Does the FHA allow nonoccupying co-borrowers?

What is nonoccupying co-borrower?

A nonoccupying co-borrower is someone who helps the borrower qualify for an FHA loan by using their income, assets, credit score and debts. They don't live in the home.

"It is important to know that not only is the nonoccupant co-borrower's income used; their debts are also counted, so using a nonoccupant co-borrower who has high income, low debt — including monthly housing expense and good credit — is essential," said Doug Perry, strategic financing advisor at Real Estate Bees. "This is often a challenging part of adding a nonoccupant co-borrower to qualify."

A nonoccupying co-borrower is responsible for the loan and ensuring monthly payments are paid, even if they don't live there. All borrowers on the loan are responsible if the loan defaults. "It is important for the nonoccupant co-borrower to understand they are obligated for the repayment of the loan and are also on title to the property," said Perry. "This obligation will show up on their credit report, which is impactful when they are attempting to get new credit at a later date and also if the payment history on the loan becomes adverse."

Who qualifies as a nonoccupying co-borrower on an FHA loan?

A nonoccupying co-borrower must be a family member who meets the financial requirements, and they must be a U.S. citizen residing in the United States.

FHA’s policy on nonoccupying co-borrowers

The FHA requires that nonoccupying co-borrowers be related by marriage, blood or law, including children, parents, siblings, aunts and uncles.

"FHA requires the nonoccupant co-borrower to be a family member to be eligible for the lowest down payment option, but their definition of a family member is pretty liberal, including step-relatives, grandparents and family related by marriage, such as in-laws," said Perry.

A parent selling a property to their child through a FHA loan can't be co-borrower unless they meet the requirement that the loan-to-value (LTV) ratio is under 75%.

» LEARN: What is the loan-to-value ratio?

How to apply for an FHA loan with a nonoccupying co-borrower

When you apply for an FHA loan with a nonoccupying co-borrower, you'll need to provide financial documents for every borrower, including income, assets, debts and liabilities and credit scores. If you have a credit score between 500 and 579, the borrower will need to put down a 10%  down payment. A credit score of 580 and higher means the borrower qualifies for a down payment of only 3.5% of the purchase price.

To apply:

1. Make sure all borrowers are eligible. Understand the requirements for an FHA loan, including age, legal residency in the U.S. and a minimum credit score of at least 500 — but ideally 580 for higher.
2. Find a lender.
3. Prepare all your documents, including proof of income, monthly expenses, assets, debts and credit report and score.
4. Complete the FHA home loan application.
5. Do an inspection and appraisal of the property.

Pros and cons of having nonoccupying co-borrowers

The main benefit of a nonoccupying co-borrower is the potential for a higher loan amount by combining the financial circumstances of another borrower, but there are other pros and cons of an FHA loan to consider as well.

Bottom line

An FHA loan can be a good option for anyone who wants to purchase a home but may not meet the financial requirements of other mortgage types. Combining financial circumstances with a  nonoccupying co-borrower can increase a person's chances of a higher loan amount as well as a lower down payment.

As with any big decision, it's a good idea to review your finances and ensure that securing an FHA loan with a nonoccupying co-borrower makes the most sense for your short and long-term goals.