This Article Is About Mortgage Guidelines On Co-Borrowers On Home Purchase
Mortgage Guidelines On Co-Borrowers has recently been updated for both FHA Loans and Conventional Loans. FHA allows non-occupant co-borrowers to be added to the mortgage loan of a borrower if the main borrower cannot qualify due to income. There is no limit on the number of non-occupant co-borrowers that can be added to the main borrower.
Mortgage guidelines on co-borrowers require that co-borrowers need to be related to the borrower by blood, marriage, or law on FHA Loans for 3.5% down payment home purchase loans. Under HUD Guidelines, if non-occupant borrowers are not related to the borrower by law, marriage, blood, then a 15% down payment is required. Some lenders are really strict and go to the extent of verifying the actual relationship of the non-occupant co-borrower to the main borrower. They require documentation, while other mortgage lenders such as myself will just take the person’s word for the type of relationship the non-occupant co-borrower has to the main borrower or borrowers.
Mortgage Guidelines On Co-Borrowers Who Are Not Related To Borrowers
HUD mortgage guidelines on co-borrowers do non-occupant co-borrowers who are not family members under HUD’s new 4000.1 FHA Handbook:
- It states if there are two or more borrowers and one or more of the borrowers will not be occupying the subject home as her or his principal owner-occupied home, the maximum LTV is limited to 75% LTV
- This is the case if non-occupant co-borrower are not family members
The exception to this rule is different for family members being non-occupant co-borrowers.
Mortgage Guidelines On Co-Borrowers And Definition Of Family Member
As mentioned in the earlier paragraph, FHA allows non-occupant co-borrowers to be added to a borrower’s mortgage loan if the borrower does not qualify with the income the borrower has alone. However, non-occupant co-borrowers needs to be a family member if the borrower only wants to put 3.5% down payment on a home purchase FHA Loan. HUD, the parent of FHA, defines that family member is defined as someone that is related to the borrower and/or borrowers by blood, marriage, or law.
Examples of a family member as defined by HUD are the following person:
- spouses of the borrower
- parents-children of the borrower
- siblings of the borrower
- stepchildren of the borrower
- aunts-uncles, and − nieces-nephews of the borrower
- unrelated individuals who can document evidence of a longstanding, substantial family-type relationship not arising out of the loan transaction of the borrower
Every lender is different in how they want to investigate the family relationship between borrowers and non-occupant borrowers. At Gustan Cho Associates, we just take the borrower’s word for their relationship status between borrowers versus non-occupant co-borrowers.
Mortgage Guidelines On Co-Borrowers On Conventional Loans
Fannie Mae and Freddie Mac do allow non-occupant co-borrowers to be added on a conventional loan. Both Fannie Mae and Freddie Mac do allow non-occupant co-borrowers to be added to the mortgage loan borrower on a conventional loan without being family members. Fannie Mae and Freddie Mac do not have such a strict requirement on non-occupant co-borrowers. Does not require that non-occupant co-borrowers be family members and does not require that co-borrowers be related to the borrower by blood, marriage, or law.
The down payment requirement is for the borrower to put 3% to 5% on conventional loans. Homebuyers need their own funds for the purchase of the home when there is a non-occupant co-borrower unless the loan to value is 80% LTV or less. There are no family member relationship requirements on the non-occupant co-borrower or co-borrowers.
Liability On Co-Borrowers
Being a co-borrower does come with liabilities:
- So does being a co-borrower on a home purchase mortgage loan
- By being a co-borrower, the co-borrower is taking on the liability
- If the main borrower of the mortgage loan does not perform and pay their home loan, the co-borrower will be responsible for the payment and the balance of the mortgage loan
- If the main borrower of the home loan is late on their monthly mortgage payments, the late payment history will also reflect on the co-borrowers credit report
It will definitely negatively impact the co-borrowers credit and credit scores.
Does Being Non-Occupant Co-Borrower Hinder Chances Of Qualifying For Mortgage For Co-Borrowers?
However, becoming a co-borrower on a mortgage loan does not hinder the co-borrower chances of purchasing a new home in the near future:
- Non-occupant co-borrowers who need to purchase another home at a later date can qualify if the following can be provided
- Can provide the 12 monthly payment history of the main borrower by canceled checks and/or online bank statements for the past 12 months
- Prove that you had nothing to do with the mortgage payment
- Someone else has made them
- The mortgage payment and loan balance will not be counted against non-occupant co-borrower in their debt to income ratio calculations
12 months payment history needs to be provided by the main borrower showing 12 months of timely canceled checks and/or 12 months of bank statements. The mortgage underwriter is looking for the mortgage payments that have been electronically paid online on time for the past 12 months.
How Co-Borrowers Are Qualified
FHA Mortgage Guidelines On Co-Borrowers require that the lower of the two middle scores between the borrower and the co-borrower is used to qualify for credit scores when there is a mortgage loan applicant with a co-borrowers.
For example, here is a case scenario:
If the main borrower had credit scores of the following:
- 500 FICO Transunion
- 600 FICO Experian
- 700 FICO Equifax
The middle credit score of the borrower is 600 FICO Experian.
If the co-borrower had the following:
- 600 FICO Transunion
- 700 FICO Experian
- 800 FICO Equifax
The middle score of the co-borrower is 700 FICO.
Since the borrower’s middle credit score of 600 FICO Experian is lower between the borrower and co-borrowers middle credit score, that 600 FICO Experian middle credit score will be used to credit qualify this mortgage loan application.
Qualified Income Mortgage Guidelines
The co-borrowers income is an important factor when it comes to mortgage qualification.
- The co borrower’s income needs to be documented just like the main borrower
- Full-time income, whether it is hourly and/or salaried income can be used
- Part-time income can be used if seasoned for at least two years
- Bonus income can be used if seasoned for two years
- Overtime income can be used if seasoned for two years
- Child support income can be used if it is likely to continue for the next three years
- Alimony income can be used if the likelihood is likely to continue for the next three years
- Royalty income can be used if the income is likely to continue for the next three years
If you are a home buyer with higher debt to income ratios and you need a mortgage lender who specializes in helping higher debt to income ratio borrowers, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The Team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
