When Varun Bisht, a 30-year-old veteran who served as an Army engineer, and his wife, Shradha Bisht, a nurse practitioner, decided to relocate to the Boston area and buy their first home, cash for a down payment was a big obstacle.
“Even with a VA loan, we needed a big down payment because the home prices are so high,” said Varun Bisht, who now works for Amazon. “We wanted to be in Somerville so we could be close to our family, especially because we’re expecting our first child in June.”
While a prime benefit of the VA loan guarantee is that qualified veterans and active duty military personnel can buy a home without a down payment, until recently that option was limited to purchases under a maximum loan amount. Now, thanks to the Blue Water Navy Vietnam Veterans Act of 2019, those limits have been lifted.
“Since 1944, there has never been a cap on how much someone could borrow with a VA loan, but there was a cap on how much someone could borrow without making a down payment,” said Chris Birk, author of “The Book on VA Loans” and director of education for Veterans United Home Loans in Columbia, Mo. “In the past, VA borrowers who needed to borrow more than the loan limit had to make a down payment of 25 percent of the difference between the loan limit and the home price.”
For example, the loan limit in Suffolk County was about $690,000. Until the law changed, a buyer of a $790,000 home would need to make a down payment of $25,000. As of Jan. 1, that veteran buyer could purchase without a down payment.
For Varun Bisht, the elimination of that limit was a game-changer.
“Our incomes are enough to support a higher mortgage amount, but we worried about draining all our cash for a down payment, especially with a baby on the way,” he said. “Thankfully, our lender told us about the change in rules, so we just closed on a three-bedroom condo at the end of January. Waiting until after Jan. 1 saved us close to $80,000.”
Like many VA borrowers, Varun Bisht decided to make a down payment in order to have some immediate equity in the home.
“We were able to make a down payment we were comfortable with instead of overspending,” he said.
“A lot of veterans who live in high-cost areas and have great jobs with an income to support a large mortgage don’t have the savings to make a big down payment,” said Eric Erickson, producing sales manager at Embrace Home Loans in Wakefield. “This rule change means they can use the benefit they earned with their service to buy the home they want.”
Veterans who have defaulted on a previous VA loan and those who have a current VA loan and are seeking a second must follow the previous loan-limit guidelines and make a down payment if they want to buy a home priced higher than the limit, said Birk.
“A lot of veterans don’t realize they can have more than one VA loan at the same time,” said Birk. “You can keep your previous home loan and that property if you want, it just means the rules are slightly different.”
Qualifying for a VA loan
To qualify for a VA loan, you need a loan entitlement based on your service. In addition, while the VA doesn’t set a minimum credit score, many lenders do. You also must demonstrate your ability to repay the loan.
VA borrowers must pay a funding fee, which recently rose slightly to 2.3 percent of the loan amount for borrowers who are not making a down payment, Erickson said. The funding fee drops to 1.65 percent if you make a 5 percent down payment and to 1.4 percent if you make a down payment of 10 percent or more, Erickson said.
“If you already used your VA loan to buy a place and then paid off that loan, your funding fee will be 3.6 percent,” he said.
All funding fees can be financed into the loan, said Erickson.
Another benefit of a VA loan, he said, is that they don’t require mortgage insurance and have competitive rates with other lenders.
Boston market anticipates high impact
For many counties in the United States, the limit for conforming loans set by Fannie Mae and Freddie Mac is $510,400. Conforming loans are those that fall under the guidelines set by the two agencies. In the Boston area, the limit is $690,000.
“We expect as many as 15 percent of VA loan borrowers to benefit from the lifting of loan limits, particularly in the more expensive housing markets like the Boston area,” said Birk.
Veterans United teamed with Realtor.com to study the potential impact of the change in the law. They compared the 2019 loan limit with the average list price for a home in June 2019 for different markets and calculated the down payment a veteran would have needed to purchase an average home, said Birk.
The Boston metro area ranked seventh on the list of locations that would see the most significant increase in buying power under the new legislation, according to the study.
“A veteran in the Boston area would have needed a $56,992 down payment to buy a $916,816 home,” said Birk. “Because of this legislation, that need no longer exists.”
Michele Lerner can be reached at firstname.lastname@example.org.