Deciphering the VA Lender’s Handbook Chapter 9 Part 5
Chances are, if you are reading this article, you already know what secondary borrowing is. However, you may also be a veteran looking into using your VA loan benefits and doing your best to learn everything you can about it before you do. Either way, you’re in the right place. Coincidentally, also either way, it’s good to define exactly what we mean by secondary borrowing since the definition varies slightly depending on who you’re talking to. In the VA Lender’s Handbook, and consequently in this article, when we say ‘secondary borrowing’, we’re referring to a veteran that obtains “…a second mortgage simultaneously with a VA-guaranteed first mortgage, both secured by the same property.” You may have had the same knee-jerk reaction I did when I first read that: “why would anyone want to do that?”
To be truthful, in the case of the VA loan program, there aren’t a whole lot of reasons why secondary borrowing makes sense. The Handbook specifically mentions two purposes that a borrower could get a second mortgage at the same time as the first: to pay closing costs on the first or to make a downpayment on the first mortgage in order to meet secondary market requirements imposed by the lender. Both of those are legitimate reasons, but beyond those two, there really aren’t very many reasons to justify secondary borrowing – especially when the first loan is a VA loan. The VA’s official policy is that secondary borrowing is allowed as long as the veteran isn’t put in a “substantially worse position” than if the entire loan amount was covered with a VA loan, and the requirements detailed in the table below are met.
The second mortgage must meet the following requirements, according to the VA Lender’s Handbook:
|Documentation||The lender must submit documentation disclosing the source, amount, and repayment terms of the second mortgage and agreement to such terms by the veteran and any co-obligors.|
|Lien Position||The second mortgage must be subordinated to the VA-guaranteed loan, that is, the second mortgage must be in a junior lien position relative to the VA loan.|
|Allowable Purposes||Proceeds of the second mortgage may be used for a variety of purposes, including but not limited to:
But may not be used to cover any portion of a downpayment required by VA to cover the excess of the purchase price over VA’s reasonable value.
|Cash back||There can be no cash back to the veteran from the VA first mortgage or a second mortgage obtained simultaneously.|
|Underwriting||The veteran must qualify for the second mortgage which is underwritten as an additional recurring monthly obligation.|
|Interest Rate||The rate on the second mortgage may exceed the rate on the VA-guaranteed first, however, it may not exceed industry standards for second mortgages.|
|Assumability||The second mortgage should not restrict the veteran’s ability to sell the property any more than the VA first mortgage. That is, it should be assumable by creditworthy purchasers.|
|Grace Period||There should be a reasonable grace period before:
Many second mortgages come with unusual terms, and can be offered by government agencies, non-profit organizations, private individuals, a builder, or the seller of the property. If the person or entity offering you a second mortgage has terms that don’t address the above requirements, your VA lender will need to consult with the VA and possibly work with the second lender to make sure that the terms on the second mortgage comply with these requirements. There are some cases where the VA might make an exception to these rules, so if you’re planning on secondary borrowing but the entity you’re going through doesn’t meet one of these requirements, it may still be worth checking with your VA lender to see if it might be possible to work out.
Secondary borrowing can be appealing on some levels, but remember that borrowing at all leaves you with less money than paying upfront; borrowing can make an impossible purchase possible, but it never makes an expensive purchase less expensive.