In most cases, using an FHA loan is pretty straightforward. You (and possibly your spouse) apply for the loan, using your incomes and credit profiles to qualify for a single-family property. It’s fairly simply, as the people purchasing the house will also be the ones living in, or “occupying” the house.
But what if you need help with qualification? Is it possible for someone who is not going to live in the house, known as a “non-occupant,” to be listed on the loan?
Under certain circumstances, a non-occupant co-borrower can be listed on an FHA loan. There are rules, regulations, and restrictions, but if you and your co-borrower qualify, it can bring a variety of benefits, including a greater chance of approval and the opportunity to purchase a larger or more expensive home.
FHA Non-Occupant Co-Borrower
As the name suggests, with an FHA non-occupant loan, one or more people listed on the loan documents do not have to live in the house. At least one borrower does need to live on the property (this is the “occupant”) but any other borrowers do not. (These are the “non-occupants.”)
Essentially, the FHA allows another borrower to be responsible for payment of the loan even if they do not live on the property.
With these loans, all borrowers (occupants and non-occupants) will have their incomes, debt loads, and financial assets pooled together, essentially (but not exactly) treating them as one. Credit scores for all borrowers can be a little more complicated, but final loan approval must factor in all borrowers’ credit scores. So a high credit score of 750 will not make up for another borrower’s sub-500 score. However, a highly qualified borrower can tilt the scales for a weaker borrower.
In some cases, the non-occupant borrower’s income, assuming it is large enough, can be the majority when pooled together, and it can even be the only income. Technically, the occupying borrower does not even need to have an income, assuming other conditions are met. (This may not be the case for some borrowers.)
The Advantage of a Non-Occupant Co-Borrower
Using a co-borrower on your mortgage application can bring a variety of benefits. Foremost, however, is simply increasing your chances of approval.
While FHA loans are designed to increase access to mortgages, there are still requirements for credit, debt-to-income ratio, and other factors. In short, it’s still possible to be rejects for an FHA loan, especially if your credit is low. With a non-occupant co-borrower, however, you may be able to secure financing for the loan when issues like credit or income hold you back. You could have a high debt-to-income ratio, but a co-borrower’s income (and lack of debt) could move the ratio in your favor.
Even if approval is not necessarily an issue, a co-borrower could still help you qualify for a larger loan. This could mean more space, a more luxurious house, or a home in a more desirable neighborhood.
Co-Borrowing: The Risks
There are advantages to using a non-occupant co-borrower on your FHA loan, but there are also risks, specifically to the non-occupant. Basically, as a co-borrower you are just as responsible for the mortgage payment as the person living on the property. If the occupant fails to pay the mortgage, the bank could seek payment from your income, come after your assets, and ruin your credit profile. This is a significant risk that needs to be considered before signing on a loan.
Rules for Non-Occupant Co-Borrower (Who Can Co-Borrow?)
If using an FHA non-occupant loan would be right for you, there are some things you should consider. First of all, only certain family members are allowed to be listed as co-borrowers.
Eligible family members include:
- Adult children (Including stepchildren)
- Parents (Including stepparents)
- Grandparents (Including step-grandparents)
- Domestic partner
- Aunts and uncles
- In-laws (mother, father, sister, brother, son, daughter)
If the non-occupant is one of the above family members, you should be eligible for an FHA loan with only a 3.5% downpayment.
Non-Family Members Still Eligible, But Large Downpayments Apply
If the non-occupant is not a family member as listed above, they can still be used on the loan documentation. However, only 75% of the purchase price will be financed; you will need to bring a 25% downpayment! Looking at a $400,000 home? Expect a downpayment of $100,000. This creates significant restrictions for most borrowers.
Multiple FHA Loans: The Co-Borrower Exception
There is also a rule for typical FHA loans that borrowers are not allowed to have two FHA loans at once. So as an individual, you can’t have FHA loans on two homes. With FHA non-occupant loans, however, there is an exception. In this case, the non-occupant co-borrower could have an FHA loan on their personal home and still be eligible.
FHA Loans for Non-Occupant Investors?
While most FHA non-occupant loans will be used to help someone purchase their personal property, many wonder if this form of financing can be used to purchase an investment, such as a residential rental property.
With FHA loans, at least one listed borrower has to occupy the home for a certain period, usually between one to two years. After that period is over, you can move out of the property and place the home as a rental. So at this point, you still have the FHA loan but are not occupying. But when you took out the loan you were an occupant, so it’s really not an FHA non-occupant loan.
The other situation is purchasing a multiunit property. The occupant requirements, however, do not change, so you have to live in one of the units for about a year or two. The rest of the units (FHA allows for up to four) can be rented. So while you are not occupying the entire property, by occupying one unit you are, technically, an “occupant.” So once again this really doesn’t qualify as an FHA non-occupant loans, although it can work as an investment.
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Interested in using an FHA non-occupant loan with a co-borrower? Contact our staff today and we’ll walk you through the details of using the option for your next purchase!
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