VA Loan Program Changes

VA Loan Program Changes

The Department of Veterans Affairs has made a variety of changes to the VA home loan program that affect borrowers at many stages of the mortgage loan process. VA home loans are unique among military benefits because eligibility for a VA loan does not guarantee loan approval; you have to qualify for the loan financially.

That means VA borrowers, while being able to take advantage of a wide range of financial benefits associated with a VA mortgage, can’t purchase the most expensive house on the market without the lender making sure the borrower can actually afford the loan.

Significant changes to the VA Home Loan program were mandated through passage of federal law, as well as other alterations the VA made on an internal basis, means borrowers have expanded options in some areas, and slightly increased costs in others.

The VA Loan program changes we’re discussing include:

  • Elimination of the VA Loan Guaranty Limit by county
  • Increases in the VA Loan Funding Fee
  • The Elimination of the VA Growing Equity Mortgage from the VA Lender’s Handbook
  • Elimination of the VA Graduated Payment Mortgage from the VA Lender’s Handbook

The VA Eliminates The VA Loan Guaranty Limit

This sounds fairly obvious to anyone who has ever filled out a credit application. But the Department of Veterans Affairs made one major policy change in 2019 that effectively removed the VA loan guaranty limit, making the VA loan amount a decision that rests in the lender’s hands when it comes to approving or denying the loan amount.

The VA does not cap the amount you can borrow–it never really has. What it DOES limit is how much liability for the loan it can assume. The lender and the VA agree that, should the borrower default on the loan, the VA will reimburse the lender a certain portion of the loan amount (not the full amount).

That reduces risk for the lender and allows the borrower to qualify for the loan even with prior credit issues, lower credit scores than conventional loans are approved for, etc.

Why The VA Eliminated The Loan Limit

The VA was required to alter portions of the VA home loan program thanks to the passage of the Blue Water Navy Vietnam Veterans Act. Those changes included giving VA lenders the ability to approve VA mortgages (including refinance loans) for amounts “greater than the Freddie Mac conforming loan limit.”

In such cases, the VA guaranty for the loan is 25% of the loan amount with no down payment required. In cases where the home’s sale price is higher than the appraised value of the home the VA loan amount will be based on the lower of the two sums.

Borrowers are required to decide whether to pay the difference out of pocket OR walk away from the loan without penalty if the VA loan amount is lower than the asking price.

The buyer cannot be required to continue with the loan amount in such cases.

Higher VA Loan Funding Fees

The VA announced higher VA loan funding fees starting with case numbers assigned on or after January 1, 2020. First-time borrowers must pay a VA loan funding fee increased to 2.30% from 2.15%. Subsequent use of the VA loan benefit is billed a VA loan funding fee of 3.60% after January 1, 2020.

VA Home Loan Program Changes: Some Loans Eliminated

The Department of Veterans Affairs publishes a VA Lender’s Handbook that contains instructions to all participating VA lenders including how to process each type of VA mortgage. There are some VA loans described as “forward mortgages” which are basically purchase loans to help you buy or build a home from the ground up.

Other VA mortgages are refinance loans including VA cash-out refinances and VA Streamline Refinancing for VA-to-VA refi loan transactions.

But the VA also had a list of certain kinds of loans that require special handling or processing. Some of those loans have gone away; the rules published in the newest version of the VA Lender’s Handbook do not include them.

A phone call to the VA’s information line (1-800-827-1000) revealed that the position of the Department of Veterans Affairs is that these loans (more on them below) are no longer supported or offered as part of the VA loan program.

The VA Lender’s Handbook, Chapter 7 details the loans that require the lender to take extra steps, require special handling, etc. The most recent version of Chapter 7 at the time of this writing was updated in its entirety in March 11, 2019 and includes:

  • Joint Loans
  • Construction/Permanent Home Loans
  • Energy Efficient Mortgages (EEMs)
  • Loans for Alterations and Repairs
  • Supplemental Loans
  • Adjustable Rate Mortgages (ARMs)
  • Loans Involving Temporary Interest Buydowns
  • Farm Residence Loans
  • Loans for Manufactured Homes Classified as Real Estate
  • Loans to Native American Veterans on Trust Lands

Now let’s compare the list to the following outdated one, previously used (before March 11, 2019) in Chapter Seven:

  • Joint Loans
  • Construction/Permanent Home Loans
  • Energy Efficient Mortgages (EEMs)
  • Loans for Alteration and Repair
  • Supplemental Loans
  • Adjustable Rate Mortgages (ARMs)
  • Graduated Payment Mortgages (GPMs)
  • Growing Equity Mortgages (GEMs)
  • Loans Involving Temporary Interest Rate Buydowns
  • Farm Residence Loans
  • Loans for Manufactured Homes Classified as Real Estate
  • Loans to Native American Veterans on Trust Lands

Two of the loans previously offered are no longer supported by the VA loan program. That does not mean the lender and borrower cannot work out a Graduated Payment Mortgage (GPM) or Growing Equity Mortgage, but the lender may not necessarily offer you a VA mortgage in such cases.

The VA Graduated Payment Mortgage: No Longer Listed In The VA Handbook

A GPM is described in the VA Lender’s Handbook as a mortgage with lower initial monthly payments, an annual increase in the monthly payment “by a fixed percentage” for a specified range of time, and monthly payments “that level off after the graduation period.”

But the VA handbook also warned lenders not to use the GPM as a way to qualify borrowers who really aren’t able to realistically afford the loan. The GPM can be used to approve a borrower who is expected to have income increases coinciding with the increases of the mortgage amount.

The GPM is approved with the expectation that the borrower’s career and ability to pay grows along with the amount of the mortgage payment. The borrower’s part in being a good credit risk involves being upwardly mobile with income.

The VA Growing Equity Mortgage: Also No Longer Listed

For the non-defunct VA Growing Equity Mortgages, the process involved the following, as described by the VA:

“A GEM has gradually increasing monthly payments, with all of the increase applied to the principal balance.” This allows the loan to increase equity faster and accomplish early payoff of the loan.

The lender was similarly tasked to make sure the borrower could afford the initial loan and the increases. This type of VA loan was also dependent on the borrower’s financial position changing over time to better afford the loan.

Why Were These Loans Removed From The VA Lender’s Handbook?

It’s not for us to speculate whether the Department of Veterans Affairs was involved in some form of risk management by eliminating these two types of VA loans discussed above. It’s just as likely that these loans may no longer be available because of low demand.

In any case, VA Growing Equity Mortgages and VA Graduated Payment Mortgages are no longer listed in the VA Lender’s Handbook and if you are interested in pursuing a loan with terms similar to a GPM or GEM, you will need to negotiate such a loan with a lender.

The VA changes that came as a result of the Blue Water Act were mandated by federal law. Sometimes legislation that addresses other issues (the Blue Water Act specifically discussed Vietnam-era military service) also contain add-ons that tackle related or unrelated issues.

The VA’s increase of the funding fee and the elimination of loan guaranty caps by county were attached or included in the Blue Water Act and passed as a result.

About The AuthorJoe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News