Qualifying for an FHA loan can feel like a challenge, especially if you're navigating income or credit hurdles on your own. Luckily, FHA non-occupant co-borrowers and cosigners are here to lend a helping hand.
These supportive individuals can make a world of difference, helping you boost your qualifications and secure the financing you need for your dream home. But what exactly do these roles entail, and how can they work in your favor?
FHA Loan Non-Occupant Co-Borrower vs. Cosigner
Before diving deeper, let’s define two critical roles: non-occupant co-borrowers and cosigners. Although they sound similar, they have distinct responsibilities and implications for an FHA loan.
What is a Non-Occupant Co-Borrower?
A non-occupant co-borrower is someone who applies for the loan alongside you and takes on equal financial responsibility for repaying it. They don’t live in the home you’re purchasing but share full accountability for the loan’s terms, payments, and liabilities.
For example, this could be a parent who agrees to help you secure financing by adding their income and creditworthiness to the application.
Non-Occupant Co-Borrower Example
Let’s say you’re ready to purchase your first home, but you’re having trouble qualifying for a loan on your own due to your debt-to-income ratio or credit score. In this case, you might consider enlisting the help of a non-occupant co-borrower or a cosigner; both can provide significant support in securing the loan.
Your sister, who has a high credit score and stable income, agrees to be your non-occupant co-borrower. She doesn’t need to live in the home, but her income, credit score, and assets will be included in the loan application. This increases your chances of qualifying for a larger loan amount and potentially better terms. As a co-borrower, she is equally responsible for the loan payments. If you miss a payment, both her credit score and yours could be affected.
Additionally, should you default on the loan, she would be held responsible for the balance, just as if she were the primary borrower.
What is a Cosigner?
A cosigner, on the other hand, is like a safety net. They guarantee the loan but don’t have ownership or equal responsibility. Their role is to step in if you fail to make payments.
Think of a cosigner as someone standing behind the loan, ready to assist in emergencies, while a non-occupant co-borrower stands beside you, sharing the financial load equally.
Cosigner Example
Let’s say that your best friend is in a position to cosign your loan. If they agree to do so, their role is to act as a safety net for the lender. While your friend won’t be a co-owner of the property, they agree to take on the financial responsibility in case you default. If you fall behind on payments, your friend would be expected to pay back the loan, but they will not have any claim to the home itself. This can help you qualify for the loan, but the risk to your relationship is significant if repayment issues arise.
Who can be an FHA Non-Occupant Co-Borrower?
Conveniently, the FHA allows both family members and non-family members to step into the role of non-occupant co-borrower.
The FHA broadly defines family members to include immediate relatives like spouses and domestic partners, parents, siblings, children (including adoptees and step-children), and grandparents, as well as relatives through marriage. Any other person would be considered “non-family.”
FHA Non-Occupying Co-Borrower Requirements
The FHA allows up to two non-occupant co-borrowers on a loan, providing an opportunity to combine financial resources with another person. This can help you qualify for a larger loan and improve your debt-to-income (DTI) ratio. However, all parties must meet FHA loan requirements and submit necessary documentation, including proof of income, assets, and credit history.
Additionally, non-occupant co-borrowers who are not family members are viewed as riskier, so they have stricter eligibility requirements.
Family Member vs. Non-Family Member Requirements
Here’s how FHA requirements differ for non-occupant co-borrowers depending on whether they are family or non-family:
Fam
| Requirement | Family Member Non-Occupant Borrower | Non-Family Non-Occupant Borrower |
|---|---|---|
| Down Payment | 3.5% or more^ | 25% or more |
| Credit Score | 580+* | 500+* |
| Occupancy | Not required. | Not required. |
Pros and Cons of a Non-Occupant Co-Borrower on an FHA Loan
Adding a non-occupant co-borrower to your FHA loan can offer many benefits, but it’s essential to consider the potential drawbacks. Below is a table to help you weigh your options:
| Pros | Cons |
|---|---|
| Increased loan qualification | Non-occupant co-borrower assumes full financial responsibility |
| Opportunity to secure better loan terms | Risk of strained personal relationships if financial issues arise |
| Ability to purchase a home sooner | May affect the non-occupant co-borrowers credit and borrowing capacity |
One of the main advantages of adding a non-occupant co-borrower to your FHA loan application is the potential to qualify for a larger loan. By combining your financial profile with that of the co-borrower, you can potentially improve your debt-to-income ratio and access more favorable loan terms.
However, there are important considerations to keep in mind. The non-occupant co-borrower shares equal responsibility for repaying the loan. This means any missed payments or defaults could negatively affect both parties' future credit scores and borrowing ability.
It’s also important to recognize that financial matters could create tension between you and the co-borrower, especially if expectations or responsibilities aren’t clear from the start. Including a non-occupant co-borrower or cosigner can provide significant benefits in securing an FHA loan, whether you’re enlisting the help of a family member or a trusted friend.
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
