If you have trouble qualifying for a mortgage, you might consider adding a non-occupying co-borrower to the loan. While this seems good in theory, don’t make the mistake of assuming you can use it on just any loan program. There are strict rules regarding when you can use a borrower that doesn’t live with you on your mortgage.
Who is a Non-Occupant Co-Borrower?
A non-occupant co-borrower is a person that goes on the loan but does not live in the home with you. They sign every loan document that you sign. The only difference is they go and live in their own home while you live in the home you just bought with the new mortgage.
The non-occupying co-borrower may be able to help you if you have bad credit, low income, or not enough money to put down on the home. Usually borrowers have some type of negative aspect of their loan application that would leave them unable to get a loan approval.
Using a Non-Occupant Co-Borrower on a Conventional Loan
Conventional loans are backed by Fannie Mae and Freddie Mac. You may also hear them called conforming loans. These loans generally allow up to a 95% LTV if you have a good credit score and a low debt ratio.
If you don’t have the credit score and debt ratio that conventional loans require, you may consider using a non-occupying co-borrower. Before you do, though, understand that you will have to contribute at least 5% of your own money for the loan. That’s a Fannie Mae/Freddie Mac rule. They want to make sure that you have an investment in the home so you are motivated to make the payments on time.
You may be able to use the co-borrower’s income to qualify for the loan, but only if the lender manually underwrites the loan. Since this isn’t the norm because most lenders use an automated system to underwrite the loan, you may have to shop around for a lender willing to allow manual underwriting.
Using a Non-Occupant Co-Borrower on an FHA Loan
FHA loans have a little more flexibility when considering a non-occupant co-borrower. As long as the co-borrower is related by blood, not marriage, you can secure a loan of up to 96.5% and use the co-borrower’s income and credit to help you qualify.
If you use a co-borrower that is not related by blood, though, the FHA limits your LTV to just 75% of the value of the home. The FHA still allows the use of the borrower’s income and credit, but you need a hefty down payment to go this route.
Non-occupant co-borrowers can help you have more buying power by increasing the total income used for the loan. Before you take this route, though, give it careful thought. Does it make seems to take a larger mortgage payment? Can you afford it? While it’s great that you have a family member willing to help you buy a home, but you are still the one that has to pay the mortgage. Remember, this is your mortgage for the next 30 years, in most cases. You want to consider the consequences of taking the loan very carefully so that you know what you are getting yourself into.