Sometimes you just need a little help. Sometimes achieving a goal or reaching a milestone just can’t quite be fully accomplished without the benevolent aid of others.
It might sound odd at first but that same assistance is relatively common when someone is buying a home.
Those needing a little extra help buying a home are typically first time home buyers but help can also be applied to a family member qualify for a home or even for a place in which to retire. These kind folks in the mortgage world are referred to as “non-occupying co borrowers” and as the name implies, they are cosigners on the mortgage being used to finance the property but they don’t intend to live in the residence. Here are some ways to take advantage of programs that allow for a non-occupying co borrower.
The Decision
When mortgage lenders evaluate a loan application they review the applicant’s credit, income and assets. The lender needs to determine if there is a history of responsible credit as well as having enough income to cover current obligations as well as the new mortgage and associated costs. In addition, there needs to be a down payment and funds for closing fees. These are the three basic guidelines and there can be different ways to make sure all three are properly addressed but with a few variations most lenders follow the same approval protocol.
A non-occupying co borrower comes into play when there really isn’t enough income to qualify for the new loan or when additional funds are needed for the down payment and closing costs.
Why doesn’t the non-occupying co borrower proceed to go ahead and buy the house on their own and let the family member live in the property?
If those who intend to live in the property are not on the loan application the property being financed will then be considered an investment property or a rental, that’s why. Such a distinction means a greater down payment requirement for an investor property as well as higher interest rates. Properly applied, a loan application with the help of a non-occupying co borrower helps secure a primary residence with a loan that requires less down and a lower rate.
The Credit Question
While non-occupying co borrowers can help with income and assets not much can be done with regard to credit. When lenders evaluate credit they primarily look at credit scores, specifically the middle one. There are three primary mortgage repositories, Experian, Equifax and TransUnion. Each of these three provides a credit score to the requesting lender and all us very same algorithm to calculate the three digit score that ranges from 300 to 850. Because different merchants report to these agencies at different times and maybe not subscribe to all three the credit scores provided to the lender will usually be similar but rarely exactly the same.
For example, a lender orders a credit report on an applicant and in addition to the credit report itself there is also a request for credit scores. The three agencies might provide scores of say 720, 702 and 699. Close, but not the same. The lender then throws out the highest score as well as the lowest and uses the middle one. In this example, the qualifying score is 702.
When evaluating a loan application that has a non-occupying co borrower involved, the lender will certainly require a minimum score from the co borrowers but will also require that same minimum to the individual occupying the property. If there is more than one person on the application who will be living in the home the lender will automatically choose the lowest middle score available. Using this very same scenario of a co borrower occupying the property has three scores of 698, 689 and 701, the qualifying score for the co borrower is 699. As two qualifying scores are 702 and 699 the qualifying score is the lower of the two, or 699.
Non-occupying co borrowers can help with income and assets but their excellent credit can’t overcome poor credit as the lender will use the lowest middle score from the group.
Income and Assets
Okay, now that we understand that poor credit can’t be corrected using credit scores from the non-occupying co borrower, we can address where they can actually help- with income and assets. When using the income of the co borrower the income is added to the total of all applicants on the loan, regardless if the applicant will occupy the property or not. Let’s say a borrower makes $5,000 per month and the non-occupying borrower makes $9,000 per month, the total qualifying income is $14,000.
At the same time, if the assets of the borrower are $500 in a checking account and the non-occupying co borrower shows $50,000 in a checking account, there is now $50,500 available for a down payment and closing costs.
Let’s say that a borrower wants to buy a home and makes $5,000 per month and the debt to income ratios for a particular loan ask that monthly credit obligations, including the future mortgage, should not exceed 43% of the borrower’s gross monthly income. That means the debt ratio requirement is 43. 43% of $5,000 is $2,650. Of this amount let’s also say there is a car payment of $500 and credit card minimum monthly payments of $200. By subtracting $700 from $2,650 that leaves $1,950 for a mortgage payment that will also include a monthly amount for property taxes and insurance. If property taxes are $200 each month and insurance $150, that leaves $1,600 for principal and interest. If we take a sample interest rate of say 4.00% over 30 years, that works out to a loan amount of around $335,000. If the borrower put down 20%, the sales price would then be $418,750.
In this scenario, the borrower could qualify based upon income but didn’t have the funds needed for closing costs nor the down payment.
Let’s take it a step further. The borrower sees a home listed at $600,000 and the non-occupying co borrower has enough funds for a down payment and closing costs. The loan amount is 80% of $600,000, or $480,000. Using 4.00% over 30 years the principal and interest payment is $2,291. Let’s say the monthly amount for property taxes and insurance is $400 and $200 respectively, the total monthly payment for housing is $2,891 which now represents nearly 58% of the borrower’s gross monthly income. This person wouldn’t qualify based upon income alone and needs some help. Assuming the non-occupying co borrower has no additional debt but also has $9,000 of gross monthly income which now adds up to $14,000. The debt ratios are now around 25%, considering the $500 car loan and $200 credit card payment. In this example, the non-occupying co borrower helps out in both income as well as assets.
In the same manner as total income of both borrowers is used is total debt. If the non-occupying co borrower had a significant amount of debt those monthly payments must be counted toward total debt ratios, even though the borrower occupying the property is not listed on any credit account of the individual not occupying the home. That can often mean even though there is additional income to help qualify there can be so much additional debt from the non-occupying co borrower to make the additional income moot.
Finally you’ve read in other featured articles here about how to treat an applicant who has poor credit with one with excellent credit. It’s certainly possible here in California and in other states to remove the applicant from the loan application as long as all remaining applicants, occupying or otherwise, can comfortably afford the individual’s monthly debt that is being left off the application to help qualify from a credit perspective.
As it relates to assets needed for a down payment and closing costs, when the loan is being approved as a primary residence the down payment requirements are lowered. This means less funds are needed in addition to helping qualify due to the lower rates afforded an owner-occupied loan even if there is a non-owner occupant on the mortgage.
Why The Non-Occupying Co Borrower Strategy Works
Let’s look into a scenario where this strategy is one of the more common- sometimes referred to as a “kiddie condo.” A college student enrolls in school and is looking for a place to live while there. The rental rates in the area are standard and when compared to a mortgage payment for a rental property there really isn’t much difference. Instead of finding a place to live the parent of the new college coed agrees to be a non-occupied co borrower and finds a home to buy. The college student will be on the loan application even there may be very little if any income to report. All the qualifying income will come from the parent.
Funds needed for a down payment and closing costs will also be pooled and of course most if not all of the funds needed will come from dad’s checking account. Now, to take this strategy one step further, let’s say the parent buys a three bedroom home near campus and now rents out the other two rooms to other college students. Most often this means there is enough rental income to not only offset the mortgage and associated costs but there’s also a monthly cash flow on the unit. Instead of paying rent each month the parent actually profits from the transaction.
In the event of an FHA loan for example, only a 3.5% down payment is needed and the lowest interest rates available will apply to the new FHA loan because the mortgage will be considered an owner-occupied purchase.
Later when the college student graduates and moves onto another city, the parent can sell the property or continue to keep the real estate as a rental well into the future. Because the initial rate was for a primary residence the cash flow each month will continue to improve as rental rates rise as the principal and interest payment stays the same using a fixed rate loan.
And finally, the new college graduate has an excellent credit score due to the previous years of timely mortgage payment history on the loan.
The reverse can also come into play. Consider a couple getting ready to retire and they want to sell their current home and buy a smaller one. Even with the smaller home and smaller loan amount, the newly retired couple’s debt ratios will be just a bit too high. Instead, the daughter suggests she become a non-occupied co borrower to help them get approved. The retirees feel comfortable with the new monthly payments but the lender not so much, even though there is quite a bit of funds available in a retirement account.
The non-occupant daughter will appear on the loan and with her additional income she can help her parents buy the home they really want.
Finally, another common application using a non-occupying co borrower is for someone who is new on the job or has yet to find one. Perhaps a teacher moves to another city and has a job offer in hand but won’t start teaching until later this fall. A co borrower is needed to help her buy a home and when she gets her new job and receives her monthly pay check she will have enough income to comfortably afford the monthly mortgage payment. Remember, lenders want to see a pay check stub or established income stream covering 30 days and with nothing but a job offer it won’t be until the fall that the teacher will have regular income.
A non-occupied co borrower is not a substitute for monthly income but is most effectively used to bolster an application and less so to make up for some serious deficiencies on the application. When income issues are only temporary or the debt ratios fall out of favor with a particular loan program but the occupant is comfortable with the payment then it’s a great way to help those who can’t necessarily qualify now but might be able to later.
Not all loan programs allow for a non-occupying co borrower and even for those that do there may be additional guidelines placed upon the occupying borrower that makes it impossible for the loan to be approved. For instance, a loan may accept a non-occupying co borrower’s income on a loan application but still require the occupants that need a co borrower to qualify on their own as if the additional income wasn’t even there. In addition, non-occupant co borrowers most often have to be family members.
Loans that accept non-occupying co borrowers aren’t a universal answer to standard loan guidelines but when a non-occupying co borrower is needed in order to close a transaction, it’s a perfect addition to the entire loan file.
Let me provide you with an example of just one such a loan program we have that allows for non-occupant co borrowers to help qualify owner-occupants to qualify. This program can be used for a purchase or a refinance even a cash out refinance.
With regard to assets, the entire down payment can come from the non-occupant co borrower as long as the down payment reflects at least 20% of the value of the home. If less, then 5.0% of the down payment must come from the owner-occupying co borrower. This is for a single family home only and can’t be used to finance multi-unit properties. The non-occupant co borrower doesn’t have to be an immediate family member but if not then the primary occupant’s debt to income ratios cannot exceed 50%.
There are a few other qualifications but this program is perhaps one of the most competitive, solid mortgages for those wanting a non-occupying co borrower in the lending industry.
If this sounds like something you or someone you know might need, it’s time to give us a call or send us an email for more information. Chad Baker can help you out!
