How Does a VA Mortgage Work & What are the VA Loan Borrowing Limits?
There are so many decisions to be made when purchasing a home, including what type of home loan to use. The financing choices are as plentiful and varied as the homes on the market. One of the best options available to former and current members of the U.S. Military is the VA loan. If you are eligible for a VA loan, this could be an ideal loan for you.
As you begin your journey toward homeownership, it is important to know not only what your VA home loan borrowing limits are, but also how the loan process works in general. We hope this article will help explain some of the terminology and steps that need to be taken, as well as how your VA home loan will be determined.
VA Home Loan Borrowing Limits
One significant benefit of a VA home loan is that the VA’s guarantee may make homeownership an opportunity to someone who otherwise could not purchase, or may allow a buyer to purchase more home than they could with a conventional mortgage. The VA guarantee acts as part of the down payment requirement, which is typically 20%.
There is no maximum VA loan amount, it is the guaranty amount that will fluctuate. For a loan up to $45,000, the VA will guarantee up to 50%. For loans $45,001-$56,250 the maximum guaranty is $22,500. For loans between $56,250-144,000, the VA will guarantee up to 40%. For loans $144,000 or more, it is up to an amount equal to 25% of the county loan limit.
To meet demand, the VA established a secondary entitlement that parallels conventional lending limits of up to $484,350 ($726,525 in high-cost areas). For home loans greater than $144,000, the VA will guarantee the lesser of 25% or $104,250.
EXAMPLE: Loan amount is $200,000, VA guarantee is up to $50,000
There are a few key regulations you should be aware of when you start shopping for a home loan. They are all in place as a means of protection for the borrower.
Consumer Credit Protection Act of 1968
This act is sort of the umbrella regulation under which the others fall. It was passed by Congress as a means to protect borrowers from abuse by lenders.
Truth in Lending Act
Also passed in 1968, the Truth in Lending Act (TILA) outlines the disclosures that lenders must make to borrowers and the timeline of those disclosures. Before you close on a mortgage, the lender must provide a Truth-in-Lending Disclosure Statement that details the interest rate, terms, and conditions of the mortgage. This statement will also have a breakdown of fees and will explain which fees may change and by what percentage. It should also provide loan product comparisons so you as the borrower are fully aware of what is available.
Take the Disclosure Statement to your closing and compare it to the one provided at closing, as well as to your HUD-1 statement, to make sure all the numbers are still accurate.
Real Estate Settlement Procedures Act
Partnering with the Truth in Lending Act, this legislation requires that lenders clearly explain the financial responsibilities of the borrower. It outlines the monthly mortgage payment, costs involved in closing (such as taxes, insurance, and origination fees), the schedule of payments, and any penalties that may occur, such as a prepayment penalty.
Equal Credit Opportunity Act
Simply put, ECOA ensures that all eligible borrowers have access to financing. Lenders may not discriminate based on race, religion, gender, age, place of residence, place of business, or any other biased factors. For example, a lender cannot deny a woman of childbearing age because she may one day have a child and her employment status could change.