FHA & Non-occupant Co-borrowers

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

With stated and limited doc qualifying programs widely eliminated from the marketplace, it’s getting tougher and tougher to qualify borrowers for homeownership these days. However, FHA allows options where non-occupying family members can co-sign to assist some borrowers in qualifying when the intended occupying borrowers may not meet every guideline requirement to qualify for the loan themselves.

FHA’s non-occupant co-borrower options are perfect for a number of situations such as these:

· Occupying borrower is a college student with limited verifiable income for qualifying purposes

· Occupying borrower works for cash income

· Occupying borrower has been self-employed for less than 24 months and thus has non-allowable income for qualifying purposes

· Occupying borrower recently made a complete change in employment field and has non-allowable income for qualifying purposes

· Occupying borrower has no credit and cannot provide non-traditional credit sources

· Occupying borrower recently received a large pay increase not consistent with earnings history rendering income non-allowable for qualifying purposes

· Occupying borrower is between jobs or assignments rendering qualifying income not useable

· Occupying borrower was recently discharged from military or is expected to be discharged from military in near future and has not secured civilian employment for qualifying income

· Occupying borrower is recently returning to the workforce after an extended leave of absence

Maximum allowable financing may be utilized for transactions including non-occupant co-borrowers when the subject property consists of one unit and when the non-occupant is related to the occupying borrower by blood, marriage or law. Additional longstanding family-type relationships can be established and allowable for maximum financing as well. An example might include a Godparent co-signing for a Godchild. When the non-occupying borrowers are not related by any of the situations described above, loan-to-value is limited to 75%.

All borrowers, whether intending to occupy the property or not, must sign the note and mortgage and must be listed in title to the property. It is important that the non-occupant borrower understands that he/she IS obligated on the security instrument which means that if the occupying borrower happens to default on the loan, the credit of the non-occupant borrower would also be negatively affected.

FHA does not specifically require qualifying of the occupying borrower however, lenders are often cautious to be assured that the occupying borrower indeed has some means of making timely mortgage payments. The bottom line is that the situation must make sense. If there is any question whatsoever on the part of the underwriter that the occupying borrower has no means whatsoever to accommodate a housing expense or if the non-occupying co-borrower clearly reflects a portfolio of investment properties, you can expect the file will be highly scrutinized and may even be declined.

Non-occupant co-signors can be used for purchase transactions but a little known fact is that FHA allows them in some cases on refinances as well. Non-occupant co-borrowers can be utilized on cash out refinances to 75% LTV when the non-occupant is not related by blood, marriage or law. Those who can prove blood, marriage or legal relation are eligible as non-occupant co-borrowers up to 85% LTV. The LTV cannot exceed 85% on any cash out with a non-occupant co-borrower being added for qualifying purposes.

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.