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Your Guide To Getting An FHA Loan With A Non-Occupant Co-Borrower

4-Minute Read
Published on August 23, 2022

FHA loans have flexible qualification standards with a low down payment requirement, making them a good option for many first-time and repeat home buyers. This holds true even if you have a few dings on your credit. One of the ways to improve your chances of qualifying is by adding a co-signer, or what’s known as a non-occupant co-borrower. Today, we’ll go over FHA non-occupant co-borrower guidelines.

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Does FHA Allow Non-Occupant Co-Borrowers?

The FHA allows non-occupying co-borrowers to make the qualification process easier for first-time home buyers and others applying for an FHA loan. The lender will consider both the borrower’s and co-borrower’s financial and residential requirements for the mortgage application.

FHA loans allow you to qualify with a lower credit score or a higher debt-to-income ratio (DTI) in many cases. This makes them attractive for younger home buyers and those looking to rebuild their credit. The ability to apply with a non-occupant co-borrower further extends this flexibility by allowing you to qualify with the income of a co-signer not living in the home.

How A Co-Borrower Works For An FHA Loan

When you have a co-borrower on an FHA loan, the main benefit is that you’ll be able to use their income to help you qualify. When a lender is doing the underwriting on your mortgage loan, the higher your income, the better chance you will have to qualify because it helps with your DTI. More on that in a minute when we get to some of the requirements.

The biggest thing to know as a co-borrower is that you’re considered equally responsible for the loan regardless of whether you live in the home or not. This means that if the primary occupying client fails to make payments on the, you can be held legally and financially responsible for the loan. This means that if they default, it can impact your credit among other effects.

FHA Guidelines For Non-Occupying Co-Borrowers

Anyone who qualifies based on a very short list of legal requirements can be a non-occupying co-borrower. However, there are advantages to having that co-borrower be a family member.

Normally, if you’re just doing a co-borrowing transaction with a nonrelative, the FHA requires that you have a 25% down payment or equity amount. If you’re borrowing in conjunction with a family member, you can make the normal minimum down payment of 3.5%.

For the purposes of your mortgage eligibility, the FHA defines a family member as the following:

  • Child (includes stepchildren, foster children and those legally adopted)
  • Parent (includes step and foster parents)
  • Siblings (including step)
  • Grandparents (including step and foster)
  • Aunt or uncle
  • In-laws (son, daughter, father, mother, brother, sister)

The one thing to be aware of with this is that your family member can’t be selling the house to you if you want to qualify for the lowest down payment. If they are, it’s an arm’s-length transaction and the minimum down payment is 25%.

Finally, the maximum financing of 3.5% when the non-occupying co-borrower is a family member only applies to single-unit homes. If your property has 2 – 4 units, the minimum down payment is 25%.

Requirements For FHA Non-Occupying Co-Borrowers

There are a couple of basic requirements to be a nonoccupant co-borrower. These include being a U.S. citizen or having a primary residence in the U.S. Additionally, they have to sign the mortgage note and be jointly responsible for the loan. Beyond that, there are several guidelines related to financial profile including the following:

  • Credit score: Under FHA guidelines, you can get a loan with a median FICO® Score as low as 500. However, many lenders, including Rocket Mortgage®, require both borrowers have a minimum 580 median qualifying score. If you have a score of 620 or higher, DTI requirements are more flexible.
  • DTI: Depending on your credit score, DTI could matter in a couple of ways. If you have a score 580 – 620, you have to maintain a mortgage payment that comprises no more than 38% of your pretax income with overall minimum debt payments no higher than 45%. If both borrowers have scores 620 or better, DTI requirements vary based on factors including credit score and the size of your down payment.
  • Down payment: If you have a credit score of 500 or better, you can get an FHA loan with 10% down. Otherwise, you’ll need a down payment of 3.5% with a score of 580 or better. Two things to remember that are special about this. Most lenders require a score of at least 580. Secondly, if your non-occupant co-borrower isn’t a family member, the minimum down payment is 25%. You’ll also see some lenders refer to this as loan-to-value ratio (LTV). You can do the conversion between LTV and minimum down payment or equity amount by subtracting from 100. If a lender tells you they can do a maximum LTV of 96.5%, that’s 3.5% down.

Co-Signer Vs. Co-Borrower

You may have heard in the past that there’s a difference between a co-signer and a co-borrower. However, when it comes to a home loan, this isn’t the case. You both sign the mortgage note and are equally responsible for the debt undertaken on the mortgage. This is true whether the lender refers to you as a co-signer or co-borrower.

The Benefits Of Using A Non-Occupant Co-Borrower

The real benefit to applying with a non-occupant co-borrower is that you can use their income to help lower your DTI, meaning you can qualify for a bigger mortgage payment. This in turn strengthens your budget and you can afford more home or qualify to refinance.

There’s a misconception that having a co-borrower will help you further if you have some blemishes on your credit report. However, this isn’t the case because qualification and the interest rate you get is always based on the lowest median score of all applicants when it comes to FHA loans. Again, the advantage is added income.

The Bottom Line

Applying with a non-occupant co-borrower can allow you to add to your budget based on the extra qualifying income. Both borrowers have to qualify from a credit standpoint and they’re both equally responsible for the loan.

If the non-occupant co-borrower is a family member, the required down payment is only 3.5%. Otherwise, you’ll need 25% down to buy or refinance. If you’re interested in checking out your options, you can apply online today or give us a call at (833) 326-6018.

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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.