Most mortgage loans allow you to have anyone that qualifies as a co-borrower. Typically, a co-borrower can help the situation. In the case of the VA loan, though, it may hinder your loan options. The VA guarantees loans for veterans – not anyone that’s not a veteran. While there is one exception to the rule, you are better off applying for the VA loan on your own if you qualify for it.
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The Exception to the Rule
The one exception to the VA rule is veterans that are married. The VA doesn’t differentiate in this situation. In other words, they will provide their full guaranty on the loan even if you use your spouse on the loan.
The full guaranty means that the VA will provide the lender with 25% of the funds they lose if you default on the loan. Without that guaranty, the VA would require you to make a down payment. This could decrease the benefit of taking out a VA loan. If you apply for a VA loan with a spouse you are currently married to, though, you don’t have to worry about a down payment.
The Non-Married Co-Borrower
Now if you use a co-borrower that isn’t a spouse and isn’t a veteran, you have a different situation on your hands. This time the VA will only guarantee half of the loan (your half). They will not guarantee the half of the loan that belongs to the non-married co-borrower.
Here’s how it works.
Let’s say you need a loan for $200,000. You apply for the loan with your live-in girlfriend. The VA will only guarantee $100,000 of that loan. This means if you default on the loan, the lender would only receive $25,000 rather than $50,000. The lender will need to make up that difference somehow. The way they do it is with a down payment from you. The VA requests that you make up the difference between what the VA will guarantee and the amount they should have guaranteed if you didn’t have a non-VA borrower.
In this case, you would have to put down $25,000. This gives the lender the same amount of money should you default. They will have the initial $25,000 down payment plus the $25,000 the VA would pay if you defaulted. Assuming you don’t default, the only plus side to this situation is that you have equity in the home right off the bat, which can help you get ahead.
The Veteran Co-Borrower
If you aren’t buying a home with a spouse, but you need a co-borrower, the next best thing is to buy with another veteran. This way the VA provides a full guarantee for the loan. Each of you will cover half of the entitlement so that the lender has the full guarantee and you don’t need to make a down payment.
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Of course, this only works if both veterans have eligibility for the VA benefit. If your co-borrower didn’t serve enough time in the military, had a less than honorable discharge, or lost their home to foreclosure and used VA financing, they may not have any entitlement to use. Before you agree to buy a home with another veteran, make sure you have proof of the amount of entitlement they have.
If both of you have enough entitlement, you can secure 100% financing, which means no down payment is necessary.
How Entitlement Works
Because we talked a lot about entitlement, we want to make sure you fully understand how it works. Basically, the VA gives entitlement to borrowers that served enough time in the military and have an honorable discharge. The time requirements are as follows:
- 90 days during wartime
- 181 days during peacetime
- 6 years in the National Guard or Reserves
If you served enough time and had an honorable discharge, you will get entitlement up to $453,100. This means that if you qualify, you can buy a home for as much as $453,100 with no down payment (unless you buy with a non-veteran and non-spouse).
Once you use your entitlement, it remains tied to the property until you sell the home and pay off the loan. At that point, you can request that the VA reinstate the entitlement. You can then buy another home using the same benefit. If at any point, you lose entitlement because you lost a home in a foreclosure or you defaulted on another federal loan, you won’t be able to use that portion of your entitlement. If you didn’t use all of your entitlement at once, though, you may be eligible to use what is left.
Your best bet is to talk with VA lender that understands VA loans well. Explain your co-borrower situation and what you would like to do. They can then verify your entitlement and determine the best steps for you to take so that you can minimize the amount of money you must bring to the table.
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