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 home ownership opportunities. Thus, they are not built to help buyers amass investment or vacation homes. As mentioned above, sometimes qualifying for home ownership 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 how this works. Basically, 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?
In order to use the lowest down payment option of 3.5%, the non occupying co borrower must be a “family member”. FHA defines family members as one of the following
- Child, parent, or grandparent;
Spouse or domestic partner
Legally adopted child – includes child placed with the borrower by an authorized agency for legal adoption
Brother or stepbrother
Sister or stepsister
Uncle or aunt
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 foster parent or foster grandparent.
Generally, FHA does not allow borrowers to have 2 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 OK 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
- Non-family members
- Buying or refinancing two to four unit property
- Family member selling to family member who will be a non occupying co borrower
Borrower & Co Borrower Eligibility
Fannie Mae Non Occupying Co Borrower Loans (Freddie Mac too!)
That’s right! FHA is not the only one allowing co borrowers outside the household. Both, Fannie Mae and Freddie Mac conforming loans allow non occupying co borrowers.
Benefits of Conforming Loans
- No mortgage insurance if 20% down
- No funding fee
- Potentially cheaper mortgage insurance
- PMI cancelling 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 relocate yet. So, the spouse staying behind could actually 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 us about using a co-borrower. One thing to remember though is that a co-signor is on the mortgage just like the borrower so if there is a late payment, foreclosure, or similar, it would affect both the borrower and co-borrower.