Non-occupying Co-borrower

Adding a Non-occupying Co-borrower gives you the opportunity to use someone who does not live in the home to help in qualifying for a home loan.  The term “Kiddy Condo” is loosely used to help describe this particular loan type.  Historically, a non-occupying Co-borrower has been either a parent or parents who have purchased primary residences, to be used by their children while they are away at college. 

However, today more and more people who have entered into the real estate market have found it increasingly difficult to qualify for a home loan on their own.  Most lenders have eliminated any specialty products that may have at one time helped unconventional borrowers qualify for a home loan. Gone are the days of stated income and no documentation loans.  Now it seems as if you have to verify just about everything but your hat size, in order to qualify for a reasonable home loan.  However, given these unwavering conditions, the Federal Housing Administration (or FHA) still allows potential borrowers some flexibility in order to qualify, provided that it makes sense. 

There are many situations in which a perfectly responsible borrower will attempt to qualify for a home loan, but is unable because they do not meet the minimum qualifying requirements.  There are a number of borrowers who fail to qualify for a home loan because they are unable to demonstrate verifiable income or continuous employment requirements.   For example, you might find yourself in a situation where you have been self-employed for only one year.  Lenders require at least two years self-employment in order to use the income generated from the business.  In essence, lenders will not accept one cent as verifiable income until you have had a full two years self-employment.  There are several other examples just like the one given, where we have been able to establish a borrower’s ability to qualify for home loan today, but were unable to get final loan approval because the borrower lacked the time needed to prove stability in their current financial position.  So, what can you do if you find yourself in this situation?  Fortunately for you, FHA provides an alternative that no other program does, which is the ability to incorporate a non-occupying Co-borrower. 

A non-occupying Co-borrower is someone who does not reside in the property but will still co-sign as a co-borrower on your home loan, in an effort to help you qualify.  Over the years, the number of non-occupying Co-borrowers has increased.  The primary purpose for having a non-occupying Co-borrower is to help you strengthen your credit worthiness to the extent needed to obtain a home loan.  FHA currently allows you and your non-occupying Co-borrower to qualify, under the full benefits of an FHA loan, provided that you both meet all of the following conditions:

1. You must occupy the property as a primary residence.

1. The non-occupying Co-borrower must be related to you by blood, marriage or law.

1. There must be a longstanding, family-type relationship between you and the Co-borrower that can be documented.

1. The non-occupying Co-borrower must not have an active portfolio, involving multiple investment properties.

1. Both you and the Co-borrower must not have any other current FHA loans in affect for any other properties.

1. The debt-to-income ratios must fall within the allowable parameters of the loan.  We only point this out because a non-occupying Co-borrower will need to have enough income to qualify for both their primary residence and the Non-occupied residence.

1. Both parties must reside somewhere within the United States.

1. The home loan being requested must make sense. Ultimately, the underwriter will have the final discretion on whether or not the loan meets the standards intended for the non-occupying Co-borrower program.

FHA also allows a non-occupying Co-borrower that has no legal affiliation to you to be on a transaction.  However, the underwriting conditions on a loan of this nature will be considerably more stringent.  For example, the maximum loan amount allowed is 75% of the actual purchase price or appraised value, depending on which is lower.  In certain circumstances you might find it beneficial to include a non-occupying Co-borrower that has no legal connection to you, but it is rare.

Obviously, the non-occupying Co-borrower will need to understand that they are adding more risk to themselves by helping you qualify for your home loan.  Both you and your non-occupying Co-borrower will have entered into a legally binding contract to borrow money, and the responsibility for repayment on this loan falls onto both parties.  If you decide to stop making your payments or fall behind on your payments the lender will hold both parties accountable to the terms listed on the note.  Therefore, any negative items reported to the credit bureaus will be reported against you and the No-occupying Co-borrower.  

The only reason you might want to consider adding a non-occupying Co-borrower is in situations where you lack the ability to qualify on your own.  A parent, relative, or significant other might be willing to help you obtain a home loan by using their own credit worthiness, as a way to help strengthen the qualifying factors for your home loan.  It is comforting to know that you have an alternative way to meet your home loan financing needs.  For this reason, FHA home loans have continued to be one of my preferred home loan financing options. To learn more about how you can benefit from having a non-occupying Co-borrower included on your loan, you should talk to your trusted mortgage broker.  With their assistance you will be able to find the answers to the questions you have.