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

A Federal Housing Administration (FHA) loan offers borrowers the chance to obtain a mortgage loan with less strict financial requirements. It’s an especially useful choice for young people, students and families. But for those struggling to qualify for this loan type, the boost of an FHA non-occupant co-borrower could be exactly what’s needed to realize the goal of homeownership.

Take a closer look at how an FHA non-occupant co-borrower could be a helpful solution for prospective homeowners.

What Is An FHA Loan?

FHA loans are government-backed loans originated by private lenders through the Federal Housing Administration (FHA). These loans often come with lower interest rates and credit score requirements, but also have limitations regarding how they can be used. For example, buyers cannot use an FHA loan to finance the purchase of an investment or vacation property.

Does The FHA Allow Non-Occupying Co-Borrowers?

Yes, the FHA allows non-occupying co-borrowers. This means you can have a co-borrower on an FHA loan who doesn’t make the home their primary residence. However, at least one borrower must live in the house as their primary residence.

Non-occupying co-borrowers can help borrowers qualify for an FHA loan by providing additional income and improving the debt-to-income ratio (DTI). This can make the qualification process easier for those who might not meet the requirements on their loan.

It’s important to note that non-occupying co-borrowers aren’t unique to FHA loans. Other loan types, like VA loans in certain circumstances and some conventional loans, also allow for non-occupying co-borrowers.

How Does Co-Borrowing Work?

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 home 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 that can increase the primary borrower’s chance of achieving homeownership.

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

FHA loans are desirable because they feature a lower 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 and still pay only 3.5% down, the co-borrower must be considered a ‘family member’ by the FHA.

The FHA considers the following relations to be family members:

• 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 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. The LTV rule of 75% also applied if the property is a two- to four-unit residence.

Regardless of family status, a non-occupying co-borrower must either be a U.S. citizen or have a principal residence in the U.S. While the choice to have more than a single co-borrower is up to you, the maximum number of co-borrowers on an FHA mortgage is capped at two. Additionally, a co-borrower must meet certain eligibility requirements such as having a qualifying credit score, debt-to-income ratio (DTI) and income to move forward.

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

While a co-signer may seem like the same thing as a co-borrower, there is actually a crucial difference between the two entities.

A co-signer on an FHA loan doesn’t hold any ownership interest in the property. Although FHA co-signers are obligated on the mortgage note, they have no legal rights to the property.

On the other hand, a co-borrower is required to take the title to the property at settlement and is also 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.

Pros And Cons Of FHA Non-Occupant Co-Borrowers

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

Pros

• Borrowers can potentially obtain a higher loan amount than they would have gotten on their own.
• Homeowners can build equity in the property while having a reliable backup on the mortgage.
• The co-buyer is able to be removed if the primary owner refinances.

Cons

• The co-buyer must submit a separate application and go through the full mortgage approval process.
• The consequences of default will impact equally on all parties, including financial penalties and lowered credit scores.
• There’s a potential lack of independence for homeowners from co-buyers.
• The interest rate is based on the lowest median credit score of the various borrowers.
• Non-occupant co-borrowers don’t get tax deductions for the mortgage unless they are making mortgage payments.

The Bottom Line: A Non-Occupant Co-Borrower Increases Loan Success

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 start your mortgage application for an FHA loan with Rocket Mortgage^Ⓡ today.