Not just anyone can be a co-borrower on your VA loan. They must be an approved co-borrower according to VA standards. Just who qualifies and how do you know? Keep reading to find out more.
What is a Co-Borrower?
A co-borrower is another person that goes onto your loan application with you. It could be your spouse or someone else that you want or need to buy a home. The lender uses the co-borrower’s credit history, income, assets, and debts alongside your own to determine if you qualify for the loan. Sometimes a co-borrower can be necessary if the original borrower doesn’t have good credit or a low enough debt ratio to qualify for the loan. At least this is the case for most loan programs.
VA loans are a little different. The VA guarantees the loans made for veterans. This means they promise to pay the lender back 25% of the amount you default if you stop making your payments. The VA offers this guaranty for veterans. If you bring a co-borrower into the situation, it changes things up a bit, which is why the VA doesn’t allow all co-borrowers on a loan.
Spouses are Allowed
The one type of co-borrower the VA allows without a doubt are spouses. Your spouse doesn’t have to be a veteran. The VA treats you and your spouse as one. This is important because it means the VA won’t limit the amount of the guaranty they provide for your loan.
Since the VA allows the full guaranty when you take a loan with a spouse, you don’t need to make a down payment on loans up to $484,350. Before you put your spouse on the loan, though, you should make sure it’s beneficial to do so. Does your spouse have credit that it is at least as good as yours if not better? Does your spouse have a lot of debts in their own name? Does your spouse have the income to support the debts in their name? Consider the answer to these questions before you decide.
A Veteran That Isn’t a Spouse is Allowed
If you buy a home with someone that you aren’t married to, your best bet is to buy a house with another veteran. You have a few options when you buy a home with another veteran. Since you need to use entitlement to purchase the house, you can use all of one veteran’s entitlement or split it amongst the two of you.
The entitlement is what the VA gives you that allow a VA loan with no down payment. Each eligible veteran starts with entitlement that is enough to get a loan worth $484,350. Once you use some of that entitlement, you cannot use it again until you pay the loan off in full and sell the home. This could help you decide which veteran’s entitlement you use. If one of you already used your entitlement and the VA hasn’t reinstated it, you may have to rely on the other veteran’s entitlement to get the loan.
The most common way to split it, though, is 50/50. Let’s say you will buy a home with Joe and both of you are veterans. Both you and Joe have full entitlement. You find a home for $300,000. You can both use $150,000 of your entitlement to purchase the home. This leaves you both with remaining entitlement of $184,350 should you need it in the future.
Buying With a Non-Veteran Non-Spouse is the Last Resort
If you have to add a co-borrower that you aren’t married to and isn’t a veteran, you deplete the benefit of the VA loan. The VA will not give you a full guaranty on this loan. This means that you’ll need a down payment. The VA will only guaranty 50% of the loan or 12.5% of the full loan amount.
Here’s how that would look:
You and your non-veteran unmarried partner want to buy a $200,000 home. Only you are the veteran, so the VA will only give you a guaranty on $100,000 of the loan. This leaves the lender short 12.5% of the guaranty they would normally receive on a VA loan. They need to make that up, so they require a 12.5% down payment on the loan. This means a down payment of $25,000.
What you do is split the guaranty/down payment with the VA. The VA will only cover the portion of the loan that belongs to the veteran. They won’t guaranty any portion of the loan that is for a non-veteran.
This could make it a little harder to secure the loan. First, you need enough money to put down on the home. Second, you need to prove the origination of those funds to prove that they are either your own funds or funds received as a gift for the down payment on a home. In some cases, it doesn’t make sense to even use the VA program if you buy a home with a non-veteran. You could secure an FHA loan with as little as 3.5% down rather than 12.5% down on the home.
The VA loan does allow co-borrowers, but only to a certain extent. Make sure that you explore all of your options to ensure that you get the loan that makes the most sense for your situation. You should even explore the option of securing the financing yourself, even if you buy a home with a non-veteran. If the rate/terms are better, you can work out the title work and the legal ownership of the home with a lawyer. Knowing all of your options can help you get the loan that is just right for you.