VA loans are one of the most powerful mortgage options available to veteran and military homebuyers. The program boasts significant benefits, such as $0 down, no private mortgage insurance (PMI) and highly competitive interest rates. It exists to level the playing field for those who serve and sacrifice to protect the American Dream and while the program’s purpose has remained true and unchanged for 75 years, 2020 brought some important updates to the loan program.
The Blue Water Navy Veterans Act of 2019 extended disability benefits for illnesses linked to exposure of Agent Orange during the Vietnam War. To pay for new benefits, the VA funding fee, which most non-disabled borrowers pay on closing a VA home loan, will increase slightly in some cases, but it also removed the loan limit caps for 2020, which enables homebuyers using a VA loan to borrow above the 2019 limit of $484,350 for most locations.
Simply put, VA Loans guaranteed after January 1, 2020 are now applicable for larger homes in pricier communities—still without a down payment. Those taking out Veteran Affairs–backed mortgages no longer have loan limits on what they can spend. They also have more freedom to buy homes in the areas they want to buy in. For example, this can open up some city areas to VA loans that veterans might not have had access to before without putting extra money down.
Previous VA loans had been capped at different amounts nationwide. Borrowers could take out more on a VA loan in a high-priced area like San Francisco, than they could in Detroit, where homes tend to cost less. If they exceeded the set limits in the city where they lived, they were required to put down 25% of the difference on the mortgage. If they stayed within the loan limits, they could get a 0% VA loan.
Under the new rules, vets can get a loan amount based on their qualifications and are not bound by city caps. Military members will still need to qualify for the mortgage and verify they can afford the monthly payments, and banks can still put in some restrictions to protect themselves against defaults. For example, some lenders may require higher credit scores or debt-to-income ratios in qualifying for the loans. The loans likely will only apply to a borrower’s primary residence, too.
The VA funding fee paid in 2020 will depend on the down payment amount and whether the borrower ever had a VA-backed loan before. If not, it’s a “first use” loan, and if so, it’s a “subsequent use” loan. The fee can be paid upfront or rolled into the cost into the loan.
The fee for first-use, zero-down loans is 2.3% of the loan amount in 2020, up from 2.15% for active-duty military and veterans in 2019. The fee for subsequent use loans will be 3.6% of the loan amount, up from 3.3%. These fee levels will stay in place for two years, return to 2019 levels from 2022 through Sept. 30, 2029, and then drop further after that.
Under the old VA fee system, there was one set of funding fee rates for “regular” military and higher fees for those in the Reserves and National Guard. Under the new system, everyone pays the same rate, whether they are active, Reserve, or National Guard.
Despite the slight funding fee increase in some cases, this is a huge win for veterans nationwide, especially those living in expensive housing markets. Extending their zero-down buying power will save some veterans a significant amount of money upfront and help them stay competitive with conventional buyers. It helps boost access to homeownership for those who serve, and it’s helping a new generation of veterans and military families put down roots in communities across the country.
When shopping for a VA loan, it should be known that not all lenders offer VA loans, and among those that do, some have more experience working with military service members and veterans than others.
Potentially there can be a huge variation, depending on which lender you choose go with, and going to the first bank you think of may not be the best option. It is best to get quotes from at least three lenders, and look for one that provides the information and help needed to understand and move as smoothly as possible through the mortgage process.