In June of 2019, Pres. Trump signed a bill that was designed to provide financial support for veterans who served on Navy ships during the Vietnam War. This bill, called the “Blue Water Navy Vietnam Veterans Act,” also carried a few additional attachments, as bills often do.
These attachments included some adjustments to VA loans. Most significant, there was an increase in the amount that can be borrowed while still using the VA’s zero-down program.
Essentially, the amount a qualifying veteran can borrow will be increased starting in January of 2020, creating new buying opportunities for numerous individuals and families all across the country.
VA Loans Limits Set to Increase in 2020
How the Law Currently Works
Note: Loan limit changes go into effect January 1st, 2020. If you are reading this article after this date, the section below essentially describes how the law used to work.
Under current regulations, the maximum loan amount that a loan will guarantee is figured as a percentage of the limit used by Fannie Mae and Freddie Mac. Currently, this amount is $484,350 in most areas. However, in high-cost areas, this amount can go much higher and can actually reach up to $726,525. (In San Diego, the loan limit is $690,000)
This is not a limit on how much you can purchase. It is simply a limit on how much you can borrow. (But if you are using the zero-down option, it is essentially a limit on how much you can borrow, as you are borrowing 100% of the purchase price.) More specifically, this is a limit on the amount you can borrow before needing a downpayment.
The downpayment in this situation can be a little more complex. Basically you need 25% of the difference between the VA loan limit and the purchase price.
Here’s a simplified example: Say you are purchasing a home in San Diego, where the VA loan limit is $690,000. The purchase price is $850,000, which means the difference between the limit and the total purchase is $160,000. ($850,000 – $690,000 = $160,000.) In this case, you would need a downpayment that equals 25% of $160,000, which is $40,000. So in this example, we’ve jumped from needing no downpayment to needing forty grand.
How the New Law Works
It’s very simple. Starting in January of 2020 this downpayment will be eliminated for many veterans. Veterans living in high-cost areas can now take advantage of the zero-down option and purchase a house that is above the typical level.
This is a big win for veterans living in high-cost areas. Previously, if you wanted to purchase a high-cost home, or you simply wanted a moderate home in a high-cost area, you had two options: you could use the significant downpayment that we described above, or you could find a different loan program, one that might come with higher fees or interest rates.
Either way, this law eliminates that need, opening new housing opportunities for veterans living in high cost areas. San Diego, for example, is a military down with thousands of sailors, Marines, and soldiers. Veterans who wanted to remain in the area would have trouble using VA loans, which is supposed to be one of the top benefits for serving our country. Now they have a better chance at finding a home in San Diego, using a VA loan, and not needing a downpayment.
Veterans Tend to be Reliable Borrowers
With a zero-percent down option, it would seem that foreclosure rates on VA loans would be higher. After all, the higher the downpayment, statistically speaking, the lower the chances of a default on the loan. It seems perfectly reasonable to assume that VA loans would be more likely to go delinquent, as the average downpayment for this program must be lower. (We are assuming here, we don’t actually have those numbers.)
However, according to statistics from CoreLogic, VA loan delinquency rates are at 1.9%, while FHA loans have a delinquency rate of 3.7%. From these numbers, we can conclude that veterans are a reliable investment when it comes to issuing loans. It’s no surprise, therefore, that the government is comfortable increasing the amount that can be borrowed without needing a downpayment.
Funding Fees Will Increase Slightly
Despite the new option for veterans, there is one small downside to these changes: funding fees. This downside, however, comes with a silver lining.
Starting in January, veterans using a VA loan will see a small increase in the funding fees for this program. The funding fee for a zero-down loan for active-duty service members using a first-time loan will go from 2.15% to 2.3%, an increase of just 0.15%. For people using their second or third VA loan (or more), the fee will go from 3.3% to 3.6%, an increase of 0.3%.
Veteran reservists, however, would see their fees decrease by .1%, going from 2.4% to 2.3% for first-time loans. Any VA loans after that are increasing from 3.3% to 3.6%. The law is also bringing small incremental fees for veterans paying 5% or 10% down.
If you received a Purple Heart during your service, you will actually be exempt from these fees, according to the new law.
All of these higher fees are temporary under the current law. They will last from January 2020 to New Year’s Day 2022. After this day, they are set to revert to the previous rates. This could change, of course, if new legislation is passed.
The Silver Lining
The temporarily-increased fees are intended to fund disability compensation for veterans who served on ships off the coast of Vietnam during the war, as well as veterans who served in the Korean demilitarized zone (between North and South Korea) during the late 1960’s and early 1970’s.
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