Does the FHA allow nonoccupying co-borrowers?

A co-borrower doesn't have to live in the home to qualify for an FHA loan

Author pictureAuthor picture
Author picture
Written by
Author picture
Edited by
single detached home with a couple standing in front of the porch

The Federal Housing Administration (FHA) offers loans catered to many first-time home buyers, as well as families, students and younger professionals who may not always meet the stricter financial requirements of other home loans. An FHA loan is a type of mortgage that is available through the Department of Housing and Urban Development (HUD).

One major draw of an FHA loan is that the down payment requirement is lower than most other mortgage types. However, sometimes people may still need additional financial help and wonder if there is the possibility for a nonoccupying co-borrower to qualify for the loan.


Key insights

A nonoccupying co-borrower can help increase a person's chances of securing a loan using their financial information.

Jump to insight

A nonoccupying co-borrower doesn't have to live in the home and can even live in a different state.

Jump to insight

A nonoccupying co-borrower needs to be a family member, and HUD defines family broadly.

Jump to insight

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."

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. ”
— Doug Perry, strategic financing advisor, Real Estate Bees

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.

Pros

  • Increases loan amount
  • Better chance of qualifying with co-borrower’s financial details
  • Lower down payment potential when a family member is a co-borrower
  • Concept of family member is broad

Cons

  • Shared financial responsibility
  • Default risk affects all borrowers
  • Nonoccupying co-borrower needs to be a family member

View rates from leading lenders now.

    FAQ

    Does the FHA allow nonoccupying co-borrowers

    A nonoccupying co-borrower is someone who doesn't live in the home but helps the borrower have a better chance at obtaining an FHA loan.

    Does the nonoccupying co-borrower's credit score affect the FHA loan application?

    Yes, the nonoccupying co-borrower's credit score will be considered for the FHA loan application. Good credit is important for securing a loan.

    Can a nonoccupying co-borrower live in a different state?

    Yes, they don't have to live in the home or the same state, but they must reside in the U.S.

    Can you remove a nonoccupying co-borrower from an FHA loan at a later date?

    Yes, this can happen when the primary borrower qualifies to refinance.

    Does having a nonoccupying co-borrower affect the interest rate on the FHA loan?

    The financial requirements of all borrowers will help determine the interest rate of an FHA loan.

    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.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. U.S. Department of Housing and Urban Development, “Section B. Property Ownership Requirements and Restrictions.” Accessed March 24, 2024.
    2. FHA.com, “FHA Loans and Non-Occupying Co-Borrowers.” Accessed March 24, 2024.
    Did you find this article helpful? |
    Share this article