Deciphering the VA Lender’s Handbook Chapter 7 Part 5
In the previous articles, we’ve covered a great deal of information about joint VA loans, and if you don’t find the information you’re looking for in this article, you’ll certainly find it in one of those. This article will cover four different topics, all of them pertinent to you as the borrower. We’ll be covering the Certificate of Commitment in relation to joint VA loans, the Loan Guaranty Certificate as it relates to joint loans, considerations that a lender will have due to the Equal Credit Opportunity Act, and calculating the VA funding fee in the case of a joint VA loan. Since joint loans can either be veteran/nonveteran or two veterans, we’ll cover each of the two situations for each topic.
The first topic to cover is the Certificate of Commitment (COC). The VA issues a COC to the lender as evidence that the loan is under guaranty by the VA. In the event the lender needs to file a claim, the COC is their bread and butter. For joint loans that involve at least one nonveteran, the loan amount shown on the COC is just the veteran’s portion of the loan, and the percent guaranty shown is based on the ratio of the amount of entitlement the veteran has available to the veteran’s portion of the loan. It’s important to remember that the COC and the guaranty only apply to the veteran’s portion of the loan, so don’t expect the guaranty to extend over the portion of the loan covered by a non-VA-eligible borrower. You should also note that in the event of foreclosure, the holder of the loan sustains the loss of the portion of the loan attributable to the nonveteran.
The Loan Guaranty Certificate (LGC) is much like the COC. The “Amount of Loan” shown on the LGC reflects only the veteran’s portion of the loan. If more than one veteran is using their entitlement on the loan, however, the loan amount will reflect the total of all the veterans’ portions of the loan. If the LGC is being issued on a veteran/nonveteran joint loan, it will contain a statement that the guaranty amount is limited to the veterans’ portion of the loan. The LGC and COC both outline the VA’s obligation to the loan holder in the event of a default, nothing else. As the lender is evaluating whether to approve the loan, they will consider whether the loan is marketable to investors with only a partial guaranty.
For those familiar with the Equal Credit Opportunity Act, they may see a potential violation when a lender refuses to accept a loan application for a veteran/nonveteran joint loan (a couple living together but not married), but lenders can refuse an application in this situation without violating ECOA. As the VA loan program is a special purpose credit program, an exemption has been made that protects lenders from making loans that they cannot sell to investors.
Joint VA loans also present a particular difficulty in regards to the VA funding fee. Whether there are multiple veterans or at least one nonveteran involved in the joint loan, the lender must make some calculations in order to determine how much the funding fee will be for the loan. The lender takes the percentage funding fee that is to be charged (how the lender calculates that percentage has been addressed in a previous article), and applies it to the amount of the loan allocable to the VA-eligible borrower(s). Since the funding fee percentage can vary depending on what type of veteran (reserve/guard, full-time), and whether a veteran has used their VA loan entitlement before, the amount is calculated one VA-eligible borrower at a time. Whose pockets the total funding fee comes out of is not of great concern to the VA or the lender.
The funding fee is not assessed on any portion of the loan allocable to a nonveteran or a veteran not using his or her entitlement. As the percentage of the funding fee can also change based on the amount of downpayment made, it’s commonly wondered if the veteran who fronted the cash for the downpayment will get a lower percentage while the other veterans’ percentages are unaffected. This is not the case. Regardless of which borrowers contributed to the down payment, it is calculated as an overall percentage of the total loan. In other words, if a downpayment of $5,000 was made on a $100,000 home, the remaining $95,000 is what would be distributed equally among all the borrowers.