After years in the shadows, the historic VA loan program is getting some time in the sun, but it may be short-lived.
VA loan volume has surged since the housing crisis. Veterans and military buyers have flocked to the program’s more flexible and forgiving requirements in a time of tight credit. But that momentum may be fleeting for veterans in some of the nation’s more expensive housing markets.
The VA’s loan limits for high-cost counties are set to roll back to 2008 levels at the end of December. Unless Congress takes action in the coming weeks, military buyers in costlier communities could suddenly face significant down payments that put homeownership out of reach.
Congress boosted the loan limits after the financial crisis, hoping to spur a housing recovery. Rather than an actual borrowing cap, the VA’s limits reflect how much a buyer can purchase before having to factor in a down payment.
VA borrowers in most of the country can purchase up to $417,000 with no money down. But the VA has higher limits in more expensive areas to help military buyers keep pace with other lending options.
Starting in 2008, a series of laws increased and extended these limits, which can change annually. There are currently about 230 high-cost counties, including 70 with limits above $625,500.
The legal language authorizing these higher limits appears set to expire at year’s end. VA loan limits would likely revert to a maximum $625,500 in high-cost counties unless Congress further extends the provision.
A rollback could have major financial implications for military homebuyers next year.
Here’s how: Buying above your county loan limit requires a down payment equal to 25% of the difference between that limit and the home’s purchase price.
A modest, three-bedroom home in Montgomery County, Md., for example, could cost $680,000. Through the end of this year, a qualified borrower could purchase this house for no money down. But if the loan limit isn’t extended, that same buyer may need to come up with more than $13,000 to close in 2015.
That’s a sizable sum for many military buyers. Conventional financing for a loan that size would likely require an even bigger down payment.
Most VA buyers purchase with $0 down. Despite that, these government-backed loans have had the lowest foreclosure rate of any mortgage product for most of the last six years.
To be sure, these larger, jumbo loans represent a sliver of the booming VA market. The average purchase loan was about $237,000 in fiscal year 2014, according to the Department of Veterans Affairs.
But that’s cold comfort to veterans and military members hoping to buy or refinance in more expensive areas near family or where they serve.
The VA’s loan limits help level the playing field for those serving in higher-priced housing markets and for veterans who want build a life in communities they’ve come to call home. However, for many of these borrowers, securing part of the American Dream they fought to protect might soon get a lot tougher.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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