The Jumbo VA Loan
The VA home loan program was first introduced way back in 1944 as part of the Servicemen’s Readjustment Act, or more commonly referred to as the “G.I. Bill.” The bill provided soldiers returning from WWII with various programs designed to better help them more easily and quickly assimilate back into civilian life. There were education programs to help with education costs, low-interest loans to help start a business in addition to low-cost mortgage assistance. Today, the VA home loan benefit is perhaps the most widely known and most used of any program introduced in the original G.I. Bill.
The VA loan is one of the three government-backed mortgage loan programs available in today’s market. The other two are the FHA and USDA program. The three are referred to as “government-backed because they all carry some form of compensation to the lender should the loan ever go into default. With the VA home loan, that’s a rarity as the VA mortgage is the highest performing loan of the three. This despite the need for a down payment. What are some of the characteristics of a VA home loan and what exactly is a jumbo VA loan?”
VA loans are used to finance the purchase of a primary residence only and cannot be used to finance the purchase of a rental or investment property nor finance a beach or vacation home. This does not mean the borrower must pay off an existing VA loan when moving to another property and keeping the home as a rental. As long as the property was first used as a primary residence, it’s okay if the borrowers keep the existing VA loan while buying and moving to another.
Eligible properties include a single family home, a duplex or a 2-4 unit property. When financing attached multi-unit properties, the veteran must occupy one of the units as a primary residence. Condominiums are also eligible for VA financing as well.
While the VA does not require a minimum credit score, lenders do. This minimum score can vary from lender to lender. The VA does ask however the lender to determine the borrower has paid debts responsibly in the past and the common method of making that determination is with credit scores. Credit scores are three-digit numbers ranging from 300 to 850.
VA loans are offered in fixed-rate terms ranging from 10 to 30 years as well as adjustable rate loans. Adjustable rate loans are most commonly in the form of a hybrid mortgage which is a loan where the initial interest rate is fixed for a predetermined period of time before changing into a loan which can adjust once per year over the life of the loan.
VA guidelines ask that lenders determine affordability and this is accomplished by comparing new debt incurred with the VA mortgage along with other monthly credit obligations. Lenders like to see monthly debt payments be somewhere near 41 percent of gross monthly income. Residual income, income left over after paying all monthly obligations is also a consideration.
There is no down payment requirement for a VA loan but the VA program also restricts the types of closing costs the veteran is allowed to pay which results in a lower overall cash to close requirement. Veterans may pay for an appraisal, credit report, title insurance and related charges, origination fees and recording fees.
Loan limits for VA loans follow conventional guidelines used by Fannie Mae and Freddie Mac. Currently, the maximum loan limit is $424,100 for most parts of the country. However, in areas that are deemed to be “high cost” the maximum loan limits can be more and as much as $636,150 before being considered a jumbo mortgage.
The Jumbo VA Loan
However, that doesn’t mean a borrower can’t still take advantage of the VA loan if the sales price is above the loan limits for the area. Recall that government loans carry a guarantee to the lender. With the VA program, the lender is compensated at 25% of the loss. This compensation is financed with what is referred to as the VA Funding Fee. This fee can vary but in the instance of first-time use by a veteran with no money on a 30 year fixed rate loan, the funding fee is 2.15% of the loan amount. For a $300,000 sales price with zero down, the funding fee is $6,450 and is rolled into the loan amount and does not have to be paid for out of pocket. The funding fee is the only form of mortgage insurance with the VA loan program.
Okay, now let’s say the loan limit for the area is $424,100 but the sales price is $500,000. What can the veteran do? To finance a jumbo VA purchase, first subtract the maximum loan limit of $424,100 from the sales price to arrive at $75,900. Remember the 25% guarantee? If the veteran comes to the closing table with 25% of the difference between the sales price and loan limit, VA financing can still be used. In this example, the veteran would come to the settlement table with $18,975 in addition to the closing costs associated with a VA home loan. Think of that for a moment. The veteran can buy a home worth $500,000 and only come to the table with $18,975 plus costs. And there is no monthly mortgage insurance, helping to keep monthly payments to a minimum.
The VA jumbo loan does require a little math and you can call me directly and we can review how much down payment you’ll need with VA jumbo purchase as well as an estimate regarding closing costs on a VA loan. And that’s another bonus with VA home loans…the veteran is restricted from paying certain closing costs, keeping cash to close to a minimum.
Don’t think you have to take out a conventional mortgage when financing a higher end home. The VA jumbo loan just might be your best fit.