FHA nonoccupant co-borrowers: Guidelines and how they can help

FHA loans appeal to many aspiring home buyers because the financial requirements are more lenient. If you’re still worried you won’t qualify, an FHA nonoccupant co-borrower can help. Read on to learn more about how an FHA nonoccupying co-borrower can help you buy a home.

What is an FHA loan?

Federal Housing Administration loans are offered by private lenders and backed by the federal government. That backing reduces the lender’s risk and encourages them to provide loans that meet the FHA’s requirements.

The FHA allows lenders to offer mortgages to borrowers with a credit score between 500 and 579, with a 10% down payment. Lenders, including Rocket Mortgage®, offer FHA loans to borrowers with a credit score of at least 580 and a down payment of 3.5%.

FHA loans also have limits on how much you can borrow and can only be used to buy a primary residence. Borrowers must pay an up-front and annual mortgage insurance premium, or MIP, to protect the lender in case of default.

“Credit score isn’t the only thing on the FHA checklist. Other requirements must be met to be eligible,” says Omer Reiner, a REALTOR® in Miami. “As with any home loan, there has to be an appraisal to ensure the property is safe to live in. And the appraisal must be conducted by an FHA-approved professional.”

Does the FHA allow nonoccupying co-borrowers?

Yes, FHA loans allow nonoccupying co-borrowers, who are co-borrowers on the loan but don’t live in the home. At least one borrower on an FHA loan must occupy the property being financed as their primary residence.

A nonoccupying co-borrower can help the primary borrower qualify for an FHA loan by providing additional qualifying income and improving the overall debt-to-income ratio (DTI). This can make the eligibility process easier for borrowers who may not otherwise qualify for an FHA loan.

Nonoccupying co-borrowers aren’t unique to FHA loans. Veterans Affairs loans allow them, in certain circumstances, as do some conventional loans.

If you want to pursue a non-FHA loan with a nonoccupying co-borrower, check with your chosen lender first.

How does co-borrowing work?

Co-borrowing is a relatively unique option for home buyers. In this scenario, the FHA will allow another borrower who will not live in the home being financed to co-sign the FHA home loan. When applying for a mortgage loan with a nonoccupying co-borrower, the lender will consider the borrowers’ combined income, liabilities, assets, and credit scores.

Since a nonoccupying co-borrower can be included in the underwriting process, the occupying borrower often sees their approval chances improve. Ideally, a nonoccupying co-borrower has a higher income, which can increase the primary borrower’s chances of achieving homeownership. If you have a high DTI ratio, the co-borrower’s earnings and credit report can reduce it.

Keep in mind that most loans use the lower median FICO® Score between all the borrowers on the loan, so the non-occupying co-borrower doesn’t necessarily need to have a higher credit score than the primary borrower.

FHA guidelines for non-occupying co-borrowers

One of the best reasons to get an FHA loan is that borrowers with lower credit scores are eligible.

While you need a credit score of at least 620 to get a conventional loan, borrowers with a score of 580 and a down payment of 3.5% can get an FHA mortgage. Some lenders also offer FHA loans to borrowers with a credit score between 500 and 579, with a 10% down payment.

If you want to add a nonoccupying co-borrower to your FHA loan application and put down only 3.5%, the co-borrower must be a family member. The FHA defines family members as:

• Parents, including stepparents and foster parents
• Spouses or domestic partners
• Children, including stepchildren, foster children, and adopted children
• Siblings, including stepsiblings
• Grandparents, including step-grandparents and foster grandparents
• Aunts and uncles
• In-laws, including a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

If the nonoccupying co-borrower isn’t a family member, you’ll have to make a larger down payment. In general, you need a 25% down payment if the co-borrower is not a family member, or if a family member is selling the property to another family member. The 25% down payment rule also applies to a two- to four-unit residence.

Regardless of family status, a nonoccupying co-borrower must be an American citizen or have a principal residence in the United States.

You can have up to four co-borrowers on an FHA mortgage. Additionally, a co-borrower must meet eligibility requirements, such as having a qualifying credit score, a DTI ratio, and sufficient income to proceed.

FHA loan co-signer vs. nonoccupant co-borrower: Understanding the difference

A co-signer on an FHA loan is different from not the same as a nonoccupant co-borrower.

A co-signer’s finances are included in getting loan approval, and the co-signer takes responsibility for repaying the loan, but has no legal ownership interest in the property.

Getting a co-signer can improve your approval odds as a primary borrower. Case in point: The co-signer’s earnings can lower your overall DTI ratio. However, keep in mind that co-signers are responsible for loan repayment if you, the primary borrower, fail to make payments or default on the loan.

A nonoccupant co-borrower, on the other hand, holds ownership interest in the property – even though they don’t occupy the home. This person is required to take the title to the property at settlement and is also responsible for the mortgage note. At closing, the co-borrower must sign all the closing documents, which makes them legally liable for the property.

“A co-signer isn’t an owner of the property but does agree to pay back the mortgage,” says Dennis Shirshikov, a professor of finance and economics at City University of New York/Queens College. “A nonoccupant co-borrower is legally obligated to repay the loan but shares ownership of the property. This difference is extremely relevant: It’s a question of not just to is ultimately responsible, but of who can make decisions regarding the home.”

Pros and cons of FHA nonoccupant co-borrowers

When considering how to proceed with an FHA loan, it can be helpful to review some pros and cons of using a non-occupying co-borrower.

The bottom line: A nonoccupant co-borrower increases loan success

Convincing a nonoccupant co-borrower to sign your FHA mortgage loan with you could fast-track your path to homeownership. Your lender will review both borrowers’ income, assets, debts, and credit scores together, which can improve your chances of FHA loan approval. But you need to carefully consider the impact of using a nonoccupant co-borrower, especially one who is not a family member. Using a non-family member may require 25% down rather than 3.5%.

Ready to move forward? Begin your application with Rocket Mortgage today.