VA loans have specific rules that a lender must follow when evaluating a VA loan application. Affordability needs to be determined by calculating debt to income ratios, a number arrived at dividing monthly obligations by monthly income. Credit is checked either by reviewing a credit score, documenting payment history, or both. And one other thing, the lender sets a maximum VA loan amount. Is there such a thing as a VA jumbo mortgage?
It needs to be noted at the outset, that the Department of Veteran's Affairs does not establish a maximum VA loan limit. The VA issues a guarantee to a VA lender that represents 25 percent of the loan amount, or four times the available entitlement. Today, that entitlement amount is $36,000 for a guarantee of 25 percent of $144,000.
In reality however, the VA guarantees 25 percent of all VA loans up to $453,100. Where does that $453,100 come from?
VA and Conventional Loan Amounts
Fannie Mae and Freddie Mac establish their own maximum loan limits. Historically, the limits were determined annually based upon the previous year's median home price. For example, a maximum loan limit was $107,000 in 1982, and $424,100 last year. Other areas, so-called "high cost" areas have higher limits, up to $721,050.
The VA essentially scrapped the "four times the entitlement" formula when lenders decided to set the maximum VA loan amount to be the same as conventional loan limits of Fannie and Freddie.
Any loan amount above those limits is considered a "jumbo" mortgage and has higher rates compared to loans at or below the $417,000 conforming limit. Regardless of the loan limit, conventional mortgages require a down payment while VA loans do not.
As long as the VA loan is no greater than $453,100 or $679,650 in man of VA's "high cost areas", you are not required to have money down in order to obtain the VA home loan. But what if the limit is $453,100 and you want to use your VA benefit to buy a $500,000 home?
Calculating the VA Jumbo Loan
You can still use the VA home loan benefit to buy a "jumbo" property but it takes a little calculation first. Remember that the VA will guarantee up to 25 percent of the $453,100 limit. In this example with a $500,000 home, you are required to bring in 25 percent of the amount over and above $453,100. The difference is $46,900 and 25 percent of $46,900 is $11,725.
This represents a down payment of 2.30 percent from the borrower, way below what a conventional loan would require. Jumbo conventional loans ask for at least 10 percent down and require private mortgage insurance to be added, significantly increasing the monthly payment as well as cash from the veteran.
Do Your Homework
You'll want to shop around for the right VA Jumbo Lender, some may not offer the program but most do and different VA lenders can price their VA jumbo loans differently. Interest rates may be slightly higher for a VA jumbo loan in some instances but whatever the difference in rate, it's still much lower compared to a conventional jumbo mortgage requiring a 10 percent down payment.
So do your homework, shop around and interview quality VA mortgage companies. If you're shopping for homes on the higher end and have your VA home loan benefit, this little known program is literally unrivaled for higher income veterans wanting to put as little down as possible on a home.