Mortgage Guidelines On Co-Borrowers On Home Purchase

Mortgage Guidelines on Co-Borrowers: Everything You Need to Know for 2024

If you want to buy a home and need extra help qualifying, you might consider adding a co-borrower to your mortgage application. Understanding the mortgage guidelines for co-borrowers is key, whether it’s a family member or someone else. This decision can be the key to getting the loan you need, especially if you face challenges with your income, credit score, or debt-to-income (DTI) ratio.

But what exactly does it mean to have a co-borrower? How does it affect your chances of getting approved for a mortgage? And what are the updated guidelines for 2024? In this post, we’ll summarize it all in simple terms.

What is a Co-Borrower?

A co-borrower is an individual who applies for a mortgage together with the main borrower. Essentially, they share the responsibility for the mortgage. Co-borrowers can be spouses, family members, or even non-family members willing to help. They can live in the home (become an occupant) or not (non-occupant).

The biggest benefit of having a co-borrower is that their income and credit score can help you qualify for the mortgage. If your credit score or income isn’t quite where it needs to be, adding a co-borrower with a better financial profile could make a big difference.

Let’s dive deeper into the mortgage guidelines on co-borrowers, focusing on both FHA loans and Conventional loans.

FHA Loans and Co-Borrowers: Key Guidelines

FHA loans feature some of the most adaptable standards for co-borrowers. The FHA (Federal Housing Administration) offers insurance for loans provided by approved lenders to those with less-than-ideal credit or limited financial resources.

Non-Occupant Co-Borrowers

FHA allows non-occupant co-borrowers—people who don’t live in the home but still help with the mortgage. This is especially helpful when the primary borrower’s income isn’t enough to qualify for the loan independently.

However, there are a few important things to keep in mind:

1. Family Relationship Requirement:
   • The non-occupant co-borrower must be a family member to put only 3.5% down on an FHA loan. This includes parents, siblings, children, grandparents, and even in-laws.
   • If the co-borrower is not related, the down payment requirement jumps to 15%. This is a significant increase, so it’s important to consider whether you can afford the larger down payment.
2. No Limit on the Number of Co-Borrowers: One of the advantages of FHA loans is that there’s no limit to how many non-occupant co-borrowers you can add. If you have multiple family members willing to help, they can all be listed as co-borrowers.
3. Loan-to-Value (LTV) Ratio: The Loan-to-Value (LTV) ratio shows how much of the loan amount compares to the home’s appraised value. The FHA allows a higher LTV if family members are co-borrowers. However, the LTV cannot exceed 75% if the co-borrowers are not family members.
4. Debt-to-Income (DTI) Ratio: Your DTI ratio is crucial in qualifying for a mortgage. It’s a comparison of your monthly debt payments to your monthly income. By adding a co-borrower, you can potentially lower your DTI ratio, which could help you qualify for a larger loan.

Conventional Loans and Co-Borrowers: What You Need to Know

Conventional loans, provided by Fannie Mae and Freddie Mac, follow distinct guidelines compared to FHA loans. A significant difference is that non-occupant co-borrowers are permitted, and these individuals do not have to be relatives.

Non-Family Co-Borrowers

Fannie Mae and Freddie Mac permit a co-borrower who is not a family member without imposing strict relationship criteria. This provides greater flexibility in locating someone willing to help even if they are not your close family.

1. Down Payment Requirements
   • For Fannie Mae’s Conventional 97 loan, you can make a down payment as low as 3%, and with Freddie Mac, you might need anywhere from 3% to 5%.
   • However, the down payment might be higher if you’re a co-borrower who is not living in the home.
2. Loan-to-Value (LTV) Ratio:
   • Standard loans generally require a maximum loan-to-value (LTV) ratio of 80% when a non-occupant co-borrower is part of the application. This implies that you need to provide a larger down payment (20% or more) to be eligible for a mortgage at that LTV ratio.
3. Debt-to-Income (DTI) Ratio:
   • Like FHA loans, your DTI ratio plays an important role. With a co-borrower, their income is factored in, which can reduce your DTI ratio and improve your chances of qualifying for a loan.

The Impact of Co-Borrowers on Your Credit

One of the most important aspects of having a co-borrower is the impact on your credit. Here’s how it works:

1. Credit Scores:
   • When seeking a mortgage with a co-borrower, the lender will evaluate the main borrower’s and co-borrower’s middle credit score to determine qualification. For instance, if the primary borrower holds a credit score of 600 and the co-borrower has a score of 700, the middle score (650 in this example) will be utilized to review the application.
2. Liabilities and Risk:
   • Co-borrowers share the responsibility for the mortgage. If the primary borrower fails to make the monthly payments, the co-borrower will be liable for the debt. Delinquent payments will be recorded on the co-borrower’s credit report, potentially harming their credit score.
3. Future Borrowing:
   • Being a co-borrower doesn’t prevent you from applying for another mortgage in the future, but the lender will look at the mortgage payments of the current loan when calculating your debt-to-income ratio for any future loan applications.

Pros and Cons of Having a Co-Borrower

As with anything, there are pros and cons to having a co-borrower. Let’s take a look at some of the main points:

Pros:

• Easier to Qualify for a Loan: Having a co-borrower with a better credit score or a more consistent income can enhance your likelihood of being approved for a mortgage.
• Lower Interest Rates: With a co-borrower, you may qualify for a better interest rate due to a stronger financial profile.
• Shared Financial Responsibility: If you’re struggling to make the mortgage payments, your co-borrower is there to share the responsibility.

Cons:

• Shared Financial Responsibility: If you fail to make a payment or default on the loan, your co-borrower will share the same level of responsibility. This situation can strain relationships, particularly if the co-borrower is not ready for this obligation.
• Impact on Credit: A late payment or default will affect the credit ratings of the main borrower and the co-borrower.
• Potential Limits on Future Borrowing: Your co-borrowers involvement in your mortgage could limit their ability to qualify for a loan in the future, as their debts will count against their DTI ratio.

How Co-Borrowers Are Qualified

Lenders need to verify the income and credit of the co-borrower to determine if they can help you qualify for the loan. Here are some details about how co-borrowers are evaluated:

1. Income Verification:
   • Like the primary borrower, the co-borrower’s income must be fully documented. Lenders may require pay stubs, tax returns, and bank statements. The co-borrowers income includes salary, overtime, bonuses, child support, alimony, etc.
2. Credit Scores:
   • The borrower’s and co-borrower’s middle credit score determines the mortgage terms.

How to Qualify for a Mortgage With a Co-Borrower in 2024

With the mortgage guidelines on co-borrowers updated for 2024, here’s what you need to do to qualify for a loan:

1. Gather Your Financial Documents:
   • You and your co-borrower must provide proof of income, credit reports, and any other documents the lender requires.
2. Calculate Your Debt-to-Income (DTI) Ratio:
   • Make sure your DTI ratio is under the threshold set by the lender. Adding a co-borrower with a strong financial background can help you meet the requirements.
3. Review Your Credit Score:
   • If you or your co-borrower has a poor credit score, work on it before applying for a mortgage. You may also want to consider a lender specializing in helping borrowers with less-than-perfect credit.

Conclusion

The mortgage guidelines on co-borrowers can be a powerful tool when buying a home, especially in 2024. Including a family member or a non-occupant co-borrower requires knowledge of the regulations and how they impact your mortgage application. Using a co-borrower effectively can assist you in obtaining loan approval, achieving a more favorable interest rate, and turning homeownership into a possibility.

If you have questions about co-borrowers or if you’re ready to start your mortgage application, contact us today. Our team is here to guide you through the process step-by-step.

Get Started Today!

Ready to take the next step in buying your home with a co-borrower? Contact Gustan Cho Associates at 800-900-8569 or alex@gustancho.com today! We specialize in helping clients navigate complex mortgage guidelines and are here to help you get the best loan for your needs. Don’t wait—let’s make your dream home a reality!

Frequently Asked Questions About Mortgage Guidelines on Co-Borrowers:

Q: What is a Co-Borrower in a Mortgage?

A: A co-borrower is an individual who applies for a mortgage alongside the primary borrower and shares the obligation for the loan. This person can be either a relative or someone who is not related, and their income and credit history can enhance the likelihood of securing mortgage approval.

Q: What are the Mortgage Guidelines on Co-Borrowers for FHA Loans?

A: FHA loans allow non-occupant co-borrowers (those who don’t live in the home) if the primary borrower needs help qualifying. If the co-borrower is a family member, you can put down 3.5%, but a 15% down payment is required if they are not related. The FHA does not limit the number of co-borrowers you can have, but there are limits to the loan-to-value (LTV) ratio.

Q: Can a Non-Family Member be a Co-Borrower on an FHA Loan?

A: A co-borrower on an FHA loan can be someone who is not in your family, but they will need to make a larger down payment of 15%. In contrast, if the co-borrower is a family member, only a 3.5% down payment is required.

Q: What are the Mortgage Guidelines on Co-Borrowers for Conventional Loans?

A: Conventional loans offered by Fannie Mae and Freddie Mac allow family members and non-family members to be co-borrowers. There are no strict relationship requirements for co-borrowers on conventional loans, which provides greater flexibility.

Q: How Does Having a Co-Borrower Affect My Debt-to-Income Ratio?

A: Adding a co-borrower can help lower your debt-to-income (DTI) ratio by including their income in the calculation. This may help you qualify for a larger loan or get better mortgage terms.

Q: How are Credit Scores Used When There is a Co-Borrower?

A: When seeking a mortgage with a co-borrower, the lender considers the middle credit score of both individuals. This score plays a role in determining the loan’s interest rate and conditions.

Q: Does Being a Co-Borrower Impact my Future Ability to Get a Mortgage?

A: Acting as a co-borrower on a mortgage might impact your chances of qualifying for another loan later. Your debt-to-income ratio will be assessed with the existing mortgage factored in, which may restrict the amount you can borrow for your subsequent mortgage.

Are Co-Borrowers Responsible for the Loan?

A: Co-borrowers have joint responsibility for the loan. The co-borrower must also cover the payments if the main borrower does not fulfill their payment obligations. Delayed payments will affect the credit ratings of both the borrower and the co-borrower.

Q: Can a Co-Borrower Help me Get a Better Mortgage Rate?

A: Yes, having a co-borrower with a higher income or better credit score can improve your chances of qualifying for a mortgage and help you secure a better interest rate.

Q: What is the Maximum Loan-to-Value Ratio for a Co-Borrower?

A: For FHA loans, the LTV ratio is generally higher when a family member is a co-borrower. However, if the co-borrower is not related, the LTV ratio cannot exceed 75%. The LTV ratio typically has a maximum of 80% for conventional loans, which means you may need a 20% down payment.

This blog about “Mortgage Guidelines On Co-Borrowers On Home Purchase” was updated on December 3rd, 2024.