VA loan limits and changes
Many active and retired members of the armed forces turn to VA loans to secure a mortgage and buy a home. For years, anyone using the Department of Veterans Affairs’ home loan program needed to keep a close eye on VA loan limits since they capped how big of a mortgage you could receive.
Good news: As of 2020, that’s no longer the case.
With those loan limits out of the way, you can take advantage of lower VA mortgage rates without worrying about making a large down payment on your new home.
Here’s what you need to know about the major changes that have happened with VA loan limits since 2020 and what they mean for you, whether you have your full entitlement or need to stretch your remaining entitlement to get the best house available.
Catching up on changes to VA loan limits
From the moment the VA home loan program was first created in 1944, service members were limited in the amount they could borrow. The tradeoff was twofold: You didn’t need a down payment and your interest rates were usually lower than a conventional mortgage. At times, those loan ceilings could make it more difficult for eligible veterans and active duty members to buy their dream home, especially in high-cost real estate markets.
VA home loan cap removed, with full entitlement
The Blue Water Navy Vietnam Veterans Act of 2019 changed all of that, though. Once the clock struck midnight on Jan. 1, 2020, service members with full entitlement were no longer hampered by VA loan limits. Before the Blue Water Act was passed, borrowers in most areas of the country would have either needed to cap their homebuying budget at $484,350 or save up enough money to pay the price difference on a more expensive house.
Because that VA loan limit has been lifted, service members are now free to — in theory, at least — spend more on a home without budgeting for a large down payment. There are pretty significant caveats to consider here, but we’ll get to those in just a bit.
The Blue Water Act has also had a big impact on VA loan funding fees, which increased from 2.15% to 2.3% of the home price. That’s assuming you have your full entitlement. Otherwise, if you’re applying for a second VA home loan with your remaining entitlement, the attached funding fee has now gone up from 3.3% in 2019 to 3.6% today.
That may seem like a small adjustment, but when you’re talking about percentage points of a six-figure purchase price, your bank account will definitely feel the difference.
For instance, let’s say you wanted to buy a home with a $500,000 asking price. Here’s how much money you’d have to pony up to cover the funding fee in each scenario:
- Old funding fee (full entitlement): $10,750
- New funding fee (full entitlement): $11,500
- Old funding fee (remainder entitlement): $16,500
- New funding fee (remainder entitlement): $18,000
Remember that, unlike a down payment, you don’t necessarily need to pay the funding fee when you close on a house. You always have the option to roll the funding fee into your mortgage amount and spread it over the term of the loan. And if you’re looking at a 30-year fixed rate VA loan, you may not even notice the uptick in your monthly mortgage payments.
How entitlement impacts VA loan limits
VA loan eligibility is more complicated than it first might seem, but that’s nothing compared with the complexity of loan entitlement. In a nutshell, entitlement is the amount of money the VA agrees to pay an approved mortgage lender if the borrower defaults on the mortgage. In most cases, that entitlement represents 25% of the total home loan, although it’s not set in stone by any means.
As seen with the changes to funding fees, the status of your entitlement can have a pretty major effect on your VA home loan. Just with that expense alone, you may pay several thousands of dollars more if you don’t have your full entitlement.
Arguably the biggest impact loan entitlement has on the mortgage process is with VA loan limits. We said earlier that the VA removed prior limits, opening the door for service members to take on larger mortgages without making a down payment. But that statement should have come with an asterisk, because it only applies to individuals who have their full entitlement. Even with full entitlement, you still have to demonstrate to prospective lenders that you have the ability to repay the loan. Just because there are no longer any set VA loan limits in place doesn’t mean you can get a huge mortgage on a low income.
If you don’t have your full entitlement — either because you’ve already taken out a VA home loan that hasn’t been repaid yet or you’ve defaulted on your mortgage — then you will be eligible for a smaller VA loan and require a larger down payment. Those financing caps are based on the same conforming loan limits you would see with an FHA home loan, and they vary from county to county.
These changes in VA loan limits can be pretty significant, depending on what market you’re looking at. In addition, the Federal Housing Finance Agency (FHFA) updates conforming loan limits each year to reflect shifts in housing costs. In 2021, for instance, the FHFA raised the maximum conforming loan limit on a single-unit property from $510,400 to $548,250. Anyone with a second-tier entitlement should take a look at the current loan limits before starting your house search.
What is the maximum amount you can borrow for a VA loan?
Assuming you have your full entitlement, there is no limit — at least not officially. Keep in mind that a mortgage lender still needs to approve your VA home loan, and they will always try to reduce their risk exposure as much as possible. That means combing through your financial records, credit scores, debt-to-income (DTI) ratio, employment status and other risk factors to determine what a reasonable loan figure would be. So, while the VA itself doesn’t limit how much you can borrow, your lender definitely will.
VA loan limits
Again, if you only have a second-tier entitlement, you won’t be able to borrow more than the maximum amount listed for your county. In many areas of the country, the VA loan limit is $548,250. On the other hand, if you’re house hunting in high-cost areas, your loan limit will be quite a bit higher. In California’s Los Angeles Country, for instance, VA loan limits are capped at $822,375, which is the absolute most you would currently qualify for if you don’t have full entitlement.
All of that being said, VA loan limits don’t necessarily prevent you from buying a more expensive home. If you want to buy a house with an asking price that’s north of $850,000, you certainly can. You just need to make up the difference with your down payment. Given that one of the most appealing aspects of a VA home loan is the fact it doesn’t require a down payment, though, you may not want to go this route.
In conclusion
Changes to VA loan limits in 2020 allow eligible service members to borrow more money for a home purchase without needing to make a down payment. At the same time, funding fees have risen — albeit only slightly — so borrowers will pay a bit more with those expenses.
Entitlement is a fundamental component to the VA home loan process, and it can get pretty complicated, even for folks who have been in the mortgage lending business for a while. If you’re not sure about your entitlement status or what it means for your VA home loan eligibility, don’t hesitate to ask for help. Consult a VA home loan expert who can answer any questions you might have and walk you through your different home loan options.
*Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
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