For one reason or another, mortgage qualification hurdles may pop up when buying a home. A common issue is a high debt to income ratio. This means the borrower(s) monthly payments compared to the income is too high for mortgage approval. These days, the culprit often causing high debt to income ratios is student loan debt. Especially younger, first time home buyers have this issue. But, a potential solution to this qualification issue is an FHA non-occupant co-borrower. Basically, adding a co-signor.
FHA Non-Occupant Co-Borrower
Government loans, which include VA, USDA, and FHA loans, are created solely for primary residences. Furthermore, the main priority of these loans is to provide affordable homeownership opportunities. Thus, they cannot help buyers amass investment or vacation homes. As mentioned above, sometimes qualifying for homeownership comes up a little short. Although, FHA offers something the other government loans do not: A non-occupying co-borrower.
How a Co-Borrower Works
You may have guessed by the name of how this works. FHA allows another borrower who will not live in the mortgaged property, to co-sign on an FHA loan. In these cases, all borrower income, liabilities, and assets are pooled together for qualification. Keep in mind that approvals must factor each borrower’s credit profile. So, a credit score of 800 would typically not make up for a 500 score. Although, a better-qualified co-borrower often strengthens a weaker borrower. A borrower by itself may not qualify, but paired with a co-borrower, may qualify.
The FHA non-occupant co-borrower is even allowed to have the only income in an FHA transaction! That’s right; the occupying borrower does not even need an income. A co-borrower could carry all borrowers’ debt with just one income. Of course, that assumes it is sufficient income. This is a perfect scenario for a parent looking to help their child buy a home. Buying a home for a college student rather than renting an apartment is a great example.
Finally, down payment may come from either or even come as a gift from an allowed source!
Who is Allowed as an FHA Non-Occupant Co-Borrower?
The non-occupying co-borrower must be a “family member” to use the lowest down payment of 3.5%. FHA defines family members as one of the following:
- Child, parent, or grandparent
- Spouse or domestic partner
- Foster child
- Brother or stepbrother
- Sister or stepsister
- Uncle or aunt
- Legally adopted child – includes child placed with the borrower by an authorized agency for legal adoption
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
FHA defines a child as a son, daughter, stepson, or stepdaughter. Additionally, parents or grandparents include a step-parent or grandparent as well as a foster parent or foster grandparent.
Generally, FHA does not allow borrowers to have two FHA loans at once. There is an exception called the 100-mile rule. But, if an FHA non-occupant co-borrower currently has an FHA loan, it is okay to co-sign on another FHA loan.
Finally, non-occupying co-borrowers or co-signers must either be U.S. citizens or have a principal residence in the U.S.
Non-Occupying Co-Borrower Scenarios Limited to 75% LTV
So, to use the lowest FHA down payment, the non-occupying co-borrower must be considered family, except in specific scenarios. The following are limited to 75% of the purchase price or appraised value, whichever is less.
- Non-family members
- Buying or refinancing two to four-unit property
- Family member selling to a family member who will be a non-occupying co-borrower
So, notice the last two examples will limit family member co-signors to 75% as well.
Borrower & Co-Borrower Eligibility
To be eligible, all occupying and non-occupying co-borrowers and co-borrowers must take title to the property in their name or a Living Trust at settlement. Furthermore, each must be obligated on the note or credit instrument plus sign all security instruments.
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Fannie Mae Non-Occupying Co-Borrower Loans (Freddie Mac too!)
Benefits of Conforming Loans
- No mortgage insurance if 20% down
- No funding fee
- Potentially cheaper mortgage insurance
- PMI cancels once under 78% LTV (80% if borrower requested)
Trailing Spouse Income
Occasionally, one spouse will occupy as a primary residence, but the other spouse cannot. Often, the reason is one spouse needs to relocate for work where the other is not able to transfer yet. So, the spouse staying behind could be the non-occupant co-borrower for the other spouse!
So if you are a buyer and are interested in purchasing a home yet don’t qualify on your own, ask about using a co-borrower. One thing to remember is that a co-signor is on the mortgage just like the borrower, so if there is a late payment, foreclosure, or similar, it will affect both the borrower and co-borrower.
Will Co-Signing Affect My Credit?
Either co-signors ask this question or should ask it. The reason is the new mortgage will report on all borrower’s credit reports. No matter if a co-signor or not. The borrower and co-signor should not overlook this for a few reasons. It could make a co borrower’s qualification for other loans more difficult. Also, late payments made by the borrower will affect the co borrower’s credit. Even worse, foreclosure affects all borrowers too! Just remember that a co-signer is as responsible as the borrower.