FHA home loan rules permit more than one person to be obligated on the mortgage, and there are situations where multiple borrowers may wish to purchase a home together even if only one of those borrowers will actually live in the home. Co-borrowing is a common practice, but there are some important facts to know before you commit.
What do FHA home loan rule say about these transactions?
FHA Loan Rules for Co-Borrowers
The most important thing to know about having multiple borrowers on your FHA home loan is that loan requirements will include all borrowers being creditworthy. The credit shortcomings of one borrower are not offset by a more creditworthy co-applicant. All borrowers on the mortgage must financially qualify for the mortgage.
There may be situations where a co-borrower has low FICO scores or other issues; the co-applicant with better credit cannot make up for the other borrower’s shortcomings. Your lender may require compensating factors in such cases including a higher down payment.
Occupancy Is A Requirement
FHA home loans require at least one borrower to live in the home as the primary residence. If you do not plan to do this, you won’t be eligible for an FHA mortgage and its’ low down payment requirements.
Non-Occupying Co-Borrowers
FHA loan rules allow non-occupying co-borrowers and FHA home loan transactions are approved for such cases but there are down payment requirements that may apply above and beyond the FHA minimum of 3.5%.
If you are applying for a loan with a co-borrower who will not occupy the home with you AND is NOT a family member, the maximum loan-to-value ratio for the loan is 75% of the adjusted value of the home, which means your down payment requirement is 25%.
This does NOT apply for family members in certain cases. FHA loan rules in HUD 4000.1 state, “For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent.
The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members” according to HUD 4000.1 IF the transaction does NOT involve a family member selling the home to another member of the family who will be a non-occupying co-Borrower. The number of units in the property may also be an issue.
Be sure to ask your loan officer about any additional requirements due to lender standards, state or local law, etc. that may affect your transaction with a co-borrower.
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