Can You Exclude Debts Paid by Others On A VA Loan?

Table of Contents

• Key Takeaways
• Understanding Contingent vs. Non-Contingent Liabilities
• What Does the VA Handbook Say?
• How to Prove Debts Paid by Others Can Be Excluded
• What About Late Payments on Co-Signed Loans?
• Non-Contingent Liabilities and Their Impact
• Summary: What You Need to Know
• Frequently Asked Questions (FAQ)
• Final Thoughts

Key Takeaways

• Not all debts automatically count against you when applying for a VA loan—debts paid by others may be excluded under certain conditions.
• Understanding the difference between contingent and non-contingent liabilities is crucial in determining which debts can be excluded from your debt-to-income (DTI) ratio.
• For contingent liabilities (such as co-signed loans), lenders typically require proof of 12 consecutive payments made by the other party to consider excluding the debt.
• Non-contingent liabilities, where you are the sole borrower, generally cannot be excluded regardless of who is making the payments.
• Late payments on co-signed loans are treated differently by lenders and may impact loan approval depending on lender discretion.
• Always consult your lender for personalized guidance on your specific VA loan situation.

When you’re applying for a VA home loan, understanding how your debts are evaluated can make a significant difference in your loan approval chances. One common question I get is whether you can exclude debts that someone else is paying—like a parent, spouse, or child—from your VA loan debt-to-income ratio. The good news is, under certain circumstances, you can. But it depends on the type of liability you have and the documentation you can provide.

In this article, I’ll walk you through the ins and outs of how VA loan underwriting treats debts paid by others, focusing on the critical distinction between contingent and non-contingent liabilities, what the VA guidelines say, and practical steps you can take to work this to your advantage.

Understanding Contingent vs. Non-Contingent Liabilities

The first step is to understand the difference between contingent and non-contingent liabilities because the VA loan rules treat them differently.

What Is a Contingent Liability?

A contingent liability occurs when you are a co-applicant or co-signer on a loan with someone else. For example, imagine your child is 18 years old and wants to buy a car, but they don’t have enough credit to qualify for a loan on their own. You agree to co-sign the loan to help them get approved. In this case, the loan is a contingent liability for you because you’re responsible if the primary borrower (your child) defaults, but the payments are expected to be made by the child.

In VA loan terms, if you can provide evidence that the other party (your child, spouse, or whoever) is making the payments reliably, this debt might be excluded from your debt-to-income ratio. This is important because excluding such debts can improve your qualification for a VA loan.

What Is a Non-Contingent Liability?

On the other hand, a non-contingent liability is a loan that you took out solely in your name, even if someone else is making the payments. For instance, if you took out a car loan for your 16-year-old child who isn’t old enough to qualify for a loan, you are the sole borrower. If the child pays you back or pays the loan directly, it doesn’t change the fact that you are responsible for the loan. This is a non-contingent liability.

When it comes to VA loans, non-contingent liabilities generally count against your debt-to-income ratio regardless of who is making the payments because you are legally responsible for the debt.

What Does the VA Handbook Say?

The VA handbook provides some guidance on this topic in Chapter 4, Topic 5, which talks about applicants as co-obligors or co-borrowers on loans. Here’s the key excerpt:

The applicant may have a contingent liability based on cosigning a loan. If there’s evidence that the loan payments are being made by someone else, and there is no reason to believe that the applicant will have to participate in repayment of the loan, then the lender may exclude the loan payments from the monthly obligations.

Simply put, if you are a co-signer and can prove the other party is making the payments, the lender can leave that loan off your monthly debt obligations when calculating your debt-to-income ratio.

However, the VA handbook is somewhat vague on specifics, which is why lenders often have their own interpretations and documentation requirements.

How to Prove Debts Paid by Others Can Be Excluded

One of the most important things lenders look for when deciding whether to exclude a contingent liability is proof of consistent payments made by the other party. The standard is usually 12 canceled checks or equivalent proof showing the other person has been making the payments on time for at least a year.

This documentation is critical because it demonstrates a payment history and suggests that the other party will continue to make the payments, which reduces your risk as the co-signer.

This rule applies in many real-world situations, including divorces where one party remains on a loan but no longer makes payments. If you can show the other party has been paying for 12 months, the lender may exclude that debt from your obligations.

What About Late Payments on Co-Signed Loans?

Late payments can complicate matters. The VA guidelines don’t provide clear-cut rules about how to treat late payments on contingent liabilities, leaving it to the lender’s discretion.

For example, if your child, for whom you co-signed a loan, recently lost their job and missed payments, this could negatively impact your credit—even though you didn’t make the payments late yourself. Some lenders may decide that’s a risk you have to bear, meaning they will count the late payments against your qualifications. Others might exclude the loan from your obligations if they believe the late payments were an isolated incident and the loan is otherwise in good standing.

Because of this variability, it’s essential to work closely with your lender and provide as much documentation as possible to explain the situation.

Non-Contingent Liabilities and Their Impact

Non-contingent liabilities, where you are the sole borrower, are treated differently. It doesn’t matter if someone else is paying the loan; the debt counts against you because you are legally responsible for it.

Here’s a real-life example: A veteran borrower went overseas and gave their car to someone else, asking that person to take over the payments. The new “borrower” failed to make payments, and the car was repossessed. Even though the veteran no longer used the car, the loan remained in their name because they never refinanced or removed themselves from the loan.

Since the loan was non-contingent, the repossession and missed payments damaged the veteran’s credit, and the lender counted the debt against them. As a result, the veteran was denied VA loan approval.

Summary: What You Need to Know

• Contingent liabilities: You may exclude these from your debt-to-income ratio if you provide proof (12 months of canceled checks) that someone else is making the payments.
• Non-contingent liabilities: These debts count against you regardless of who pays them because you are the sole borrower.
• Late payments: Treatment varies by lender. Some may count late payments against you, others might exclude them if the loan is a contingent liability and the late payments were a one-time issue.
• Documentation is key: Keep clear records of payments made by others to help your lender accurately assess your liabilities.
  
  

Frequently Asked Questions (FAQ)

Can I exclude a loan from my VA loan application if my spouse is paying it?

Yes, if the loan is a contingent liability where you co-signed with your spouse, and you can provide evidence (such as 12 months of canceled checks) that your spouse is making the payments, the lender may exclude that debt from your debt-to-income ratio.

What if the loan is only in my name but someone else is paying it?

If you are the sole borrower (non-contingent liability), the debt will count against you regardless of who is making the payments because you are legally responsible for repaying it.

How strict is the VA about the 12-month payment proof?

While the VA guidelines are somewhat vague, most lenders require proof of 12 consecutive monthly payments made by the other party to exclude the debt. This is a common industry standard to demonstrate consistent payment history.

What happens if there are late payments on a co-signed loan?

Late payments complicate the situation. The VA allows lenders to use their judgment. Some lenders will count the late payments against you, while others may exclude the debt if they believe the late payments were isolated and the loan is otherwise current.

Can I remove myself from a loan to avoid it affecting my VA loan application?

Yes, if possible, refinancing or otherwise removing your name from the loan can help. This is especially important for non-contingent liabilities where you are the sole borrower.

Final Thoughts

Applying for a VA loan can be complex, especially when you have debts that someone else is paying. The key to navigating this successfully is understanding the difference between contingent and non-contingent liabilities and being prepared to provide thorough documentation to your lender.

Always communicate openly with your lender, as each situation can be unique and lenders may have different interpretations of VA guidelines. If you’re unsure how your debts will be treated, don’t hesitate to ask for personalized advice to help you position yourself for approval.

If you have any questions about VA loans or need help with your specific situation, feel free to reach out. I’m here to help you understand the process and work toward your homeownership goals.

Good luck with your VA loan journey!

Contact Info: You can reach me at (907) 572-3713 or visit scarpero.com for more information and personalized assistance.