bases how much residual income is needed based on the size of your family and where in the country you live. The country is broken down into four segments: Northeast, Midwest, South and West. As an example, a family of 4 in the Midwest has a residual income threshold of $1,003.00. That means that after your regular expenses are paid, you must have at least this amount left over to cover living expenses for the month.
Now that you have an overview of loan limits and what you’ll need to qualify, let’s talk about how the housing market is trending for 2019. What does the future hold for VA home loan amounts, and VA home loan limits? According to real estate trend website Zillow, the median home price across the nation reached $226,800 in 2019. That’s a huge increase from 60 years ago, where the median home price was less than $100,000 (adjusted for today’s values). Experts are currently predicting that home prices will continue to rise, but not as quickly as they have been over the past 12 months. According to Zillow, home values have gone up 5.2% over the past year and they forecast growth of about 2.2% over the next 12 months.
The housing market varies widely across the country. Coastal states tend to have the highest costs of living whereas the Midwest and South provide more moderate options. West Virginia, Arkansas, Ohio, Iowa and Mississippi have the lowest median listing prices, ranging from $166,488 to $188,900. The five most expensive listings are found in Colorado, Massachusetts, California, Washington D.C., and Hawaii. The median listing in Hawaii tops $635,000!
What does that mean for VA loan limits? There is good news on that front. On June 25th, President Trump signed a bill lifting the loan guarantee cap starting January 1, 2020. Part of the Blue Water Navy Vietnam Veterans Act (H.R. 299), the bill passed the house unanimously, with a vote of 410-0. The bill also made some changes to the fee schedule for VA loans. The VA Funding Fee will see a slight increase of 0.15% – 0.30% for most people. The money gained by this increase will be diverted to easing health care costs for veterans affected by exposure to Agent Orange. Other changes include eliminating the difference in the funding fee between veterans and members of the National Guard/Reserve, and exempts recipients of a Purple Heart from having to pay the fee.
There will obviously need to be some additional guidelines given to lenders in the wake of the passage of Bill H.R. 299. With no loan limit and the right qualifications, a borrower could potentially get a $2 Million dollar loan, default on it, and the Government would be on the hook for $500,000. The VA has not set any projections on how this change in the law will affect the program going forward. It is assumed that new lender guidelines will be forthcoming prior to the start of the new year. Remember that any loans that start processing prior to January 1, 2020 will still be subject to current VA loan limits. In any case, this change will only benefit service members in getting into the house of their dreams.
In summary, when applying for a VA home loan, you are free to finance as much as you qualify for. Just be aware that any loan amount above the VA guarantee for your county may entail a 25% down payment on the amount above the limit. Check the Federal Housing Finance Agency map here to check limits for your areas of interest. You’ll also still need to meet all lending requirements put forth by the lender, including credit score and income requirements, in order to qualify. And beginning in 2020, loan limits will be going away – so if you aren’t in a hurry it may be to your advantage to wait and see what the new lending guidelines will be. They should be available in the next few months. And as always, our loan specialists at VA National Loans are here to help you along the way. You can give us a call at 855-956-4040 if you have any questions.