VA Loan Co-Borrowing Options

The VA loan provides eligible veterans and active troops an incredible home buying option. But, VA eligibility does not equal lender approval. If you don’t meet the lender’s income, credit score, and other requirements, you won’t qualify. This leads many borrowers to ask about applying for a loan with a co-borrower. As such, we’ll use this article to outline VA loan co-borrowing options.

Specifically, we’ll discuss the following:

• VA Loan Overview
• Loan Co-Signer vs Co-Borrower
• VA Loan Co-Borrowing Options
• Avoiding Co-Borrowing Requirements
• Final Thoughts

VA Loan Overview

The VA loan has its origins in the Servicemen’s Readjustment Act of 1944 – more commonly known as the GI Bill. Among other items, this legislation created an affordable mortgage option for veterans and active service members. In its current form, the VA loan offers the following outstanding benefits:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

But, it’s important to understand that the Department of Veterans Affairs doesn’t actually lend money. Instead, it guarantees a portion of every VA loan issued by a variety of VA-approved lenders (banks, credit unions, mortgage companies, etc.).

This system significantly reduces risk for these lenders. If a borrower defaults on a loan, the VA will reimburse the lender a portion of the outstanding balance. But, this arrangement also means that borrowers need to meet the requirements of two organizations: the VA and the individual lender.

The VA’s requirements largely revolve around the borrower’s military background and the condition of the property. Lenders, on the other hand, concern themselves primarily with the borrower’s financial situation. That is, can you continue to make the monthly payments for a VA loan? If lenders believe you lack the financial strength (e.g. income, credit score, etc.) to reliably make payments, they likely will not approve your VA loan.

Loan Co-Signer vs Co-Borrower

When veterans do not qualify for a VA loan on their own, they likely A) do not have adequate income, B) have too much debt, C) have too low a credit score, or D) some combination of all of these. Fortunately, an alternative exists when someone cannot independently qualify for a loan: he or she can apply for financing with someone else.

In theory, another person’s strong financial situation offsets your weaker one, allowing the two of you to qualify for a loan together. But, borrowers have two ways to structure such an arrangement, and it’s important to understand the difference:

• Co-signing on a loan: A co-signer assumes responsibility for a loan if the borrower defaults on it. This personal guarantee reduces risks for lenders, which is why a co-signer can get a loan application approved. But, co-signers do not own any of the property purchased with the loan.
• Co-borrowing on a loan: Co-borrowers assume responsibility for loan payments from the beginning – not just if the other borrower defaults. As such, these individuals can also boost the overall financial situation for a borrower, leading to loan approval. But, unlike co-signers, co-borrowers actually own a portion of the property purchased with the loan.

As these differences illustrate, co-borrowing on a VA loan involves purchasing a home with someone else – ideally someone with a better financial position than your own. Broadly speaking, three of these co-borrowing options exist, which we’ll outline in the next section.

VA Loan Co-Borrowing Options

Co-Borrowing Option 1: VA-Eligible Borrower and a Spouse

Typically, this represents the simplest option for VA loan co-borrowing. With some unrelated co-borrowers, you will still need to provide a down payment, negating the primary benefit to the VA loan. But, when your spouse serves as your co-borrower, his or her financial picture can assist your loan application without triggering the need for a down payment.

Co-Borrowing Option 2: VA-Eligible Borrower and Unmarried Partners

Conversely, having an unmarried partner (e.g. fiancé/ee, friend, sibling, etc.) as a co-borrower can trigger a down payment requirement. The VA will only guarantee the eligible borrower’s portion of a home loan. Consequently, a lender will only receive half the level of protection if you and your co-borrower evenly split a purchase. Due to this reduced protection, the lender will require a down payment for the co-borrower’s portion of the purchase.

But, if this co-borrower makes the difference between qualifying and not-qualifying for a loan, this partial down payment requirement may make sense.

Co-Borrowing Option 3: Two VA-Eligible Borrowers (Married or Unmarried)

The final co-borrowing scenario involves two borrowers, both of whom have VA loan eligibility (e.g. two veterans, two active service members, eligible reservists, etc.). In this scenario, whether or not these borrowers are married does not matter, as they both have eligibility.

You can take a couple different approaches to using the two borrowers’ respective VA loan entitlements. Option 1: use all of one borrower’s entitlement and save the other’s entitlement for a future home purchase. Option 2: evenly split the entitlement of both borrowers on the first purchase, leaving equal remaining amounts of entitlement for future purchases.

Avoiding Co-Borrowing Requirements

At the end of the day, people need co-borrowers due to shortcomings in their own financial situation. Accordingly, if you improve your financial situation, you can avoid the need – and potential drawbacks – to using a co-borrower for a VA loan. While certainly not an all-inclusive list, here are some ways to improve your financial situation to help qualify for a VA loan:

Purchase a Home on Active Duty

If you use the VA loan while still on active duty, you can use your BAH towards lender income requirements. Once you retire or separate, you lose these monthly, tax-free payments, frequently making loan qualification far more difficult.

Pay Off Debt to Reduce Your DTI

Debt-to-income ratio, or DTI, serves as one of the primary metrics lenders use to approve or deny loans. Conceptually, it represents the amount of every dollar of income used to pay your debt. Mathematically, DTI equals your total monthly debt payments (including your future mortgage) divided by your total gross (pre-tax) monthly income. If you pay off credit card debt, auto loans, or student loans, you can reduce the amount of your monthly debt payments, thus reducing your overall DTI.

Improve Your Credit Score

Credit scores serve as another major metric lenders use when assessing a borrower’s financial situation. If you improve your credit score, you gain two major benefits. First, you’ll be more likely to qualify for a VA loan. Second, the higher your credit score, the lower your interest rate, potentially saving you tens of thousands of dollars over the life of a mortgage. Plenty of techniques exist to improve your credit score, and paying off debt – as recommended above – absolutely helps. If concerned about mistakes on your credit report, you can appeal with the major reporting agencies. Alternatively, you can hire a credit repair company to help rectify the issues.

Final Thoughts

Even with VA loan eligibility, you may not qualify for a loan. Veteran and active duty borrowers still must meet strict lender requirements to secure a VA loan. If you fail to meet these lender requirements due to financial issues, using a co-borrower can help. Bringing on a co-borrower can potentially improve your overall financial picture enough that the two of you together qualify for a VA loan.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.