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.

It can make sense for prospective home buyers to want or need a co-borrower on their VA 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 free resource.

But counting someone else’s income can come at a cost — you’re also at the mercy of their credit and financial profile. Anyone on the loan with you will need to meet VA and VA approved lender requirements for things like minimum credit score, debt-to-income ratio and more.

What’s more, some co-borrowers will be subject to more financial scrutiny than others. If you’re hoping to have a co-borrower who isn’t your spouse or another VA-eligible veteran who’ll live in the home with you, plan on needing money for a down payment.

Let’s take a closer look.

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VA Loans and Co-Borrowers

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 guaranty the eligible borrower’s portion of the home loan. That leaves a chunk of the mortgage without the government backing the program relies upon.

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

There are lenders out there that will make a “joint loan” for a veteran and a non-spouse, non-veteran co-borrower. But, in these cases, they’re usually going to require a down payment of 12.5 percent.

Why 12.5 percent? Because the VA typically guaranties, or insures, 25 percent of the loan. Having only one “acceptable” co-borrower on the loan means the lender has only half that guaranty. A down payment for the remainder helps keep that level of risk intact.

Otherwise, having on the loan with you a spouse or eligible veteran who will also live in the home doesn’t trigger any down payment needs. Being able to purchase with $0 down is a significant financial benefit, and one that nearly 9 in 10 VA buyers took advantage of last year alone.

Dual Entitlement

If your co-borrower is also a veteran or a service member with VA loan entitlement, then you may want to have a more in-depth conversation about how to approach using your entitlement.

Check out another article where we take a closer look at dual entitlement options and military couples pursuing VA home loans.

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