Lending for Two: VA Loans and Co-Borrowers

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Contrary to what you’ve always believed, two is not necessarily better than one.

When it comes to a VA mortgage, the requirements for individual borrowers are simpler than those for two.

It can make sense for prospective home buyers to want or need a co-borrower on their loan. Utilizing another person’s income, credit score and debt level might do wonders for your ability to qualify for a loan. If your credit is what’s holding you back, the Veterans United Lighthouse program is a great way to boost your credit, free of charge.

But the VA doesn’t let qualified borrowers tack on anybody to their loan application. In most cases, in order to secure a VA loan, the only acceptable co-borrower is a spouse or another veteran who will maintain the property as his or her primary residence.

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VA Loans and Co-Borrowers

Does that mean you can’t secure a VA loan with your fiancée, your long-time significant other or your civilian neighbor? Yes and no.

The VA doesn’t expressly prohibit co-borrowers who aren’t in those two acceptable categories. In those instances, the agency tells VA lenders that it will only guarantee the military member’s portion of the home loan. That could leave a big chunk of the mortgage exposed and without the kind of government-backed safety net the program relies upon.

And here’s where VA regulations meet cold, hard truth on the ground.

The reality is most VA lenders aren’t going to issue a loan without a complete guaranty from the VA. That guaranty is what gives lenders the confidence and ability to originate loans without a down payment. Veterans without an acceptable co-borrower—again, either a spouse or another veteran—are going to be hard-pressed to find a lender will to take them on.

In those cases, the prospective home buyer is going to have to rely on his or her credit and income alone.

VA loans have flexible credit and underwriting requirements, which makes it easier for borrowers without sterling credit or significant cash reserves to secure financing. Nearly 90 percent of the VA loans issued last year came with no down payment.

Dual Entitlement

If you are looking to purchase a home with your fiancée who happens to also be a veteran or you are just purchasing a home with a veteran friend there is another option.  You can each use portions of each of your entitlements to obtain the full guarantee.  But note that these dual entitlement scenarios not only have to be approved by the lender but also by the VA.

Refinance Scenarios

Co-borrower relationships can get tricky post-purchase, too.

For example, if a couple purchases a home with a VA loan and then experiences a divorce, the civilian spouse is not automatically eligible to refinance the home with a VA loan.

A military member is required to participate in any VA-issued refinance, so the divorce settlement would have to cover not only the ownership of the property, but also whether the entitlement will continue to be attached to it.

Photo courtesy The U.S. Army