In the last article, we talked about eligible purchases for the VA loan program. We discussed that the borrower must be intending to occupy the home as his or her primary residence as well as many other requirements for a property to be purchased using the VA loan program. In this article, we’ll be covering an important topic for any VA borrower – the maximum loan amount you can get a VA loan. The VA loan program is unique among home loan programs for the way it addresses maximum loan amounts, and it can often confuse borrowers who are trying to learn about the VA loan program and see if it will work for their situation.
The VA loan program is unique because it actually has no stated maximum dollar amount for its loans. There are, of course, limitations on the size of the VA loan, but they are completely contextual in nature. There are two primary factors that will determine the maximum amount the VA loan can be made for. The first one is for lenders selling their VA loans through a secondary market. Secondary market loans are sold through a third party service, such as the Government National Mortgage Association, and those third party services often prescribe maximum loan amounts. VA loans are not granted an exception to those limits.
The second factor that determines the maximum loan amount is the reasonable value of the property shown on the Notice of Value (NOV) provided by the official VA appraisal. The loan will be limited to either the reasonable value on the NOV or the sale price of the home, whichever is lower, plus the cost of energy-efficient upgrades up to $6,000 and the VA funding fee. There are (of course) exceptions to this depending on the type of VA loan you’re getting. For IRRRLs, two interest rate discount points can be rolled into the loan, so the loan can add that on top of the $6,000 for upgrades, the VA funding fee, and any allowable fees and charges (closing costs). For a cash-out refinance, the limit is 100% of the VA reasonable value plus the upgrades and VA funding fee.
The Handbook goes on to talk about the exceptions relating to “loans to refinance”. These include construction loans, installment land sales contracts, and loans assumed by the borrower at an interest rate higher than that for proposed refinancing loan. All of these types of loans have basically the same limits as normal VA loans, but construction loans max out at the “balance of the loan”, which includes the balances of construction financing and lot liens. Graduated Payment Mortgages (GPM) on existing properties have the following stipulations:
● The VA reasonable value, minus
● the highest amount of negative amortization, plus
● the cost of any energy efficiency improvements up to $6,000, plus
● VA funding fee
GPM loans on new homes have a maximum of 97.5% of the NOV or purchase price (whichever is less), plus the energy efficient upgrades and VA funding fee. We’ll be going more into detail on what a GPM is and how the VA loan program handles them in a future article. The great majority of consumers have no interest in a GPM and many lenders do not even offer them.
Down payments can interact with the maximum loan amount for VA loans. Normally down payments aren’t required because the VA will guarantee the full reasonable value of the property. This is one of the best perks of the VA loan program because saving up for a 20% down payment on a home is one of the biggest obstacles to home ownership, especially for young families and first-time buyers. There are, however, two instances where the VA will require a down payment. First, if the sale price of the home is greater than the reasonable value as shown by the NOV, the seller won’t reduce the price, and the buyer still wishes to buy the house, the buyer must make a down payment to bring the loan amount down to the reasonable value of the property. This down payment must come out of the borrower’s own resources. Second, the VA requires a down payment on all GPMs.
Lenders may require a downpayment under certain circumstances, such as when a veteran has less than full entitlement available. Generally, for secondary market mortgages, the GNMA requires that a combination of the VA guaranty plus the down payment and/or any equity the borrower may already have in the home must cover 25% of the loan.