FHA: The Non-Occupying Co-Borrower Rule

The Department of Housing and Urban Development (HUD) administers FHA loans. This loan type requires a 3.50% down payment, which can be a gift from a relative or down payment assistance from an eligible source. The credit standards for this loan type are easier to qualify for as compared to typical conventional bank loans. One of the greatest benefits of this loan type is that it allows a non-occupant co-borrower. Although, it is not required that they are a relative, it is highly recommended. If the non-occupant is not a relative, the lender will likely require an extensive letter explaining the relationship and why the non-occupant is willing to co-sign on the mortgage. The lender will calculate one debt ratio using both applicants' income and debts to qualify for the mortgage. The non-occupying borrower will need to provide their proof of income, last 2 years tax returns, and recent bank statements. The borrower not occupying the home must live in the United States. Both borrowers are subject to all the mortgage underwriting guidelines and rules of the mortgage. With this said, the non-occupying borrower is liable for the mortgage if the other borrower does not make the payment.

This loan is extremely beneficial to borrower's who cannot document all of their income. For instance, if a married couple applies for a mortgage using both of their incomes, but one of the borrower's does not have an acceptable credit score, their income cannot be used. Without both spouses income, they may not qualify for the mortgage. In this circumstance, the FHA non-occupant rule may be the perfect solution. There are many scenarios where this FHA rule will help a capable individual to obtain a mortgage with a co-signer. Most other financing types would deem a mortgage with a non-occupant borrower as an investment property, thereby requiring a much greater down payment. In addition, investment mortgages have more restrictive underwriting guidelines.

FHA Loan Requirements:

• Employment - Borrower(s) must have a steady employment history with a minimum 2 year employment history.

• Legal Residency - Borrower(s) must have a valid Social Security number, lawful residency in the United States, and be of legal age to sign a mortgage.

• Down Payment - Borrower(s) must have a minimum down payment of 3.5 percent. The money can be gifted by a family member.

• Owner Occupied Residence Only - New FHA loans are only available for individual who intend to live in the property.

• FHA Appraisal - An FHA loan requires that a property meet certain minimum standards. The lender must request an appraisal from an FHA approved appraiser. If the home you are purchasing does not meet FHA standards and the seller will not agree to the required repairs, your lender may allow money to be held in escrow and the repairs to be completed after closing (consult with your lender regarding this option).

• Debt to Income Ratio - The standard debt to income ratios for an FHA mortgage is 31% and 43% of the borrower(s) gross income. The first debt ratio used is 31% of the borrower's gross monthly income, which is the maximum percentage of income that can be used towards the mortgage payment. The second debt ratio is 43% of the borrower's gross monthly income, which is the maximum percentage of the income that can be used towards the borrower's total debt.

• Credit History - Typically, A bankruptcy must be discharged for at least 2 years and the borrower(s) must have re-established acceptable credit. FHA generally requires a three year waiting period after a foreclosure as well as on-time re-established credit.

Everyone's financial situation is different. Understanding the basic guidelines of each mortgage type may assist homebuyers in making the best decision when financing their next home. Consult with a licensed loan officer to discuss your financing options. After you complete the mortgage pre-approval process you will know how much you qualify for, you're down payment options, and what loan types you are eligible for. The pre-approval will also make you a stronger buyer when bidding on a home.

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