VA loans typically offer 100% financing, but there’s a limit to it. If you borrow more than the standard limit of $484,350, you may be looking at a VA jumbo loan.
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While the name sounds scary, it isn’t anything to be alarmed about. You still get the flexible underwriting guidelines, you just have a few other stipulations you must meet in order to get approved.
A Down Payment is Necessary
The first difference that will likely have the largest impact on you is the need for a down payment. The VA guarantees up to $484,350 for veterans. If you need to borrow more than that, you will need to make a down payment.
The down payment you must make is equal to 25% of the difference between the purchase price of the home and the guaranty that you have available. Let’s assume, in this case, that you have full entitlement. This means the VA will guaranty a loan up to $484,350 for you. If you find a home for $550,000, you need a jumbo loan.
Your down payment is equal to 25% of the difference between $550,000 and $484,350. So in this case, you would need $16,412 down on the home. While this sounds like a lot, it’s only a 3% down payment on the purchase price of the home. You would have a hard time finding any other loan that would allow you to put down as little as 3% on a jumbo loan.
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Compensating Factors May be Necessary
You may also need compensating factors to make up for the risk that a jumbo loan poses. If you are familiar with the VA loan, you know they have relaxed guidelines already. Typically, all you need is a 620 credit score, 41% debt ratio, and stable income/employment.
With a jumbo loan, though, lenders may require a higher credit score (closer to the 700s), a lower debt ratio, and maybe even some reserves on hand (assets). Typically, you don’t have to verify assets to qualify for a VA loan, but with a jumbo loan, it’s pretty typical.
Because each lender can have their own rules and make their own lending choices, some may have higher requirements than others. While a high credit score may seem like a great compensating factor to one lender, another lender may require a high credit score and 6 months of reserves on hand.
Everything Else is the Same
Aside from the loan amount and the minor changes in the requirements that lenders may require, everything else remains the same. The VA still guarantees the loan up to the amount of the entitlement that you have.
You still go about the same process when you apply for the loan. The main difference, in this case, would be that you probably need to bring money to the closing. While at a standard VA loan closing you need money for the closing costs, at a VA jumbo loan closing, you need money for the down payment and the closing costs.
As long as you know that you can afford the higher payment, the VA loan can be a great way to get the jumbo loan that you need. With a small down payment compared to other loan programs and flexible underwriting guidelines, you stand to earn the most with this loan program as long as you can find a willing lender.
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