Deciphering the VA Lender’s Handbook Chapter 7 Part 2
In the last article, we began talking about joint VA loans. Joint loans are considered a special type of loan with special underwriting guidelines and other considerations and limitations imposed by the VA. The last article talked in depth about the different terms you’ll hear relating to joint VA loans, as well as the occupancy requirement as it relates to the joint VA loan program. In this article we’ll be answering a few common questions about joint VA loans including how many units the property being purchased can have, which joint loans require prior approval from the VA before the lender can close, and special considerations a lender will have when underwriting a joint VA loan.
In a normal (non-joint) VA loan, the property being financed can have no more than four total residential units (one of which must be occupied by the veteran) and one business unit. The rule for joint VA loans is similar but different enough to take note; if the property is going to be owned by two or more eligible veterans, then the property can have four residential units, one business unit, plus a unit for each veteran participating in the purchase. In other words, if two veterans use their entitlement to purchase a property, the property could have up to six residential units and one commercial unit. The rule is the same for a veteran/nonveteran joint loan – an additional residential unit on top of the normal four for each veteran using his or her entitlement on the loan is permitted. If the unit being applied for has more than the appropriate number of residential or commercial units, it is not eligible for the VA loan program.
Some joint VA loans require prior approval, and some don’t. As a borrower, it’s smart to be prepared for your VA loan by knowing in advance if you’ll need to wait for the VA’s prior approval before your lender can close on your loan. Any joint loan that the veteran holds title to the property along with any person other than the veteran’s spouse will need to be submitted to the VA for prior approval. In other words, going in with an old military buddy on a small apartment building to make some extra cash will need to be approved. On a joint VA loan between a veteran and his or her spouse (to be considered joint in this case, the spouse must also be a veteran and must also be using his or her entitlement on the loan), the loan can be automatically approved without first submitting to the VA.
There are some special underwriting considerations that your lender will need to make while underwriting your joint VA loan. The considerations depend, however, on which type of joint loan you are applying for. On a two veteran joint loan, the lender must combine the income, assets, and credit of all of the parties to be signing on the loan. In the case of income and assets, the strength of the income or assets of one borrower can compensate for the weakness of income or assets of another borrower. As long as the total income and assets are sufficient for the loan, approval should be possible. This is good, but it is important to remember that this does not carry over to the credit of each borrower; outstanding credit of one veteran borrower will not make up for poor credit of one of the other borrowers. All of the borrowers to be signing on the loan must have satisfactory credit.
There are some different considerations that a lender must make when underwriting a veteran/nonveteran joint loan. When outlining these considerations, the VA is really only concerned with the veteran because only the portion of the loan allocable to the veteran is being guaranteed. So, without regards to the nonveteran borrower(s), the underwriter must verify that the veteran’s credit is satisfactory and his or her income is sufficient to repay the portion of the loan allocable to him or her. In some cases, the combined income of the borrowers, both veteran and nonveteran, can be considered when evaluating the ability to repay the loan, but this only works one way – the veteran’s income strength can make up for the nonveteran, but the nonveteran’s strength does not make up for the veteran’s weakness.