If you want to have someone else on your VA loan because you won’t’ qualify on your own, you may want to think twice about who it is.
Unlike other loans available today, VA loans don’t allow just ‘anyone’ to be o your loan. If you do put someone that isn’t’ allowed, the VA will change how much they guaranty on your loan. In other words, they will only guaranty your half of the loan. This means that you’ll need a down payment on the loan because of the lack of guaranty.
The one type of co-borrower the VA does allow is your spouse. They treat you and your spouse as one, so that you do get the full guaranty on the loan. The full guaranty means that the VA will pay the lender back 25% of the amount a lender loses if you default on the loan.
Without that full guaranty, the VA would only pay the lender back 12.5% of the amount lost. This means that the lender could be out a significant amount of money. In order to make up for that risk, they require a down payment, but not if you use your spouse as the co-borrower.
Another Veteran as a Co-Borrower
Another type of co-borrower that is welcome is another veteran. The VA can treat a loan for two veterans in a couple of ways:
- You can use all of your guaranty or all of the co-borrower’s guaranty for the loan, assuming one of you has enough
- You can split the guaranty down the middle 50/50, using half of each of the borrower’s entitlement
- You can use all of one veteran’s entitlement and supplement it with a portion of the other person’s entitlement should you not have enough
Any way you slice it, as long as you between the two of you there is enough entitlement to cover the loan amount, you are in good shape and you won’t need a down payment.
Using a Non-Veteran Co-Borrower
Now, if you want a non-veteran co-borrower that you aren’t married to, you can do it, but you’ll need that down payment like we discussed above. Here’s how it would work.
Let’s say you want to buy a $250,000 home. You are a veteran with full entitlement, but you want to buy the house with your sister that is not a veteran. The VA would guaranty $125,000 of the loan. This would leave $125,000 without a guaranty, which means you’d need a down payment. The down payment equals 12.5% of the loan amount, which would be $31,250. That’s a very large down payment. It may make getting VA financing not worth it in this case.
If you are set on buying a home with a non-veteran that isn’t your spouse, you may want to look at your other loan options. The closest option to the VA loan would be the FHA loan. You only need a 580 credit score and can have debt ratios as high as 31/41. The only difference is that you would have to pay upfront mortgage insurance as well as annual mortgage insurance on the loan (it lasts for the life of the loan).
Should you use a non-veteran co-borrower that isn’t a spouse? It really doesn’t make sense to do so. You’ll have to put so much down on the home that you might as well get conventional financing. If you are buying the home with a veteran or your spouse, you are in good shape, otherwise, it may be best to shop around and figure out your other options.