Work-around a BAD Co-Sign to Assume an FHA?

[John Winters]

Hey BP ~

Long (horrible) story kept short, I co-signed/co-owned on a property YEARS ago. I signed when I was about 22 (should have known better), and it remained open on my credit for years.  After not refinancing me out (as agreed), the primary co-signer/owner then also missed consecutive payments in recent years. I had to push to sell the home over the past two-to-three years.  I did not ever pay towards the mortgage, only helped with co-sign, and received some equity share.  When I pushed for the sale, the co-owner stopped paying the mortgage completely -- for 12 months straight (basically all of '2024').  He drained some equity, and the home was sold, closing a few months ago, in January 2025.

*My own credit, work history, debt-to-income, savings, etc. otherwise, is excellent -- all strong, zero negative marks. I have since thankfully been approved for non-QM mortgages (with high deposits and rates) and hard-money. I have not used any yet.

I found a duplex that I would like to buy, as a primary residence; the FHA loan is assumable at 2-3%.

Unfortunately, the lender, of course, automatically denies me because the person for whom I co-signed did not pay the mortgage for 12 months, with the final month being December 2024.

I take my accountability for not knowing better and for not forcing a sale much earlier.

Does anyone have any ideas how I can work-around this to assume the 2-3% FHA mortgage?

I understand that it looks wild.  It's also evident the entire rest of my credit is great.  I do have bank statements that reflect the co-owner paying for it as agreed, while it was being paid.

**Any possibility of opening an entity (LLC or otherwise) that I could use to assume the mortgage & close? Again, my credit score is great, but if anyone digs into the profile, the missed payments from the co-signed property are clearly reported. Also, I realize FHA mortgages are intended for primary residences, not investments/businesses (LLCs). Although, I do believe there are some rare occasions in which an LLC could be approved for an FHA?

The situation is unfortunate.  I know this is a long shot, but I figured I'd put it out here and see if anyone has some insight and/or ideas for a work-around.  Thank you in advance for any feedback!

john

[Lauren Robins]

Hey John! 

First off, thank you for laying out your situation so clearly. A lot of people have faced similar issues after co-signing, especially at a young age, and it’s commendable that you’ve managed to maintain a strong financial profile despite the fallout. The fact that your credit score, work history, savings, and debt-to-income ratio are all solid — and that you’ve already been approved for non-QM and hard money loans — shows you’ve handled this responsibly. Still, it’s incredibly frustrating that a decision made years ago continues to impact you, especially when you never missed a payment yourself.

Now, regarding FHA assumptions: yes, FHA loans are assumable, and the terms you're looking at (2-3%) are phenomenal, especially in today's market. However, FHA requires that anyone assuming a loan meets their full underwriting guidelines — and that includes an evaluation of your recent mortgage history. Since you were legally responsible for a mortgage that was delinquent for 12 consecutive months (even if you weren't the one making payments), FHA lenders are bound by their guidelines to treat that as a serious credit event. Unfortunately, it's usually an automatic disqualification, regardless of context.

There are a few potential paths forward. The most straightforward — though not ideal — option is to wait until the 12-month window has passed from the last missed payment. If the final late was December 2024, that would make you eligible around January 2026. This is the cleanest route in terms of meeting FHA standards without complications, but it obviously doesn’t help if you want to move on this duplex now.

That said, there’s a very slim possibility of success if you prepare a compelling appeal for an exception. This would require thoroughly documenting the fact that the co-borrower was making all payments (bank statements, deposit records, etc.), that you never personally paid or benefited from the mortgage, and ideally showing some legal or written agreement proving it was always their responsibility. Some lenders may submit that to FHA for a manual underwrite or exception, though this is rarely approved — it depends a lot on the lender’s willingness to advocate on your behalf.

As for the idea of using an LLC or entity to assume the FHA loan — unfortunately, FHA does not allow loan assumptions by entities. FHA loans are strictly for owner-occupied properties, and assumptions must be taken over by an individual who will reside in the home. An LLC or trust (even a disregarded one) can't assume the mortgage in this case.

So, short term, your best shot is either a manual underwrite exception (with strong documentation and a persuasive story), or pursuing the duplex using a different financing route — perhaps non-QM or hard money — and then refinancing into a conventional loan or assumption down the line once the 12-month window clears. It’s not the easiest route, but there is still a path forward if you're willing to get a little creative and flexible.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.