Cosigners help you secure a mortgage. Most loan programs allow them with no problems. VA loans, on the other hand, have strict requirements for the cosigner. Not just anyone can cosign a VA loan with you. They must have specific qualifications. We discuss your various options here.
Veteran and a Spouse
The easiest situation is when you are a veteran and you are married. If you wish to put your spouse on the loan, you can. There aren’t any entitlement issues or guarantee problems. You could use your spouse’s income and qualify for the loan as you would qualify on your own.
The benefit of adding a spouse is the addition of the income. Of course, you’ll also have to take on his/her debts. If your spouse has a lower middle credit score, the lender must use that score for qualifying purposes as well. Luckily, the VA loan has very lenient guidelines making it easy to qualify for the VA loan.
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Two Non-Married Veterans
If you aren’t married, but you have a veteran cosigner, you can secure VA financing without an issue. The VA looks at this situation a little differently. First, you shouldn’t be blood-related. Second, the VA splits the entitlement. Usually, they split it 50/50. This means you use up half of the entitlement you would have used if you purchased by yourself. Your cosigner uses up the other half. Here’s an example:
John and Joe are both veterans. They buy a house together. The house costs $160,000. The VA guarantees this amount. Normally, you’d use up $40,000 of your entitlement with this loan. That would leave you with $66,025 left. However, in this case, you’d only use up $20,000 of your entitlement. Your co-borrower would use up $20,000 of his entitlement as well.
In some cases, veterans choose not to use their entitlement. In the above example, John could tell the VA to use his entitlement only. This leaves Joe’s entitlement untouched. However, in order to qualify, Joe must verify that he will occupy the property as his primary residence.
Non-Married and Non-Veteran Cosigner
There is also the unique circumstance of a non-spouse and non-veteran cosigner. The VA does allow this situation. However, they work it a little differently. Instead of receiving 100% of the purchase price in a loan, you’ll need a down payment. Usually this means a 12.5% down payment. On the above $160,000 home, you’d need $20,000 down.
The VA does this because they won’t guarantee the portion of the loan that belongs to the non-veteran. The 12.5% down payment is half of the 25% guarantee they provide lenders for veteran borrowers. This is only if you aren’t married to the co-borrower, though.
What Does the Guarantee Mean?
The VA guarantees the loans for banks. This means they’ll pay the bank back if the borrower defaults. This is how banks provide loans to “risky” borrowers. By risky we mean with slightly lower qualifications than they may need on a conventional loan. For example, VA loans require a 620 credit score and a 41% maximum debt ratio. Compare this to the conventional loans that require a 680 credit score and 28/36 debt ratio.
The VA approved lenders provide loans to risky borrowers. They then have the guarantee that the VA will pay them back. The VA guarantees 25% of the loan amount with a maximum guarantee of $106,025, which equals a $424,100 loan. If a borrower defaulted on a $424,100 loan, the VA would pay the bank $106,025.
The Benefit of a Cosigner
You should weigh the pros and cons of adding a cosigner especially if they aren’t a spouse. When you buy a house together, you should think of the future. How will you separate? Who will get the house? When you are married, there are laws regarding who gets what. When you aren’t married, there aren’t laws to protect you.
However, a cosigner can help you secure the loan. If you have a lot of debt or not enough income, the co-borrower can help. However, you also take on the co-borrower’s debts and credit score. If his/her credit score is lower than yours, it could hinder your chances at approval. If, however, the score is higher, you may benefit by using their income.
Before you enter into a purchase contract, consider all of your options. Do you need the cosigner? If so, who will make the best candidate? How will you handle it if you decide to part ways? Think of all of these things before signing the contract. This way home ownership can be exciting rather than a headache for you and your co-borrower.
