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FHA Non-Occupant Co-Borrowers: Guidelines And How They Can Help

Sarah Sharkey3-minute read

January 12, 2023


FHA loans are one type of loan that offers borrowers the chance to buy a home with the help of less stringent financial requirements. It’s an especially useful choice for young people, students, and families. But if you are struggling to qualify for this loan type, the boost of an FHA non-occupant co-borrower could be exactly what you need to obtain your goal of homeownership.

Let’s take a closer look at how an FHA non-occupant co-borrower could be the solution you’ve been looking for.

Does The FHA Allow Non-Occupying Co-Borrowers?

FHA loans are government backed loans administered through the Federal Housing Administration. Many first-time home buyers use FHA loans to obtain a primary residence. But borrowers cannot use an FHA loan to finance the purchase of an investment or vacation property.

The residency requirements are not unique among non-conforming loans. However, FHA loans offer a unique twist by allowing non-occupant co-borrowers. With the help of a non-occupying co-borrower, the qualification process for an FHA loan can be much easier.

How A Co-Borrower Works

Co-borrowing is a relatively unique option for home buyers.

The FHA will allow another borrower, who will not live on-site, to co-sign on an FHA loan. When applying for a mortgage loan with a non-occupying co-borrower, the lender will take all of the income, liabilities, assets, and the credit score of both borrowers into account.

Since a non-occupying co-borrower can be included in the underwriting process, the occupying borrower often sees an improvement in their approval chances. Typically, non-occupying co-borrowers have a higher income or better credit score that can increase the occupying borrower’s chance of achieving homeownership.

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FHA Guidelines For Non-Occupying Co-Borrowers

Another perk of the FHA loan is the low down payment option. Depending on your qualifications as a borrower, you may only have to put down 3.5% on a mortgage.

But if you want to add a non-occupying co-borrower to your application, they must be considered a ‘family member’ by the FHA. Otherwise, you may have to make a larger down payment.

The FHA considers the following relations to be family members:

  • Child, parent, or grandparent
  • Step-parent or step-grandparent
  • Foster parent or foster grandparent
  • Spouse
  • Domestic partner
  • Adopted child
  • Foster child
  • Brother, step-brother
  • Sister, step-sister
  • Aunt or uncle
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

If the non-occupying co-borrower isn’t a family member, you’ll have to make a larger down payment. In general, the loan-to-value (LTV) is limited to 75% if the co-borrower is not a family member or if a family member is selling the property to another family member. For borrowers in these situations, a 25% down payment is required.

Regardless of the familial status, a non-occupying co-borrower must either be a U.S. citizen or have a principal residence in the U.S. Additionally, a co-borrower must meet certain eligibility requirements such as having a qualifying credit score, DTI, and income to move forward.

Although there is not a defined limit to the number of co-borrowers that can be added to the loan, the application can get more complicated with more people involved.

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FHA Loan Co-Signer Vs. Non-Occupant Co-Borrower: Understanding The Difference

If you’ve heard of a co-signer, you might be wondering what’s so different about a non-occupant co-borrower. There are some key things to be aware of.

A co-signer on an FHA loan doesn’t hold any ownership interest in the property. And although FHA cosigners are obligated on the mortgage note, they have no liability for repaying the obligation.

On the other hand, a co-borrower is required to take the title to the property at settlement and is obligated on the mortgage note. At closing, the co-borrower must sign all of the security instruments, which puts the new home firmly in their liabilities.

As a co-borrower, the responsibilities are more extensive. And with that, it can be challenging to find someone willing to sign up for this financial commitment.

Why Use A Non-Occupant Co-Borrower?

Adding a non-occupant co-borrower to your FHA loan application comes with certain challenges. But it can be worth the extra effort.

That’s especially true if you are a young home buyer with family members willing to help. A non-occupant co-borrower can help you lock in reasonable housing costs.

Plus, anyone with extensive student loan debt or negative marks on their credit report can benefit from having a more creditworthy co-borrower on their application. The co-borrower could open the door to lower interest rates, a relief for any budget.

The Bottom Line

A non-occupant co-borrower could be a solution for those pursuing homeownership through an FHA loan. With the help of a higher income and better credit score on your loan application, more affordable homeownership could be within reach.

If you are ready to move forward, take a minute to get preapproved for an FHA loan today.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She’s covered mortgages, money management, insurance, budgeting, and more. She lives in Florida with her husband and dog. When she's not writing, she's outside exploring the coast. You can connect with her on LinkedIn.