How Do VA Loan Limits Work?
If you think you know VA loan limits, think again. Limits have nothing to do with how much you can borrow using your home loan benefits. Instead, loan limits have everything to do with how much the VA will back for each loan. Depending on your entitlement, you may or may not have a loan limit.
If you are eligible for a VA-backed home loan, you’ll receive a Certificate of Eligibility (COE) that allows your lender to calculate your entitlement amount. The term “loan limits” refers to the maximum loan that the VA will guarantee. By backing a portion of your loan, the VA takes some of the risk off lenders, such as banks and mortgage companies. In turn, lenders can offer VA loans with more favorable terms, which can make the loans easier on a Veteran’s pocketbook. No down payment, no private mortgage insurance (PMI), and competitive interest rates are just some of the features many VA borrowers enjoy.
What Is Entitlement?
Entitlement refers to the amount of VA backing (or guarantee) you have available to use on your new loan. When you take out a VA loan, you may or may not use all of your entitlement. And sometimes you have entitlement left over. The VA is willing to repay the mortgage holder, up to the amount of entitlement you use on your loan, should you default. The amount of VA entitlement used is typically one-fourth of the total loan amount or limit.
Full Entitlement Means No Loan Limit
Full entitlement means you’ve never used your benefit, or you’ve restored all entitlement from past use. Borrowers with full entitlement have no loan limit. In theory, then, the sky’s the limit. But in reality, your loan amount is limited by how much you can afford. So, for borrowers with full entitlement, where no VA loan limit applies, your loan limit is based on your financial qualifications.
Partial Entitlement Means Loan Limits Apply
Loan limits apply to borrowers with partial entitlement. If you’ve used your benefit on a prior loan, and you don’t plan to restore that entitlement, then this applies to you. The VA only limits how much it will guarantee on loans for borrowers with partial entitlement. Of course, your loan will also be based on what you can afford.
What If the Home I Want Exceeds the Limit?
It’s worth repeating: loan limits have nothing to do with the amount you can borrow with your VA benefit. The limit shows the amount the VA will put up for its guarantee. Typically, this means it’s the maximum loan amount possible without a required down payment from you to secure the portion of the loan not backed by the VA. If you have partial entitlement, and you exceed the loan limit on a VA loan home purchase, you’ll likely need to make a down payment. But, the down payment will only be factored on the amount that exceeds the limit.
What’s My Down Payment If I Exceed the Limit?
In many areas of the U.S., you may come across homes priced above the loan limit. This doesn’t mean you cannot buy a more expensive home using your home loan benefit — you can borrow as much as the lender determines you can qualify for.
Loan Limits and Loan Qualifying Are Separate
Keep in mind, VA loan limits and your available entitlement have little to do with how much of a mortgage you will qualify for. Regardless of the entitlement you receive, you may have to limit your loan amount to how much you can borrow based on your income and credit qualifications.
A VA-approved lender will be able to help you determine what you qualify for and how much entitlement you have based on your COE and/or the VA loan limits in your county. If you’re ready to apply for a loan, consider talking to someone here at Veterans First. We help Veterans get into homes.
