You aren’t alone. Many people consider this, especially if they are unable to qualify for a loan on their own. A co-borrower helps the primary borrower qualify for the loan by using their income and/or assets to qualify for the loan.
The Non-Occupant Co-Borrower Guidelines
First, at least one borrower must occupy the property full-time. FHA loans are only for owner-occupied properties. In fact, you will sign a statement that says that you will occupy the property as your primary residence. You typically have 60 days to occupy the property. Not doing so could result in mortgage fraud.
Next, non-occupying co-borrowers must be a relative by blood or marriage. A blood relative would be a brother, sister, or parent. A relative by marriage could be step-parents or in-laws. There needs to be a documented relationship between the two of you. This does exclude any friends that may be willing to be a non-occupying co-borrower. The only exception to this rule is friends that you have a long-standing relationship with that you can document. Typically, you must know the friend for at least 5 years and have proof of the relationship. (It’s rare to find a lender willing to let a friend be a non-occupant co-borrower).
The Credit Score Guidelines
Now, it’s time to dig into the qualifying guidelines of a non-occupant co-borrower. It’s not enough to know that your mother-in-law can be your non-occupant co-borrower. You need to know how her qualifications will affect your loan.
The first concern is the credit score. If you need a co-borrower to help you qualify for the loan because you have a high debt ratio or very little income, the lender will consider the co-borrower’s credit score. This is the highest concern. The lender will use the lowest credit score of the borrowers. Lenders usually use the middle credit score of each borrower. In other words, they pull all three credit reports, determine which score is the ‘middle score’ and compare that score to the other borrowers. Since the lowest score is used, it could hurt your loan approval if a co-borrower’s score is low.
Of course, the opposite is true too. If your credit score is too low to qualify for the loan, a co-borrower won’t help you. Lenders usually take the lowest score of the two borrowers.
Helping Your Income
The largest reason to use a non-occupying co-borrower is to help you qualify with low income. There could be many reasons your income is low on paper, but you can truly afford the mortgage payment. Below are the most common reasons:
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- You are self-employed – Self-employed borrowers often deduct large expenses on their tax returns. Because the lender must use the adjusted gross income on your taxes as your qualifying income, it can hurt your chances of loan approval on your own.
- You work on commission – If you have months of high and low income, it could hurt your chances of loan approval. Lenders take an average of your income to qualify you for a loan. If that average isn’t high enough to bring your debt ratio down, you may need a co-borrower’s income to bring it back up.
- Your debt ratio is too high – Even if you have a straightforward income, if your debt ratio is too high, you won’t qualify for the FHA loan, plain and simple. Using a non-occupying co-borrower can increase your total income, and hopefully, decrease your debt ratio to help you get approved.
The Results of a Non-Occupant Co-Borrower
There is a major difference between a non-occupant co-borrower and a cosigner. The co-borrower goes on the title of the home. In other words, he has ownership in the property. A co-signer doesn’t go on the title. He doesn’t have ownership. Co-signers are at a disadvantage because they can’t do anything with the property, but they are legally liable for the debt should the borrower default.
If the borrower defaults in a non-occupant co-borrower situation, the co-borrower has a say in what they do with the property. Of course, there needs to be an agreement between the two, but the co-borrower is a little more protected than the co-signer.
In either case, you should give careful consideration to the situation. Becoming a co-borrower or co-signer puts you at seriously liability. Make sure it’s a situation that you are comfortable with and that you can afford the payments should the responsibility land in your lap.