In a perfect world, you would be able to qualify for your VA loan on your own. In reality, this does not always happen. Many people benefit from using a co-borrower to qualify for a loan program, including the VA loan. Because the veteran’s program has a unique aspect to it regarding the veteran’s entitlement, you must consider some unique aspects before applying for a VA loan with someone who is not a veteran and is not your spouse.
A Tricky Situation
When you have two borrowers, one veteran and one non-veteran, the VA looks at the loan a little differently. If there were two veterans, for example, the entitlement would work in one of two ways:
- One borrower uses his entire amount of entitlement to cover the loan
- Both borrowers share their entitlement equally, leaving the remaining entitlement for future use
With a non-veteran borrower on the loan, though, this is not an option. There is only entitlement for one borrower. This means the VA would guarantee a loan for someone who is not a veteran of the military. In order to avoid this situation, the VA only guarantees the portion of the home that the veteran has interest. In most cases, this would be 50%, unless there were some odd circumstances.
How Lenders Proceed with a Non-Veteran Co-Borrower
The VA loan typically does not require a down payment. Veterans can borrow 100% of the purchase price of the home and even wrap their closing costs and funding fee into the loan. If the veteran purchases the home with a non-veteran, however, this may not be the case. The lender will likely require some type of down payment. Because the lender only receives a guarantee on a portion of the mortgage, they have to have some type of collateral for the remaining portion of the home.
What the lender usually ends up requiring is a down payment of 12.5% of the purchase price. This number comes from the 25% guarantee the VA usually provides for veteran loans. Since there is a non-veteran on the loan, the VA only provides half of the guarantee. In order to make up for the other half, the lender requires the 12.5% down payment. This means on a $100,000 home, the non-veteran would need to provide $12,500 to put down on the home.
Qualifying for the Loan
Aside from the guarantee, everything else remains the same when it comes to qualifying for the VA loan with a non-veteran co-borrower. Every borrower will need to verify his or her income, assets, credit scores, and any other miscellaneous items that could affect their loan approval. The VA has flexible guidelines in terms of the VA loan, so this portion of the qualification process is usually fairly simple.
One area the VA requires extra validation, however, is in regards to the veteran’s income. Since the VA will guarantee ½ of the loan, they want to ensure that the veteran’s income covers that half of the loan. This means the veteran must prove enough income to cover his portion of the loan. He does not have to be able to cover the entire loan – the remaining responsibility lies on the co-borrower. This person must be able to prove adequate income to cover the non-guaranteed portion of the loan.
The VA Guidelines
In general, VA guidelines are fairly flexible. Borrowers need to have adequate credit scores, which can go as low as 580, but most lenders require a slightly higher score. They must also have steady employment and income. The VA does not care as much about debt ratios; instead, they focus on the amount of disposable income a household has after the mortgage and other recurring monthly expenses are paid. The VA has specific guidelines for each area of the country regarding how much money must be left over at the end of the month. These amounts are as follows:
- Northeast Region – A minimum of $1,025
- Midwest Region – A minimum of $1,003
- South Region- A minimum of $1,003
- West Region – A minimum of $1,017
As long as you have residual income that meets the above guidelines, the VA considers your loan less risky. In fact, the VA has some of the lowest default rates amongst all of the loan programs available which they attribute to their residual income guidelines.
If you wish to purchase a home with someone who is not your spouse and is not a veteran, you must abide by the non-veteran co-borrower rules for VA loans. You will not use your entire entitlement and your entire loan will not have the VA guarantee. This does not mean you cannot secure financing, though. There are ways to obtain VA financing with someone who is not a veteran. You will have to have plenty of documents ready to prove the worthiness of both you and the non-veteran borrower. If the person borrowing with you can cover their portion of the loan and have a decent debt ratio and residual income that meets the guidelines, it is possible to secure financing with a non-veteran borrower.
These guidelines do not pertain to a spouse of a veteran, though. In this case, the loan is treated the same way as any other veteran loan. The guidelines are the same and you will receive a full guarantee. The differences come into play when you buy a home with someone you are not married to and who is not a veteran of the military.