VA Loans: Important Co-Borrower Issues
In our last blog post, we discussed the VA requirements for veterans and non-veterans who want to apply for a home loan together. VA rules affect much of the veteran’s portion of the purchase, but since non-veterans don’t get a VA guaranty for their portion of the loan, most of the rules for these situations are designed to explain what the veteran’s rights and responsibilities are–and how they may share the financial burden with the non-veteran borrower.
Because the Department of Veterans Affairs won’t allow a full VA guaranty for the entire loan amount–just the borrower’s portion–if the borrower and co-borrower don’t look like a good match for a home loan a lender may deny the application. According to VA rules, “The lender must satisfy itself that the requirements of its investor or the secondary market can be met with this limited guaranty.”
If those requirements can’t be met, “in the case of a veteran/nonveteran joint loan may cause a lender to refuse to accept an application for such loan”.
To some that might look like a violation of the Equal Credit Opportunity Act or ECOA, which prevents lenders from discriminating against borrowers based on family status. Because the borrower and co-borrower aren’t married (and therefore not subject to the VA mortgage loan rules that cover spouse income and other issues) some might be led to believe that violates the letter of ECOA.
VA loans permit a non-military spouse to be included on the VA mortgage as a co-signer or co-borrower AND allows the veteran a full guaranty of the entire loan amount. The Department of Veterans Affairs recognizes the married veteran in a different way for the purpose of VA loan eligibility than it does a non-military co-borrower. By the same token, the spouse is subject to requirements a non-military co-borrower isn’t–the married couple must certify they will live in the home as the primary residence, where as a non-veteran does not.
Civilian co-borrowers are also exempt from paying a VA loan funding fee–the non-veteran has no VA loan guaranty, so there is no reason to pay the fee. That also applies in cases where a veteran borrower applies with another veteran, but one of the two does not use his or her VA loan entitlement.
The Department of Veterans Affairs reminds borrowers, “the lender may refuse the application under these circumstances without violating ECOA. This is based on an exemption for VA being a special purpose credit program.”