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Can You Borrow More Than Your Home Is Worth?

Green house in hands.

How much can you borrow using your VA home loan benefit? That question is answered both by how much your monthly payments will be compared to how much you make each month along with your entitlement amount and loan limits for the area. But when you do find out how much you can qualify for you also have the benefit of putting no money down, something you can’t do with FHA and conventional loan programs. If the sales price on your home is $200,000 then you can borrow not just the $200,000 but also finance the funding fee as well. Can you borrow more than that if you can afford it? Can you borrow say $220,000 when the sales price is $200,000? Let’s first look at how lenders establish the loan amount.

Current Market Value

You’ve signed a sales contract on that $200,000 home and the seller accepts your offer. The contract accompanies your loan application as the VA lender orders an appraisal. The appraiser will research recent sales of similar properties in the area that will support the $200,000 value. The appraiser is required to provide at least three sales that have closed within the previous year, preferably within the previous six months.

The appraiser considers the prices of the homes, the square footage and adjusts for other factors such as condition of the property, upgrades or a magnificent view for instance. Say there are three homes that are 2,000 square feet in size that sold for $200,000. That works out to $100 per square foot. If your property is similar to the others and your value works out to $100 per square foot, your property should appraise at the $200,000 contract price. What if the appraiser can’t find any sales that support a value of $200,000 and the appraisal comes in low at $180,000? Then you must make up the difference or otherwise renegotiate the price of the home. Why?

Lenders establish value based upon the lower of the sales price or appraised value. Conversely, should the appraisal come in at $210,000, the lender will use the lower of the two values, in this instance, $200,000. You don’t have access to the “extra” equity but you do know you got a good deal on the property.

What You Can Borrow

When refinancing, lenders perform mostly the same routine yet with a streamline refinance the borrower is able to borrow not just the outstanding loan balance but also finance the funding fee and allowable closing costs. With a streamline there is no value established because no appraisal is required. However, streamline refinances require there be no cash back to you at the closing table. If you want cash back, you will have to apply for a fully documented refinance (click here to apply) which includes a full appraisal and the loan balance is limited by most VA lenders to 90 percent of the appraised value of the property.

You may also be able to borrow more than the sales price plus the funding fee if the additional funds are used to make energy improvements to the home up to $6,000. In this instance, you certainly may borrow more than the home is worth. The VA feels that such improvements not only increase the value of the property but also keep utility bills lower, making the home more affordable. Allowable improvements that qualify for the $6,000 allowance are:

  • Heating and air conditioning systems
  • Solar panels
  • Smart thermostats
  • Storm windows and doors
  • Caulking
  • New insulation
  • Heat pumps

Follow your VA lender’s advice when adding these improvements but you must provide documentation with your request that identifies the types of energy upgrades you are making, product brochures, contractor quotes as well as an energy audit.

So can you borrow more than your home is worth? Not really, with the exception of the energy improvements listed. But is that something you would really want to begin with? If your home is worth $200,000 and you somehow borrowed $220,000 and soon you thought about selling it’s likely you would owe more on your new mortgage than the home was worth. If someone wanted to buy your property in this example, you would have to pay down the difference or resort to a short sale.

Chris Birk is executive editor of Veterans United Home Loans and author of The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits. Nearly 330,000 people follow his VA Loans community on Facebook. You can also follow him on Google+.

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