3 Major Updates to the VA Home Loan Program & How It Affects You

Robin Kocherhans Robin Kocherhans / Published Sep 4, 2019, 9:45 AM

Since the original version of the VA loan program was passed by Congress in 1944, the program has been helping veterans afford and purchase homes.

There also haven't been very many changes made to the laws that define the VA loan. Major amendments have only been made a handful of times.

However, three significant updates to the VA loan program have already been passed, or are on their way to passing, in Congress. In general, these updates will have a positive impact on veteran borrowers, though some veterans might see costs rise temporarily.

Update #1 – Changes to the Funding Fee

There are technically two separate changes being made that will affect the funding fee:

  1. Removal of the funding fee for Purple Heart veterans
  2. Changes to the fee percentages for certain categories of veterans

Both changes are being made as part of the Blue Water Navy Vietnam Veterans Act of 2019, which was signed into law by President Trump on June 25, 2019. However, the law doesn't go into effect until January 1, 2020.

Fee Removal for Purple Heart Veterans

Purple heart medal resting on an American flagOnly veterans with a disability award used to be able to waive the funding fee.

Because it was a separate process, having a Purple Heart wasn't a guarantee of disability status, which meant that many veterans still had to pay a funding fee of anywhere between 1% and 2.15% on their first VA loan.

However, thanks to the new law, Purple Heart veterans will automatically be able to waive the funding fee regardless of their disability status.

The exact percentage depended on the type of home being purchased and whether they were putting any money down

Changing Fee Percentages

The main purpose of the Blue Water Navy Vietnam Veterans Act of 2019 is to award all Vietnam veterans exposed to Agent Orange the disability benefits they were previously denied because of inconsistencies in legislation.

However, this increase in disability benefits costs money, which is why the 2019 act includes a section that will temporarily increase the funding fee for all veterans who served in one of the five main branches of the military, as well as those who were in the National Guard or reserves who are getting a subsequent VA loan with $0 down.

These temporary fee changes are shown below:

In addition to the increases, veterans who served in the National Guard or reserves will actually experience temporary fee decreases:

These changes are only in effect for two years, from January 1, 2020 to December 31, 2021. On the first day of 2022, the increased percentages revert back to their prior amounts and will stay that way until 2029, when they drop all the way to 1.40%.

As for decreased percentages experienced by members of the National Guard or reserves, they won't revert back to their prior amounts in 2022. Instead, they will drop again so that they match the percentages for all other servicemembers.

Part of the act's intent is to eliminate the fee differences between full-time servicemembers and those who serve in the National Guard or Reserves. So when the fees drop again in 2029, the percentages between these two groups will continue to match.

How These Changes Will Affect You

Purple Heart veterans who will now be able to waive the funding fee on their loan could potentially save thousands of dollars in closing costs.

Here's an example of what that might look like on the median sale price of homes in the US as of June 30, 2019:

Description: For our calculation, let's say our Purple Heart veteran served in the regular military (not the Guard or Reserves). It's their first time using their VA home loan benefit, and they've decided to purchase a single-family home without putting any money down.

Before the changes to the law, our Purple Heart veteran in this example would have had to pay or finance over $5,000 just for the funding fee. But with the new law, that's over $5,000 they get to save!

As for the veterans who will experience increased funding fees, the cost of what they pay at closing will, of course, increase. Here's an example of what those increases might look like for veterans who served in any of the five main branches of the military:

And as for veterans of the National Guard or reserves, here's an example comparing what they would have paid for the funding fee before the law changed versus now:

Update #2 – Changes to VA Loan Limits

The VA Guaranty
All VA loans are backed by the VA, which means that if you default, they will repay your lender a portion of the original loan amount. In simple terms, your lender is guaranteed to recoup at least part of the loan.

Another area of the VA loan program that was affected by the Blue Water Navy Vietnam Veterans Act of 2019 is the VA loan limit for each county.

Prior to this change, the VA would only guarantee loans that matched the "conforming loan limit" set by Fannie Mae and Freddie Mac. These limits have always been based on the average price of a home in each area.

So, if a veteran wanted to buy a home that exceeded their area's conforming loan limit, the VA would only guarantee 25% of the limit. The veteran would then be required to make a down payment equal to 25% of the difference.

Here's an example:
A veteran wants to buy a $900,000 home in Washington, DC, where the 2019 VA loan limit was set to $726,525.

However, because of the Blue Water Navy Vietnam Veterans Act of 2019, which goes into effect on January 1, 2020, the VA loan guaranty will no longer be linked to the conforming loan limits set by Fannie Mae and Freddie Mac.

This example calculation was a two-step process:

  1. $900,000 - $726,525
  2. $173,475 x 0.25

How This Change Affects Veterans

Essentially, this change eliminates VA jumbo loans, effective January 1, 2020. Now all VA loans, regardless of the size or how it relates to the average cost of a home, will receive the full 25% guarantee from the VA.

Going back to our example, here's what it will look like under the new law:

This change will allow veterans to have more versatility in choosing the home they want to buy, especially in high-cost areas. It also saves veterans a ton of money when they choose a more expensive home—over $43,000 in closing costs in our example.

It also means that every VA loan is truly a $0 down loan, which is one of the biggest benefits of the VA home loan program and part of what differentiates it from almost every other type of mortgage.

However, there may also be some negative consequences.

One of the hallmarks of the VA loan program is its exceptionally low default rate. In the second quarter of 2019, the delinquency rate for a VA loan was only 4.24%, according to the most recent National Delinquency Survey (as of this publishing) by the Mortgage Bankers Association (MBA).

Compared to the 9.22% delinquency rate for FHA loans, it's easy to see how much more stable the VA loan program has been for veterans.

Part of the reason the VA default rate is so low may be the fact that veterans have typically been prevented from buying homes they can't afford, thanks to the loan limits. With this barrier removed, it is possible that the delinquency rate may rise for VA loans.

It's still important to note, however, that this is all just speculation. There is no way to tell for sure if the VA delinquency rate will rise. It may continue to remain low as veterans make responsible choices about the type of home they can realistically afford.

Update #3 – Allowable Income for Veterans in the Marijuana Industry

The only change that hasn't fully passed into law, there is currently a bill making its way through Congress that would allow veterans working in the cannabis industry to count that money as income.

As of right now, there is a ban on allowing veterans to count any income they earn working in the cannabis industry, even if they live in a state where it's legal. For many veterans, this means they don't have the income needed to qualify for a loan, VA or otherwise.

The proposed bill has currently been approved by the US House of Representatives, but it has yet to go before the Senate.

How This Change Would Affect Veterans

As more states legalize marijuana, more and more veterans are choosing to legally work in the industry. However, these veterans cannot include this income when they apply for a VA home loan.

If their job in the marijuana industry is their primary source of income, not being allowed to report it on their application increases the likelihood they will get denied for a loan, despite the fact that they've earned this benefit through their service.

However, if this law passes the Senate and is signed by the president, the VA home loan benefit would open back up for these veterans—along with all of the program's incomparable perks, such as a $0 down payment and a lower interest rate.

VA Homes Loans for Even More Veterans

Our veterans have sacrificed so much. The VA home loan program is just one small way to try and thank them for all they've given.

That's why we're excited for these upcoming changes, both confirmed and potential.

In general, they will expand the benefits of the VA loan program to an even greater number of servicemembers, including Purple Heart veterans, Vietnam veterans, those living in high-cost areas, and those legally working in the marijuana industry.

If you're interested in learning about your qualifications for a VA home loan or you'd like to take advantage of all the benefits of one, you can give one of our expert loan officers a call at (866) 569-8272. You won't be obligated to get a loan from us. We're simply happy to answer your questions.

We'd also love to know what you think about these changes. Are there any you're most excited about? Are there any that concern you? Let us know by dropping a comment!