Conventional Versus FHA Non-Occupant Co-Borrower Guidelines

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This ARTICLE On Conventional Versus FHA Non-Occupant Co-Borrower Guidelines Was PUBLISHED On September 11th, 2020

There are differences in Conventional Versus FHA Non-Occupant Co-Borrower Guidelines.

  • Adding non-occupant co-borrowers are allowed on FHA and Conventional loans
  • Many borrowers often are short in qualifying for a home mortgage due to exceeding the maximum debt to income ratio caps
  • There are countless reasons why borrowers exceed debt to income ratio caps
  • It can be due to not making enough money or having a non-qualified income
  • Remember that cash wages cannot be used as qualified income
  • Part-time jobs, bonus income, and/or overtime income can only be used if it has been seasoned for two years
  • Adding non-occupant co-borrowers can be a great benefit for homebuyers who need additional income to meet the maximum debt to income ratio requirements on FHA and/or Conventional loans
  • Both FHA and Conventional loans have their benefits on their agency guidelines
  • Mortgage borrowers can add multiple non-occupant co-borrowers on FHA and Conventional loans

In this article, we will discuss and cover Conventional Versus FHA Non-Occupant Co-Borrower Guidelines.

Conventional Versus FHA Non-Occupant Co-Borrower Guidelines: FHA Loans

FHA loans are very popular among first-time homebuyers and buyers with less than perfect credit.

  • Homebuyers can qualify for a 3.5% down payment home purchase FHA loan with a 580 credit score
  • Buyers with under 500 FICO and down to 500 credit scores can qualify for an FHA loan with a 10% versus 3.5% down payment on the home purchase
  • FHA loans are more forgiving with bad credit
  • It is easier to get an approve/eligible per automated underwriting system (AUS) versus conventional loans

To qualify for a 3.5% down payment home purchase FHA loan with non-occupant borrowers, the non-occupant co-borrowers need to be related to the main borrower by law, blood, or marriage.

Being Related By Law, Marriage, Blood Versus Not Being Related Non-Occupant Co-Borrower Guidelines

HUD, the parent of FHA, is the federal agency in charge of setting up mortgage guidelines on FHA loans.

  • FHA allows non-occupant borrowers both related and non-related to the main borrower
  • To qualify for a 3.5% down payment home purchase FHA loan with non-occupant co-borrowers, the non-occupant co-borrower needs to be related to the main borrower by blood, law, or marriage
  • HUD allows non-occupant co-borrowers who are NOT related to the main borrower by law, marriage, and/or blood

However, if the non-occupant co-borrowers are not related to the main borrowers by law, blood, marriage, HUD requires a 25% versus a 3.5% down payment on the home purchase.

Definition Of Being Related By Law, Marriage, Blood Versus Not Being Related

FHA Loans are only for owner-occupant primary home financing. You cannot finance a second home and/or investment home with an FHA loan.

According to FHA loan rules found in HUD 4155.1, the following applies:

The borrower must occupy the home purchased with a single-family FHA mortgage as his/her personal residence as a condition of loan approval. But what about cases where two or more people are obligated on the FHA home loan? Do both people have to meet the occupancy requirement? At least one person obligated on the FHA loan must live in the home as the primary residence, according to HUD 4155.1. In cases where not all the borrowers will live in the home full-time, the loan is classified differently. As a result, there are different rules that may affect the mortgage. According to HUD 4155.1, Chapter 2 Section B, A non-occupying borrower transaction involves two or more borrowers where one or more of the borrower(s) will not occupy the property as his/her primary residence. When there are two or more borrowers, but one or more will not occupy the property as his/her principal residence, the maximum mortgage is limited to 75% loan-to-value (LTV). Borrowers should take note of some exceptions to that 75% limit which are based on family-type relationships. Borrowers are eligible for maximum FHA loan financing for non-occupying borrower situations for FHA loan applicants who are related by blood, marriage, or law. 

The following people will qualify to become non-occupant co-borrowers as co-borrowers related to the main borrower by law, blood, marriage:

  • Spouse of the main borrower: The marriage rule applies 
  • Parents: The blood rule applies
  • Children: The blood rule applies
  • Siblings: The blood rule applies
  • Stepchildren: The law rule applies
  • Grandparents: The blood rule applies

Again, to qualify for a 3.5% down payment home purchase FHA loan with non-occupant co-borrowers, the non-occupant co-borrowers need to be related to the main borrower by blood, marriage, law. HUD allows non-occupant co-borrowers who are not related to the main borrower to become non-occupant co-borrowers. However, a 25% down payment is required.

Conventional Versus FHA Non-Occupant Co-Borrower Guidelines: Conventional Loans

Both Fannie Mae and Freddie Mac allow non-occupant co-borrowers on conventional loans. However, unlike FHA loans, non-occupant co-borrowers do not have to be related to the main borrowers by marriage, blood, and/or law. Friends can become non-occupant co-borrowers on conventional loans without any regard to law, marriage, and/or blood.

To qualify for a home mortgage with a lender licensed in multiple states with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at GCA Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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