Difference between VA Loan Limit and VA Loan Guarantee

When applying for a VA loan, you'll probably hear these two terms tossed around a lot: VA Loan Limit and VA Loan Guarantee. Because they are referred to generally in the same context, people will often confuse them. Because the previous news article discusses the recent temporary raise to the VA loan limits and mentions the loan guarantee, we decided to help ease the confusion between these terms in this article. Especially since, the newly increased VA loan limits also directly affect the VA maximum loan guarantee and the down payment requirements for your loan.

VA Loan Limit
The maximum VA loan limit is the maximum amount of money you can borrow under the VA home loan program. The VA doesn't actually set any maximum loan amount, nor do they actually extend loans. This is why the maximum loan amount for FA loans is set by lenders at banks and financial institutions. Because lenders are the ones extending the loans, they are the ones to limit on how much a borrower can borrow under the VA loan program. The only guidelines VA provides is that the loan cannot exceed the lesser of the appraised value or purchase price, plus VA funding fee and energy efficient improvements (if applicable).

VA Maximum Loan Guarantee
The VA Maximum Loan Guarantee is how lenders are protected in case the borrower defaults on the mortgage loan. It is what allows eligible active-service military, surviving unmarried spouses of deceased veterans, reservists and veterans to purchase a home with no money down and competitive interest rates. This guarantee lowers the risk to which lenders are exposed by extending a 0% down loan. Without this guarantee, you'd have to make a 20% down payment as you would with a conventional Freddie Mac or Fannie Mae loan, and the interest rates you're offered would depend on your credit scores (if you can get the loan).

The Veterans Benefits Act of 2004 changes the maximum guaranty amount to an amount equal to 25% of the Freddie Mac conforming loan limit determined under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act. Your VA guaranty amount is calculated based on 25% of the total amount of the home loan. So, if you borrowed $417,000, the maximum loan amount in most areas), the VA guaranty amount would be the maximum $104,250.

VA Zero Down Payment Limit
Qualified borrowers can borrow up to $1M on a VA loan, but there is a limit on the zero down payment feature. The no down payment limit is whatever the maximum VA loan limit is for your area. While in certain counties, the no down payment limit can go up to $729,750, most areas are still limited to $417,000. What does this mean? We'll use the $417,000 limit imposed on most areas as an example to explain how the down payment requirement is affected. Of course, if the limit for your county is higher, these figures will have to be adjusted accordingly.

1. The same no-money down rules apply for the first $417,000 of your loan.
2. Borrower pays a 25% down payment only on the amount above $417,000.
3. Borrower pays the funding fee in cash for loans between $417,000 and $1,000,000.

For example, if you borrow $690,000:

• The first $417,000 of the loan = $0 down.
• Any amount in excess of $417,000 = 25% down payment on that amount.
• A total loan of $690,000 would be $273,000 over the no money down limit of $417,000.
• Your 25% down payment on that $273,000 = $68,250.
• You are also required to pay a funding fee in cash up front.

Most lenders require a minimum FICO score of 680 for loans above $650,000. And, they typically will not extend a jumbo loan on a manufactured home. Funding fees cannot be financed above conforming loan limits. Other terms and conditions apply, depending on the lender. Fill out the loan quote request on this site to learn more about VA loans and how you can qualify for one.