You Can Use a Non-Occupant Co-Borrower on an FHA Loan. But Should You?

Written by Peter Warden in Home Loans

Published October 3, 2024. 6 MIN

Older gentleman and younger relative considering co-borrowing on an FHA loan

Using an FHA non-occupant co-borrower is a way to beef up your FHA mortgage application, helping you potentially get approved — and perhaps winning you a lower mortgage rate or a bigger loan than you’d otherwise get.

What Is A Non-Occupant Co-Borrower?

“Non-occupant” means a co-borrower won’t be living in the home that will secure the mortgage. At least one applicant must live in the home as his or her main residence for most loan programs.

A co-borrower is someone who signs the mortgage application and has an ownership interest in the home. Most co-borrowers live in the home. A non-occupant co-borrower doesn’t.

Non-Occupant Co-Borrowers vs. Co-Signers

This makes co-borrowers different from co-signers. Like a co-borrower, a co-signer takes on legal responsibility for the mortgage, and the lender will pursue them to recover losses if the loan goes bad. And both risk seeing their credit in tatters. But a co-signer doesn’t own any share of the home.

How A Co-Borrower Helps A Mortgage Application

FHA non-occupant co-borrower(s) (you may have one or two) could help you get:

Your mortgage application approved
A bigger loan for a better home
Perhaps a lower mortgage rate

So, exploring this can lead to valuable benefits.

Debt-To-Income Ratio

Those benefits mostly arise because the lender will take into account the co-borrower’s income. So, if the original applicant’s debt-to-income ratio would normally disqualify him or her, that problem would be solved.

Of course, the co-borrower(s) must have a relatively low debt-to-income ratio for this to work. If the co-borrower(s), too, are struggling to stay afloat financially, they could harm rather than help the application.

Let’s consider an example. The occupier borrower earns $5,000 a month. But she has a student loan, minimum card payments and an auto loan. And those, together with her new mortgage payments, homeowners insurance and property taxes, add up to $3,000. That’s a 60% DTI and disqualifies her from the FHA loan. ($3,000 in commitments ÷ $5,000 income = 0.6 or 60% DTI.)

But Mom and Dad say they’ll become non-occupant co-borrowers. Together, they earn $10,000 a month and their monthly commitments are just $2,000.

All three co-borrowers have a combined income of $15,000 and outgoings of $5,000. That’s a combined DTI of 33%, well withing lending guidelines. ($5,000 commitments ÷ $15,000 income = 0.33 or 33%.)

Down Payment Help

Given that the FHA non-occupant co-borrower(s) will have an ownership interest in the home, they might be willing to contribute all or some of the down payment. One of those that’s larger than the 3.5% minimum can often earn you a lower mortgage rate. However, it might be easier to simply receive gift funds. The giftor does not have to be on the hook for a loan.

Credit Score Help is Harder

Unfortunately, a co-borrower won’t always rescue an application that’s failing because of a low credit score. Lenders use the lowest score of all applicants for qualification purposes. Still, that means a non-occupying co-borrower doesn’t need a higher score than the occupying co-borrower.

Who Can Be An FHA Non-Occupant Co-Borrower?

The U.S. Department of Housing and Urban Development (HUD) says your co-borrower must be a family member. It does allow one exception, for “unrelated individuals who can document evidence of a longstanding, substantial, family-type relationship not arising out of the loan transaction.” Expect such a relationship to be examined rigorously.

HUD says family members who can be co-borrowers must be “borrowers related by blood, marriage, or law,” such as:

spouses
parents-children
siblings
stepchildren
aunts-uncles
nieces-nephews

Co-borrowers must also be U.S. citizens or legally resident in the country.

Non-Occupant Co-Borrowers Not Allowed on 2-4 Unit Homes

However, even family may not sign on as a non-occupant co-borrower for a home of more than one unit.

Pros And Cons Of FHA Non-Occupant Co-Borrowers

We need to break down the pros and cons for FHA non-occupant co-borrowers and occupant co-borrowers.

Pros for the Occupant

The pros are pretty obvious for the person who will live in the home:

You get a mortgage and become a homeowner when you couldn’t have without your co-borrowers
You may be eligible for a lower mortgage rate
The home you can afford to buy might be bigger or better than without co-borrowers
With their agreement, you can drop your co-borrowers when you’re better established and refinance your loan

Cons for the Occupant

There are downsides, too:

You own only a share of your home.
That means you only get a share of “equity” (the amount by which your home’s value exceeds your mortgage balance) growth
You’ll need your co-borrowers consent if you want to tap your equity with a home equity loan or HELOC
Your co-borrowers might demand their share of the proceeds when you sell or refinance
If your loan goes bad, you might spoil one of the most important relationships in your life: the one with your co-borrowers

For many, the upsides will outweigh the downsides. But you need to take the full picture into account.

Pros for the Non-Occupant

There are pros for the non-occupant, too:

You’re helping someone very precious to you to realize their homeownership dreams
This could be a worthwhile investment. Assuming home prices keep rising, your ownership share of the home will appreciate, perhaps quickly

Cons for the non-occupant

You share responsibility for the loan payments
If the loan turns bad, you’ll be on the hook for the lender’s losses
And that could do serious damage to your credit score
Will you blame your loved one if things go wrong? Might that spoil your relationship with him or her?
Will you ever get your due? Are you prepared to enforce your right to your share when the home is sold? Or will you let it slide for the sake of your loved one?

As a co-borrower, you’ll have access to the mortgage account. So, you can monitor payments and keep the loan on track. But, to avoid trouble, you’ll have to make payments if your co-borrower(s) can’t.

Making The Right Choice For All Borrowers

You can see from the pros and cons that much depends on the quality of the relationship between the co-borrowers. A successful co-borrowing could bring loved ones closer. But an unsuccessful one could create festering resentment that could lead to a tragic wedge.

Meanwhile, the financial implications are equally serious. How likely is it that the occupant co-borrower will be able to keep up the mortgage payments?

These are the scenarios all the co-borrowers should be exploring. Usually, these loans work out just fine. The occupant pays on time and the non-occupants would have no trouble paying should the need arise. Not only that, but they wouldn’t resent doing so.

If that doesn’t describe your situation, you should think very carefully before co-borrowing.

About The Author:

Peter Warden has been covering mortgage, real estate, and personal finance for 15 years. He has appeared on The Mortgage Reports, Credit Sesame, Bills.com, and other publications.

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