New Law Allows You to Get a Bigger VA Home Loan Without a Down Payment

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VA home loans are one of the best benefits available to veterans. The program allows honorably discharged veterans to buy a house without a down payment, something civilians only wish they could do. But now the program is about to get even better.

A new law expanding VA disability benefits to more veterans who were exposed to the herbicide Agent Orange during the Vietnam War will change home loan limits for all veterans.

The bulk of Public Law 116-23, the Blue Water Navy Vietnam Veterans Act of 2019, which became law on June 27, 2019, addresses the expansion of VA disability benefits for Agent Orange exposure to those who served in ships off the coast of Vietnam during the war. Previously, only those who served in-country or on inland waters were eligible for disability benefits.

So what does that have to do with VA home loans?

To pay for the expanded disability benefits for the approximately 90,000 veterans who may now be eligible, the VA is removing some restrictions on VA home limits.

Currently, VA limits the price of a home you can buy without a down payment to $484,350 for most of the country. This amount is based on limits set by the Federal Housing Administration (FHA) and changes every year.

There are several locations in the country where this limit is higher, mostly in urban areas and Alaska & Hawaii. But, for most of the country, if you currently want to buy a house that costs more than the FHA limit you can't use a VA home loan without having to pay a down payment, and that down payment usually has to be enough to cover 25% of the difference between the purchase price and the FHA limit. That means if you buy a $500,000 house you have to come up with a cash down payment of $3,912 ($500,000 - $484,350).

New VA Home Loan Limits Coming Jan. 1, 2020

Starting Jan. 1, 2020, when the new law takes effect, the VA will not cap the size of a loan a veteran can get with no money down, paving the way for veterans to buy higher-value homes. Of course, the lender may still issue a cap and deny a large loan. But the denial won't be due to VA home loan rules.

A VA home loan is not the VA lending you money. Instead, the Department of Veterans Affairs "guarantees" to a lender that you, as a veteran, are a good credit risk. That guarantee allows you to get a home loan without having to make a down payment.

The average lender requires a down payment of 20% of the home purchase price before they will give you a mortgage. According to Zillow.com, the average home value in the U.S. is around $227,000. That means veterans, unlike civilian buyers, can get a home without having to pay up to a $45,000 cash payment. And now that VA guarantee may go a little bit further.

The other change that comes with the new law will affect fees for some veterans. VA charges most veterans a "funding fee" when a VA loan is issued. Veterans receiving any VA disability benefits are exempt from the funding fee. For example, the funding fee for an active-duty veteran using a VA home loan for the first time will increase from 2.15% of the purchase price to 2.35% of the price on Jan. 1, 2021. (There are different funding fees depending on the kind of loan and the situation of the borrower.) 

The change, however, eliminates the funding fee for some users. Purple Heart recipients still on active duty will no longer be subject to the funding fee starting Jan. 1. 

The VA and Congress hope the increased money coming in from a combination of the increased funding fee and the eliminated loan limits will be enough to cover the disability benefits of the Vietnam veterans and their children who suffer long-term health problems due to Agent Orange exposure. That remains to be seen. However, for many veterans looking to get a new home loan, especially those in high-cost areas, the process has become easier. 

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This article was updated to clarify the down payment required by current rules.

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