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FHA Rules Around Non-Occupant Co-Borrowers: Who Is Eligible?

An FHA loan from the Federal Housing Administration offers homebuyers the opportunity to purchase a home with more flexible financial requirements. This option is particularly beneficial for young individuals, students, and families. If qualifying for this loan proves challenging, enlisting the support of an FHA non-occupant co-borrower might just be the key to achieving your dream of homeownership. 

Let’s explore deeper into how an FHA non-occupant co-borrower could be the missing piece you’ve been searching for.

Can Non-Occupying Co-Borrowers Be Accepted by the FHA?

Yes, a co-borrower who doesn’t reside in the home can be part of an FHA loan. 

At least one borrower must live in the home. FHA loans, managed by the Federal Housing Administration, offer lower interest rates and credit score requirements but have usage restrictions. Typically, non-occupant borrowers use these loans for investment properties they won’t live in. FHA loans differ by permitting non-occupant co-borrowers, making qualification easier with their assistance.

Understanding the Role of a Co-Borrower on an FHA Loan

Co-borrowing presents a distinctive opportunity for homebuyers. Through the FHA, another borrower who won’t reside at the property can co-sign on an FHA home loan. When seeking a mortgage with a non-occupying co-borrower, the lender considers the income, liabilities, assets, and credit scores of both borrowers.

By involving a non-occupying co-borrower in the underwriting process, the primary borrower often enhances their chances of approval. Typically, non-occupying co-borrowers possess higher income or superior credit scores, boosting the primary borrower’s path to homeownership.

What You Need To Know About Non-Occupying Co-Borrowers On an FHA Loan

One notable advantage of an FHA loan is the opportunity for a low down payment. Depending on your borrower qualifications, you might only need to contribute 3.5% towards your mortgage.

Adding a non-occupying co-borrower to your application can still allow for a 3.5% down payment, provided that the co-borrower meets the FHA’s definition of a ‘family member’.

The FHA recognizes the following individuals as family members:

  • Child, parent, or grandparent
  • Step-parent or step-grandparent
  • Foster parent or foster grandparent
  • Spouse
  • Domestic partner
  • Adopted child
  • Foster child
  • Brother, step-brother
  • Sister, step-sister
  • Aunt or uncle
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

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If the non-occupying co-borrower isn’t a family member, a larger down payment is necessary. Typically, the loan-to-value (LTV) is capped at 75% when the co-borrower isn’t a family member or in cases where a family member sells the property to another family member. This scenario requires a 25% down payment.

Irrespective of familial ties, a non-occupying co-borrower must either be a U.S. citizen or have their primary residence in the U.S. Furthermore, the co-borrower needs to meet specific eligibility criteria, including a qualifying credit score, debt-to-income ratio (DTI), and income, to proceed.

Understanding The Difference Between FHA Loan Co-Signer and Non-Occupant Co-Borrower

When comparing a co-signer to a non-occupant co-borrower, there are notable distinctions to consider.

In the case of an FHA loan, a co-signer does not possess any property ownership rights. Despite being obligated on the mortgage note, they lack legal entitlements to the property.

Conversely, a co-borrower assumes property title at settlement and shares responsibility for the mortgage note. Upon closing, the co-borrower must sign all security documents, establishing full liability for the new home.

The role of a co-borrower entails greater responsibilities, making it challenging to secure someone willing to undertake this substantial financial commitment.

Benefits of Having a Non-Occupant Co-Borrower

Incorporating a non-occupant co-borrower into your FHA loan application presents specific challenges, yet the potential payoff makes it a valuable consideration. This is particularly advantageous for young home buyers with supportive family members. By involving a non-occupant co-borrower, you can secure more affordable housing expenses. Moreover, individuals burdened by substantial student loan debt or adverse credit history stand to gain from the inclusion of a creditworthy co-borrower on their application. This collaborative approach may lead to reduced interest rates, offering financial relief to any budget-conscious individual.

Key Takeaway

Utilizing a non-occupant co-borrower may offer a viable path for individuals seeking homeownership via an FHA loan. By leveraging a co-borrower with a stronger income and credit score in your loan application, the prospect of more manageable homeownership costs becomes attainable. 

To take the next step, seize a moment to initiate your FHA loan mortgage application with Elevation Mortgage today.

Picture of Reed Letson

Reed Letson

Reed offers two decades of expertise as a mortgage broker, focusing on veterans and first-time home buyers. With a strong grasp of real estate and mortgage markets, he empowers clients with practical insights. Reed's passion is guiding clients to build wealth through real estate investments and financing solutions.

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