VA Loans: Why Can’t I Borrow the Maximum Loan Amount?
Borrowers new to the VA loan process may have trouble understanding one of the finer points of VA loans–the maximum loan amount (set by county) versus what the borrower is actually permitted to borrow. There are three factors at work in determining a VA loan amount. One is the county maximum loan limit for VA loans, another is the fair market value of the home.
The third factor has to do with the rules covering VA home loans for a new purchase. If the VA loan limit in a given county is $400,000 and the property a VA loan applicant wants to purchase is worth only $300,000 according to a VA appraisal, why can’t the borrower apply for a loan worth $400,000?
VA regulations prohibit any cash back to the borrower on a new purchase–the borrower is specifically prohibited from taking out a loan worth more than the home’s fair market value as appraised by a VA-assigned appraiser, plus any permitted closing costs, points or other expenses rolled into the loan as allowed by VA rules. The buyer must not “profit” from the purchase of the home by getting cash out of the deal.
As stated elsewhere in this blog, there is a big difference between getting cash back and getting a refund for money the borrower paid up front. A borrower who chooses to finance allowed fees or expenses but paid the money up front is due a refund of the money already invested. This is not “cash back” on the VA loan but simply a return of the money the borrower put into the VA home loan process up front.
Another thing that can stand in the way of a borrower getting the VA loan maximum is when the home sells for more than it is appraised for. A house for sale may be offered at the VA loan limit for that county–our $400,000 example in this case. But if the home is appraised for only $300,000 the VA will not guarantee the loan for more than $300,000.
The buyer must either re-negotiate the sale price or pay the difference up front and out of pocket. Borrowers are faced with a tough choice in these cases if they really want the home; pay the extra and recalculate their budgets accordingly or walk away from the deal.
The financial pressure placed on a borrower is sometimes not that great if the difference between the appraised value and the sale price is small, but in cases where the difference is much larger the borrower may have some serious budgetary re-thinking (or renegotiating) to do.