VA Loan Limits Removed in 2020 with New Law

Vets Can Now Get a Bigger VA Home Loan

Because of the sacrifices they’ve made serving our country, veterans have the option of using a VA loan on home purchases. This loan type is designed to be a benefit, allowing more servicemembers access to home loans at great ratesand with no down payment.

In 2020, things are even better for veterans looking to get a VA loan. A recent law change means veteran loans no longer have to be within the VA loan limits that were previously required to buy a home without a down payment.

Why the Change to VA Loan Limits?

In the past, some veterans faced a barrier when they tried to get a home using their VA mortgage benefits: VA loan limits.

Prior to 2020, limits on VA loan amounts were based on conforming loan limits set by Fannie Mae and Freddie Mac. For VA loans, they defined the amount the VA could guarantee on a VA loan in each county.

Let’s go over just what that means.

The VA, under previous requirements, could guarantee 25% of a loan within the loan limit. So if you wanted to borrow more than the limit permitted, you’d need to make a down payment equal to 25% of the difference between the limit and the loan amount.

Say you wanted a loan for $600,000, but you lived in a county that, like most counties in 2019, had a VA loan limit of $484,350. You’d have two choices:

  1. Find a less expensive home that falls under the limit and receive the zero down payment requirement benefit.
  2. Pay 25% of the difference between the loan limit and actual loan amount, or $28,912.50, as a down payment.

This made one of the most important VA loan benefitsgetting a loan with $0 downdifficult for some veterans to access.

What Does This Mean for Veterans?

Under the new law, veterans who qualify can get homes at higher amounts, without having to put money down.

This is great news for veterans in more expensive housing markets or those who would like to get a larger loan while still taking advantage of the benefits they’ve earned.

2020 loan limit changes: Then, veterans had to stay within VA loan limits to receive the no-down-payment benefit. Now: veterans can get a loan of any size they're approved for and still take advantage of the no-down-payment benefit.

It’s important to keep in mind that veterans still need to be approved by a VA mortgage lender to get a loan.

While the law change makes it easier for veterans to get larger loans because of the opportunity to put 0% down on the home, it won’t change the stricter requirements that are often attached to larger mortgages.

With larger VA loans, lenders may require: a higher credit score and a lower debt-to-income ratio

Does This Apply to All Veterans?

VA Entitlement
Your VA loan entitlement is the amount the VA will guarantee on your mortgage. Your current amount depends on things like your service details and whether you’ve used your VA loan benefit before.

Veterans must have full VA entitlement to qualify under the new law. If you don’t have full entitlement, you’ll still be required to get a loan within the loan limits.

You may not have full entitlement if you already have a VA loan or you’ve defaulted on a loan. A VA loan officer (like one from Low VA Rates) can help you check your entitlement and determine what kind of loan you qualify for.

The Law Behind the Change: Blue Water Navy Vietnam Veterans Act of 2019

The recent change to VA loan limits was part of the Blue Water Navy Vietnam Veterans Act of 2019 (Public Law 116-23), which offered a variety of adjustments to laws regarding veterans, such as the redefining of Agent Orange Exposure in VA disability benefits and the removal of some fee requirements for Purple Heart Recipients.

There was also a temporary change made as part of this law: slight increases to the VA funding fee. This will help fund the benefits offered to veterans exposed to Agent Orange. In 2022, the fee will return to its original amount, until 2029, when the fee will decrease.

You can learn more about these and other changes in this law made by reading our article about 3 Major Updates to the VA Loan Program.

Expecting PCS Orders? What About Your VA Loan?

One of the trademark attributes of military service is getting new PCS orders. Sometimes PCS orders come at the best time, and sometimes they come at the worst time. Many active service members worry about getting a VA loan where they are currently stationed because they will likely only be there between two to three years. It’s true that military service members and their families move more than twice as much as civilian families do. So should anticipating PCS orders within the next few years stop you from getting a VA loan to purchase a home where you’re currently living? Hopefully the information we provide will help you make the best decision for your family.

benefits2
This concern stems from correct knowledge that a VA borrower is only eligible to get a loan on the home they use as their primary residence, and that VA loans are typically restricted to one home at a time (it’s hard to use two different homes as ‘primary’ residences). However, there are certain special circumstances where a borrower can have two VA loans open at the same time. One of these circumstances is, you guessed it, when an active service member is needing to move to comply with PCS orders. The VA has this exception to the rule because they want service members to have full access to their benefits, but recognize that military life itself sometimes makes it difficult to do so.

One of the most beautiful things about this exception, is that it does not matter why the service member wants to keep the home. If they are moving because of PCS orders, the residency requirement is waived and the borrower can keep the house for whatever reason they see fit. Many service members use this as a way to earn rental income off their old house. More typically, the borrower may wish to wait until market conditions are better to list the house at a higher price, or to immediately list their house at a slightly higher price that might take more time to sell. Still others, especially those close to finishing their time in the military, might wish to keep the house because they’re planning on moving there after discharge. Remember, though, that just because VA rules don’t prevent a borrower from keeping their old home after PCS orders, that doesn’t mean there aren’t qualifications for a borrower to be able to use their VA loan benefits a second time.

In order to be able to use their VA benefits to purchase a new home at their new station, they need to have both sufficient entitlement and the ability to pay for both loans. For many young military families, those two conditions constitute an obstacle that is impossible to overcome. Since the VA has a rule that a borrower’s debt-to-income ratio cannot be higher than 41%, in order to handle two mortgages the borrower’s family would need very impressive income. Additionally, the borrower must have enough entitlement remaining in their VA loan account to cover the cost of the new home. This is not too much of a problem when talking about smaller, low-cost homes, but a borrower will likely not be able to use their VA loan for two sizable homes.

In short, a veteran’s full entitlement is $417,000 in most areas, though some higher-cost areas have higher limits. In other words, if a borrower buys a home for $200,000, then gets PCS orders to somewhere else, that borrower could potentially purchase another home for up to $217,000. If the service member is sent to a higher-cost area, that entitlement could increase. When opening a second VA loan, a borrower is subject to all of the same hoops to jump through as the first time; the borrower’s ability to pay the loan back is evaluated, as well as his or her credit and debt-to-income ratio, and a decision is made to determine whether the borrower can afford a second VA loan.

While it doesn’t work for every situation, it’s worth finding out if you could be taking advantages of the VA loan benefits program – both before and after your next PCS orders.

The Income of a Spouse and Child Support Payments

Part of the process of getting approved for a VA loan is establishing what is called “verifiable income”, which is then used in calculating the potential borrower’s debt-to-income ratio, as well as playing a crucial role in determining both the size of the loan that the borrower may be approved for as well as the interest rate they will be charged for the loan. The VA has specific rules on what sort of things can be counted as verifiable income and what can not. A typical job, of course, can be counted as verifiable income, but the borrower is required to provide the past two years of employment history and income on his or her VA loan application. For a self-employed person or a small business owner, the application can get a little bit more complicated. Income from a side business or even a primary business, if the owner has not kept good books detailing all of the income and expenses of the company, they will have a very difficult time establishing their business as a source of verifiable income.

military family

With verifiable income being such an important part of the VA loan application, there are many questions that come up in regards to what can be considered verifiable and what cannot. A lot of questions have to do with spousal income (especially if the spouse is not co-signing on the loan), and with child support payments. While there are many questions about child support on the flip-side of income (where the borrower is the one making the payments), there are also many questions about child support being received whether for the borrower’s own child or their spouse’s child from a previous marriage. The questions on verifiable income are the ones we will be talking about in this article.

The VA Lender’s Handbook, also known fondly as VA Pamphlet 26-7, tackles these issues and outlines VA policy on the matter of verifiable income. The handbook explains exactly what kind of income can be counted as verifiable and contribute to being approved for a VA loan. Unfortunately, however, it gets a little more complicated, because the VA isn’t the only government body that gets to make up rules. There are a plethora of state and federal laws that dictate whether a spouse’s income can be included on a loan application and what conditions have to be met in order for that to take place. As far as the VA is concerned, the first question to ask is: “Is the spouse obligated on the VA loan?” If the spouse is obligated on the loan, then the spouse’s income would of course be considered on the loan application just as with any other co-borrower.

Child support is a little different, but the biggest thing that makes it different actually has nothing to do with the VA. The Fair Housing Act prohibits lenders from requiring information regarding child support when considering whether to approve a loan application. As such, it is not required for the borrower to disclose information about child support payments unless they choose. However, the borrower cannot use child support payments as verifiable income unless they choose to declare it. Once declared, income from child support can be included as verifiable income and taken into consideration when calculating the debt-to-income ratio of the borrower.

In the event that the spouse is not going to be obligated on the VA loan along with the veteran borrower, usually the laws of the state is what determines whether the spouses income can be used to help qualify the veteran borrower on the loan. The laws that a state has that allow this to happen are called “community property laws” and consider that a married couple has shared financial obligations and can therefore act as one unit; the one supporting the other in their financial commitments. Typically, if the borrower lives in a state considered a “community property” state, there won’t be any problem having the spouse’s income count. However, if the borrower lives in a state that has no community property laws, usually the only way that a spouse’s income can be considered is if the spouse is co-signing on the loan.

How VA Loan Eligibility Works for Guard and Reserve Members

Eligibility is different for members of the National Guard and the Reserve than it is for full-time servicemembers or veterans. The good news, though, is that members of the National Guard are still eligible for VA loan benefits, there are just different requirements. For a Guard or Reservist looking to use VA loan benefits, it’s a good idea to become familiar with the options available to you as well as the rules and restrictions to using your VA loan benefits. The VA rules explain exactly what the minimum service requirements are for Guards and Reservists and when you can begin using your benefits. The VA loan benefits do not kick in immediately upon joining up or finishing boot camp. The soldier must meet the minimum service requirements as well as several other requirements in order to be eligible for a VA-guaranteed loan.

couple back house (2) These requirements are very different from the requirements for Guards and Reservists. However, they are in the same spirit, which is making sure that those who qualify for the VA loan benefits are those who have contributed to and sacrificed for their country. For a soldier in the Guard or Reserves, the VA expects them to serve for 6 years in order to qualify for VA loan benefits. If the soldier is still serving after 6 years, he or she is fully able to apply for their Certificate of Eligibility, but if the soldier has been discharged or is otherwise no longer serving, there are other requirements.

First, the soldier must have been honorably discharged. Any less-than-honorable discharges will automatically disqualify a veteran of the Guard or Reserve from getting any VA loan benefits. The soldier may also have been placed on the retired list or transferred to the Standby Reserve or Ready Reserve and had their service in the Selected Reserve characterized as honorable. The VA considers it important that the veteran left the Guard or Reserve in good standing in order to qualify for VA loan benefits. The VA has some exceptions in place that cover those who were discharged prior to their six-year mark depending on why they were discharged. For example, if a veteran was discharged from the Guard or Reserve due to circumstances beyond their control, they can apply for eligibility in spite of not having served long enough. From the official VA website: “If you do not meet the minimum service requirements, you may still be eligible if you were discharged due to (1) hardship, (2) the convenience of the government, (3) reduction-in-force, (4) certain medical conditions, or (5) a service-connected disability.”

In more recent days, the “reduction-in-force” qualifier for being discharged can crop up more and more often as budget cuts and many other factors both political and economical have caused the entire military and all of its branches to reduce their forces. For those Guards or Reservists discharged for this reason, they can still apply for eligibility for the VA loan program. While the military will sometimes employ voluntary means of reducing force such as voluntary early retirement and incentives for voluntary separation, there are often only so many ‘voluntary’ methods the military can use to reduce their force, and many servicemembers find themselves being discharged early due to reduction in force.

Exactly what qualifies as “hardship” is foggy at best, but should be explicitly stated in your discharge papers as the reason for discharge. The “convenience of the government” is exactly as it sounds. The really good news is that those who are discharged early due to medical conditions or a service-connected disability can still be eligible for VA loan benefits. If you’re unsure if you can qualify for the VA loan program, contact the VA or a VA-approved lender and give them your information. If you were discharged before your 6-year mark for any of the above reasons, chances are you can qualify.

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