Loan With a Non-Occupying Co-Borrower
Purchasing a home is an aspiration most people have. However, realizing this goal isn’t always that easy when you have been through college accruing student debt.
Saving for a down payment isn’t necessarily easy anyway, but when you have other loans, it will seem more out of reach. If you don’t want to spend years gradually saving up for a down payment, there is a faster option.
If a parent or family member can help purchase the home, this can solve a lot of problems. This is known as a non-occupying co-borrower arrangement, and it allows people to finance a home sooner than they would otherwise be able to.
The FHA, Fannie Mae, and Freddie Mac allow borrowers to co-sign on a mortgage loan with someone who isn’t going to live in the home. If using a co-borrower seems appealing, we take a look at your options to help you finance a home.
FHA Non-Occupant Co-Borrower Guidelines
The FHA makes it easy for a relative to become a non-occupying borrower. Though if the person is not a close or blood relative, things could be trickier.
In any case, some basic requirements need to be met:
- The borrower has a valid social security number
- They need at least two years’ history of employment, residence, and credit
- If the main borrower is a citizen, the co-borrower can be either a citizen or a non-permanent alien
On top of these qualifications, there will also be other rules that need to be followed for the loan to be approved. These will include:
- Their principal residence must be in the United States, unless exempt
- While they cannot live in the home, they will have joint liability for the loan
- They will take title to the home at closing
- They are required to sign all mortgage documents
- They cannot have a financial interest in the home, like being the seller, builder, or Realtor, though there can be exceptions when related to the borrower
- They can’t have been foreclosed on an FHA loan in the past 3 years
The borrower or co-borrower cannot be ineligible for a mortgage through FHA loans. If they are on the HUD Limited Denial of Participation list or other government exclusion lists, they are ineligible. They cannot have a delinquent federal debt or have a lien against their property because they owe money to the government. They also can’t be excluded from being involved in HUD programs.
Military personnel are eligible for maximum financing and are considered occupant owners even if they are living overseas. This applies when the borrower is from their immediate family and will use the home as their primary residence.
Credit score requirements
If the borrower’s credit rating is 580 or above, they are eligible for maximum financing. If their credit score is between 500 and 579, there will be a maximum loan-to-value (LTV) of 90%. If their score is under 500, they will not be eligible for a loan from the FHA. There are some exemptions to these minimums, though underwriting could take longer.
They will use the lower credit score of two applicants and the median score when there are three applicants.
If your credit score isn’t above 580, there are things you should do to improve your credit before you apply for a loan. Making payments on time, reducing your credit usage, using credit cards to build credit, and checking for errors in your credit report could fix problems pushing down your credit score.
FHA down payments
The minimum down payment for one-unit FHA loan will be 3.5 percent, and many first time homebuyers get help with this from parents or other relatives. With these down payment gifts, the lender will need to be sure where the money is from. If the relative becomes a non-occupying co-borrower, they can avoid these issues by paying the down payment of 3.5 percent directly.
Higher down payment is required for 2-4 unit properties.
Fannie Mae Guidelines
If you want to enter into a non-occupant co-borrowers agreement, the Federal National Mortgage Association, better known as Fannie Mae, also backs these types of loans.
Co-Borrower Requirements for a Fannie insured loan include:
- They cannot occupy the home
- They can’t benefit from the sales transaction, so they can’t be the seller of the home, the builder, or the real estate agent involved
- They can have an ownership interest in the property
- They will have to sign the mortgage or deed of trust notes
- They will have joint liability for the note along with the borrower
Additionally, they will need to have their identity confirmed, and provide their Social Security number or an Individual Taxpayer Identification Number.
Debt-to-income Ratio Eligibility
If a young couple is buying their very first property, but they are struggling with the finances, one of their parents might be willing to be a non-occupant co-borrower. This means that the parent will not be living in the home, but their income and debts will be part of the calculation during the underwriting process.
Let’s take a look at an example of how debt-to-income (DTI) ratios could allow eligibility for a loan:
First-time home buyers income; $4,500 per month
Their debts; $2,340 per month
Their ratio; 52% ($2,340/$4,500)
With a ratio of 52%, these first time buyers would not be eligible by themselves for a mortgage. But the parent’s ratio will also be included in the calculation:
Non-occupant’s income; $6,000 per month
Their debts; $1,900 per month
Total combined income; $10,500
Total combined debts; $4,240
Total ratio; 40.38% ($4,240/$10,500)
With a ratio of 40.38%, the combined incomes and debts will allow these first time buyers to be eligible for their mortgage with Fannie.
This example is only for loans that are using Desktop Underwriter. If manual underwriting is required, the first-time buyers would need to have a ratio not higher than 43%. If the Desktop Underwriter software is used, it doesn’t matter what the occupants’ ratio is, just so long as the total is low enough. Using the automated software to analyze the loan application also increases the LTV ratio allowed to 95% instead of 90% with manual approval.
Down payment requirements
If the loan is manually looked at, and the non-occupant co-borrower is used to qualify, the occupying borrower has to pay 5% of the down payment on a one-unit property. This isn’t the case if the LTV is 80% or less. It also doesn’t apply if some or all of their minimum contribution is eligible to be made using gifts, funds from an employer, or grant funds.
A higher down payment is required for 2-4 unit properties.
Freddie Mac Rules
Freddie Mac also offers non-occupying co-borrower mortgages. For this type of home loan, they have a few different rules beyond the normal requirements of FHA Loans.
Where Freddie Mac differs from the other loans is their requirement for the occupying borrower to provide the down payment themselves. This down payment will need to be 5% for a one-unit home or more for 2-4 units, of the purchase price. Money for the down payment can come from:
- Checking or savings accounts
- Money market accounts
- Certificates of deposit
- Retirement accounts if the funds are easy to access
When the online system is used to analyze the application, the exact ratios are decided by the system based on the type of loan.
If the mortgage is manually gone through, the loan-to-value ratio cannot be higher than 90%, meaning that they won’t lend more than 90% of the home’s value. The occupant’s DTI cannot exceed 43% when the loan is manually looked at.
Why You Should Consider Using a Non-Occupying Co-Borrower
When you receive help from a parent or relative, it does mean they will have more control and influence over your financial life. If this is your first home and you want independence from your parents, this arrangement might not seem ideal.
However, borrowers choose this route as it gives them the ability to buy their first home while their income is lower. They might have graduated from college and started on their career path, but their current income will be a lot less compared to their future potential.
After graduation, paying rent and utility bills will take a large proportion of their income, reducing their opportunity to save money to finance a home. Further into their career, saving for a down payment and affording mortgage payments won’t be such a problem, but until then, having a co-borrower makes so much sense.
Student loan debt is another thing that makes buying a home after graduation difficult. While the end of college will be something to celebrate, it does mean that the student loan will suddenly need to be repaid each month. With this addition to monthly outgoings, being able to afford a mortgage begins to look more remote.
Even if your career path promises good increases in your earnings each year, future earning potential isn’t a factor in mortgage applications. The process only looks at your current situation to judge how much can be loaned.
If your credit score isn’t as good as you would like, a co-borrower can greatly improve your eligibility for a home loan. Without the time to build up a good credit history or if you have had some setbacks to your finances, qualifying for a mortgage can be difficult. Even if you can qualify for other types of lending, it still might not be enough for a mortgage lender. But a co-borrower without these problems can allow you to purchase the home you want.
As long as they have enough income to cover their expenses with some room to spare, this can benefit a first-time buyer. The co-borrower also needs to have low debt and a good credit history to help their relative finance a home. This is particularly beneficial to the home buyer when interest rates are lower, before the inevitable increases that make buying a home more costly.
When Does a Non-Occupying Co-Borrower Arrangement Make the Most Sense?
There are some circumstances where this type of arrangement works out better. Aside from a young person or couple who recently graduated from college and are early in their careers, other situations also benefit more from having a non-occupying co-borrower.
When attending college, the student needs somewhere to live. Their parents could, instead of helping them with rent, help them finance a home. Whether they choose a condo or another type of property, if the home is larger, it will allow rooms to be rented out to other students.
This will contribute to paying the mortgage, and when the student finishes college the family has an asset. They might choose to sell the home or continue renting it to other students. Either way, the newly graduated student has a great start to their homeownership and financial life.
When parents are in the later stages of their lives, it is often beneficial to be nearer family. This way, if they have medical issues, their family is closer. As well as that, they can avoid the isolation that can sometimes be felt by seniors.
If the senior doesn’t have the funds to move to a new area, their children can become non-occupying co-borrowers.
This option opens up homeownership to more buyers. These are often first time buyers who wouldn’t otherwise be able to afford homeownership so soon.
While it still means the buyer’s finances are tied to their families, it is a better situation than borrowing money. When you borrow money from family, it can create difficult situations and destroy relationships if money isn’t repaid as expected.
Getting the additional help means you won’t feel like you are wasting money paying rent. While it gives you somewhere to live, it also helps build a solid financial future.
Additional Helpful Resources:
Learn everything you need to know about qualifying for a loan with deferred student loan debt. Brad Yzermans goes into the detail about how each of the major loan programs treat deferred student loan debt and how to help you qualify for more house.
No one wants to be in the position where they regret buying a home. In this article by Debbie Drummond learn the different ways to avoid buyer’s remorse after buying a new home.
Have you ever thought about how buying or selling real estate is like playing chess? This article by Xavier De Buck teaches you how there are different parts to the process of real estate and how they relate to the game of chess.
About the author: This article was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.
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