When someone can’t qualify for a loan, they often consider using a cosigner. Whether it’s a mother, father, sibling, or helpful friend, a cosigner can help potential borrowers secure the loan they need for a vehicle or for a home.
However, there is another, slightly different option for mortgage loans: a non-occupant borrower. A non-occupant borrower is able to use their income and credit profile to help another person qualify, but there are some requirements that need to be met.
If you are considering being a non-occupant borrower or using a non-occupant for your own mortgage loan, make sure you understand all the details for this helpful option.
What Do We Mean By “Non-Occupant” Borrowers
A non-occupant borrower is pretty much exactly what it sounds like. This is someone who is also listed on the loan but is not living in the home. Essentially, a non-occupant can be anyone, as there are not relational requirements between the occupant and the non-occupant borrowers. For example, the non-occupant borrower does not need to be a parent or child of the main borrower; they could simply be a friend, distant relative, or (theoretically, at least) a complete stranger.
However, the non-occupant borrower cannot have a financial interest in the sale of the property; they cannot be a real estate agent, contractor, or developer who would profit from the sale of the house. Other than that, there are no limits to who can be a non-occupant borrower.
Non-Occupant Borrower is NOT a Cosigner
Sometimes a non-occupant borrower or “co-borrower” is confused with a cosigner. While these two roles are similar, there are important differences. A cosigner will have no official ownership of the property, but will be listed as a responsible party on the mortgage note. While they are not liable for repaying the obligation, they will become liable if the loan goes into default.
A co-borrower, on the other hand, must be listed on the title of the property, giving them ownership status in the home. While payment plans will be worked out between the occupant and the non-occupant, a non-occupant borrower is responsible (as far as the lender is concerned) for repayment of the loan.
The biggest difference, however, is ownership. As a cosigner, you simply pledge to support the loan on someone else’s property if they go into default; you don’t own anything tied to the loan. As a non-occupant borrower, you have just as many ownership rights as the other person.
How Lenders Work with Non-Occupant Borrowers
So how is this unique situation treated by lenders? A lot will depend on the nature of the lender, as well as the specific loan type you are seeking (FHA, jumbo, or refinancing, for example), but there are some common threads that all lenders will consider.
“Income Balance” is Not an Issue
One of the most common concerns that people have with non-occupant borrowers is that there will be a requirement for income between the occupant and the non-occupant. Borrowers are concerned that there should be a balance between the two incomes, with one earning a comparable amount to the other. (45% to 55%, for example.) In the past, there was a requirement for non-occupant incomes, but this been phased out to allow for greater borrowing flexibility.
Currently, there is no income requirement for one or the other; as long as the total income amount reaches the lender’s requirements for the loan, there should be no issues.
Therefore, you can have situations where the non-occupant’s income is 50% of the qualifying income, and you can have situations where the non-occupant’s income is 75%. If fact, it’s possible for the non-occupant borrower to represent 100% of the qualifying income.
How Much of the Costs Can Be Contributed by the Non-Occupant?
Another concern that borrowers have is how much of the costs can be contributed by the non-occupant. For example, can the non-occupant borrower contribute 75% of the costs for closing, down payments, and reserve requirements, or do these need to come primarily from the occupying borrower? The truth is, there is no limit to how much can be contributed by the non-occupant.
In the past, Freddie Mac, which was the only organization to have such a rule, used to require that the occupant borrower contribute at least 5% of the initial costs. Now that rule has been retired and there are no organizations that require a certain amount from either borrower. This gives you even more freedom and flexibility when seeking a loan with a non-occupant borrower.
Different Loan Types Will Have Different Loan Requirements
The previous two points about non-occupant borrowers generally apply to all types of loans, but you will find, as you dive further into the details, that there are slight variations depending on what type of loan you secure.
FHA loans generally have flexible credit guidelines, so, because qualification can be easier, non-occupant borrowers are not as common with these types. The FHA does, however, allow for two non-occupant borrowers, but they must have a qualifying credit score and live in the United States. Like other loans, the name of the co-borrower will need to be listed on the mortgage and title.
Conventional loans also allow for non-occupant borrowers. This option is available for many people, and the lender will use the lesser of the borrower’s credit scores, but the co-borrower will need to have a minimum credit score of 620. For conventional loans, it may be possible to have the non-occupant not listed on the property title, but they will need to be listed on the mortgage loan.
A Helpful Team with a Dedication to Service
If you have more questions about using a non-occupant co-borrower, contact the team at San Diego Purchase Loans. We’ll help you understand the benefits and risks of using co-borrowers and cosigners so you can make the right choice for your financial future.
From first-time homes to using retirement income for qualification, you’ll get the right advice on all your mortgage issues!
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