Understanding Non-Occupant Co-Borrowers
Qualifying for a mortgage loan can be challenging, but having a non-occupying co-borrower may help ease the burden. A non-occupying co-borrower allows another person (usually a family member) to co-sign for the mortgage loan without needing to live in the subject property, strengthening the borrower’s ability to qualify for the mortgage.
How Does It Work?
A non-occupant co-borrower’s income and credit profile are considered alongside the primary borrower’s. This can improve the debt-to-income (DTI) ratio, increasing the chances of approval. However, loan terms will be based on the lender’s guidelines, which may include considering the lower median credit score between both borrowers.
Loan Program Variations
Different loan programs have specific requirements for non-occupant co-borrowers:
- Conventional Loans: Some lenders allow non-occupant co-borrowers, but loan terms may vary. Higher down payments or stricter credit requirements might apply
- FHA Loans: Allow non-occupant co-borrowers with a minimum 3.5% down payment if they are a family member.
The 12-Month Rule
Anytime a non-occupant co-borrower signs for a mortgage loan, they will be impacted in their ability to qualify for their own mortgage loan until there has been a 12-month pay history established by the primary borrower, before the debt can be omitted from their loan application.
Ideally, the primary, occupying borrower is able to refinance after 12 months of on-time mortgage payments to remove the co-borrower. This is subject to interest rates, market conditions, etc.
Who Can Be a Non-Occupant Co-Borrower?
Mortgage lenders prefer co-borrowers to be family members, such as:
- Parents, step-parents, or foster parents
- Siblings, children, or grandparents
- Aunts, uncles, or in-laws
Things to Consider
Before agreeing to become a non-occupant co-borrower, keep these factors in mind:
- Financial Responsibility: If the primary borrower misses payments, both credit scores are affected.
- Impact on Future Loans: The mortgage appears on both borrowers’ credit reports, potentially affecting future loan eligibility.
- Legal Obligations: The co-borrower is legally responsible for the loan and must sign all mortgage documents.
- No Tax Deductions: Unless they contribute to mortgage payments, co-borrowers typically cannot claim tax benefits.
- Exit Strategy: Refinancing after 12 months (where applicable) can remove the co-borrower from financial liability.
Having a non-occupant co-borrower can be a valuable option to help someone qualify for a mortgage, but it comes with responsibilities. Understanding the financial implications ensures that both parties make informed decisions.
If you have questions, please contact our office to discuss your mortgage needs with one of our experienced Mortgage Loan Originators at (760) 930-0569.
