Every Loan Counts Against You? Not Under This VA Guideline

Everyone says every loan on your credit report counts against you when you apply for a home loan. The VA guideline says certain ones don't. Arabesque found that out the useful way: by asking. She is a fictional VA loan applicant house hunting near Hunter Army Airfield in Savannah, GA, and she has a loan secured by her own deposited savings. She worried it would count against her qualification.

Why the worry makes sense

A credit report lists loans. It does not explain why a loan exists or what backs it. When Arabesque looked at her report, she saw a loan and assumed every lender would treat it like any other debt. That is the assumption many applicants make, and it is worth testing before you decide your qualification is in trouble.

What the VA guideline says

The VA guideline covers this in Chapter 4, Topic 5, Subsection g, Loans Secured by Deposited Funds. It reads:

"Certain types of loans secured against deposited funds in which repayment may be obtained through extinguishing the asset, do not require repayment consideration for loan qualification."

That is the exact text, and I am not adding to it.

Reading it one phrase at a time

"Certain types of loans" is the qualifier. The guideline does not say every loan gets this treatment, so the loan has to fit the description.

"Secured against deposited funds" means money is held on deposit and the loan is tied to it. In Arabesque's story, her own savings sit in the deposit account that backs the loan.

"Repayment may be obtained through extinguishing the asset" means the loan can be repaid by using up the deposited asset.

"Do not require repayment consideration for loan qualification" is the payoff. For loans that fit the description, the repayment does not have to be considered when qualifying.

The overlay question

The guideline is one layer. A lender can add its own stricter rules on top, and those are called overlays. The guideline may say a loan does not require repayment consideration, while a particular lender may still handle it differently. So the question is not only what the VA guideline says. It is also whether your lender applies any overlay. Better to learn that before you fall in love with a house.

What Arabesque says to her lender

Arabesque does not argue. She asks, using the name of the guideline:

"My loan is secured by funds on deposit. Can you review it under the VA guideline, Chapter 4, Topic 5, Subsection g, Loans Secured by Deposited Funds, and tell me whether your lender applies any overlay?"

Then she requests the loan agreement showing the deposit account as collateral, and she asks what else the underwriter needs. That agreement is the document that shows the loan is tied to her deposit, so she gets it in hand early instead of waiting to be asked.

What you can do today

Find the loan agreement for any loan you hold that is secured by your own deposited funds. Check that it shows the deposit account as collateral. Then use the words above with your lender and write down the answer about overlays. If one lender applies an overlay, you have learned something useful about that lender, and you can ask a different one the same question.

None of this means a loan is automatically ignored. It means you have a specific guideline to point to and a specific question to ask, instead of a vague worry.

Where I come in

I am Jason Sharon, a licensed mortgage broker with Home Loans Inc, and I am licensed in Georgia among other states. Arabesque is an illustrative character, not a real client, but the situation comes up often enough to be worth knowing. If you have a loan secured by your own deposit and you are planning a VA purchase, call me at 843-LOW-RATE and I will walk you through it. I find the path.

Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.