Applying for a VA Loan with a Co-Borrower? Read This First!
The VA recognizes that borrowers may need to team up with coworkers, friends, or other non-family members to take a VA loan. Adding a co-borrower allows borrowers to take the added advantages of the other person’s credit score, income status, and credit history. The option, however, has its share of advantages and disadvantages. Therefore, before you decide on adding a co-borrower to your loan, you must ask yourself, “What benefit does it bring to the table?”
To answer the question, in this post, we discuss the merits and demerits of taking a VA loan with a co-borrower, before that, let’s learn the difference between a co-borrower and a co-signer.
Co-Borrower Vs. Co-Signer
Many people confuse a co-borrower with a co-signer, and often use the terms interchangeably, which is a common mistake. Both co-borrower and co-signer can help you get a loan. The key difference between the two is that a co-borrower is like a partner in borrowing and has equal rights and responsibilities. Co-borrowers can own the title of the property and is equally accountable for the mortgage. In addition, a co-borrower's assets, liabilities, income, and credit history also play a role in when lenders evaluate a mortgage application.
Co-signers, on the other hand, are individuals, who do not hold any ownership interest in a property. They are primarily liable for repaying the obligation and must sign all the documents except the security instruments. In simpler words, co-signer signs after a borrower files a loan application and agrees to be a backup if the borrower can’t make the payments.
Types of Co-borrowers Permitted for VA Loans
Adding a military veteran as a co-borrower helps extend the benefits of VA loans, and also enable borrowers to qualify for larger loans. If you are a veteran and your loan eligibility amount is not enough to fund a suitable property, you can add a co-borrower who may be your spouse, parents, or friends.
The VA Lender’s Handbook addresses this specific situation in Chapter Seven under the heading, “Joint Loans.” The rule in the Chapter Seven says that a veteran and fiancé are eligible to apply for a VA loan together and be treated the same as a married couple. There is, however, a little twist. Here’s what the rule states further:
“A loan to a veteran and fiancé who intend to marry prior to loan closing and take the title as veteran and spouse will be treated as a loan to a veteran and spouse (conditioned upon their marriage), and not a joint loan.” - VA Pamphlet, Chapter 7- Joint Loans.
If you find it difficult to qualify for a standalone loan because of a lack of credit history or low debt-to-income ratio, adding a co-borrower is a possible way out. A co-borrower acts as a second layer of protection for lenders.
The VA does not prohibit joint loans to veterans with non-military co-borrowers, but it also does not provide a guarantee to cover the non-veteran's part of the loan. The VA policy states that “The guarantee is based only on the veteran's portion of the loan.” In such scenarios, the VA insures only the veteran's portion of the mortgage, and the non-veteran needs to pay the down payment to offset the risk of the non-insured part of the mortgage. If you are looking for a VA loan in Texas, adding a non-veteran co-borrower in compliance with the said rule can help you get loan approval.
Is there a Flipside of Adding a Co-Borrower?
Adding a co-borrower has its share of downsides, too. An example can be when relations between a borrower and a co-borrower turns bitter, they may decide to give up the loan. There are instances when after taking joint loans, husband-wife, father-son, or friends pulled themselves out of the mortgage or sought to refinance options because of an internal rift. If you are, therefore, planning to apply for a VA loan with a co-borrower, keep in mind this downside.
A Word of Advice
If you are a veteran and looking to apply for a VA loan, then regardless of the co-borrower you team up with, consider all the aspects before you sign on the dotted line. You can get more information about VA loans, your eligibility, and the rules about co-borrowers, by consulting one of our loan officers. We will put all our knowledge to work to get you the best possible mortgage deal aligned with your prerequisites. Contact us today!