Mortgage Guidelines On Co-Borrowers On Home Purchase

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Mortgage Guidelines On Co-Borrowers On Home Purchase

This BLOG On Mortgage Guidelines On Co-Borrowers On Home Purchase Was UPDATED On September 26th, 2018

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 are 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 borrower by law, marriage, blood, then 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 does 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 on the earlier paragraph, FHA allows non occupant co-borrowers to be added on 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 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

Mortgage Guidelines On Co-Borrowers On Conventional Loans

Fannie Mae and Freddie Mac does allow non-occupant co-borrowers to be added on a conventional loan.

  • However, both Fannie Mae and Freddie Mac does 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 does 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
  • Down payment requirement is borrower to put 3% to 5% on conventional loans
  • Home buyers needs 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 requirement on the no-occupant co-borrower or co-borrowers

Mortgage Guidelines On Co Borrowers And 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 negative 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 months 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
  • 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 that the mortgage payments have been electronically paid online on time for the past 12 months

Mortgage Guidelines On Co-Borrowers And 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 the lower between the borrower and co-borrower’s 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-borrower’s income is the 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 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. The Gustan Cho Team at Loan Cabin Inc. is available 7 days a week, evenings, weekends, and holidays.

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