VA Loans and Second Mortgages
VA loans have a variety of uses and flexible options that make them very attractive for first time homebuyers. But not every VA loan is a traditional home purchase; some buyers have unique needs that require additional consideration. A second mortgage, also known as secondary borrowing, is one option some qualified VA loan applicants may consider.
For this discussion, we’ll follow the Department of Veterans Affairs definition of secondary borrowing, which the VA Lender’s Guide says is:
“…the veteran obtaining a second mortgage simultaneously with a VA-guaranteed first mortgage, both secured by the same property.”
The VA allows secondary borrowing under specific circumstances. It’s not an “all comers” loan option because of the additional financial burden a second mortgage can put on the home owner, but the VA will allow such loan applications when “the veteran is not placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA.”
The VA puts additional restrictions on the transaction by requiring documentation about the second loan to include the amount and repayment terms.
Second mortgages in these cases must be subordinate to the VA home loan, in what the VA describes as the “junior lien position relative to the VA loan.” When applying for the second mortgage, the VA rules allow interest rates on the junior lien to be higher than the VA guaranteed loan, but interest rates on the second mortgage may not exceed industry standards.
There are also rules on assumability. The VA does not approve of second mortgages that prevent the borrower from selling the home or having the loan assumed. VA regulations allow the home to be sold or have the loan assumed by any credit-worthy buyer; the rule of thumb here is that the second mortgage shouldn’t restrict the owner from selling any more than VA rules covering the first mortgage.