August 20, 2017

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FHA Loans: Non-Occupying Co-borrower Requirements

In our last blog post we discussed the FHA loan rules for parents and children who want to apply for an FHA loan together. A parent who acts as a non-occupying co-borrower on an FHA loan for a condominium for a child in college, for example, would be eligible for 100% of the maximum FHA loan amount.

Compare that to non-occupying co-borrowers who are not related; such loans are limited to 75% of the loan-to-value ratio. The family status of a borrower and non-occupying co-borrower is an added benefit in such cases.

But the FHA has additional rules for non-occupying co-borrowers. For example, all co-borrowers are required to sign the FHA loan regardless of occupancy status. On the surface, that rule wouldn’t seem terribly important, especially in a situation where a parent is trying to help his or her child with living expenses while in college. But this “signature rule” can be viewed as an important part of enforcing a larger set of regulations.

FHA requirements state “If the LTV exceeds 75%, a mortgage with non-occupying borrower(s) is limited to a one-unit property.” A parent and child would not be allowed to purchase a multi-unit property together with 100% maximum financing. What’s the reason for this rule?

The FHA forbids a non-occupying co-borrower arrangement in order to purchase investment properties or rental units. The co-borrower relationship must be used for an occupying borrower when taking advantage of the family status rule that allows the maximum FHA loan amount.

With that in mind, the FHA requires the co-borrower’s signature in part to keep the system honest. According to FHA rules,”The non-occupying borrower arrangement may not be used to develop a portfolio of rental properties. The financial contribution by the nonoccupying borrower and the number of properties owned may indicate that the family members are acting as ‘strawbuyers.’ ”

By having both parties sign the loan, the lender is able to verify the status of that loan as a bona fide primary residence for the occupying co-borrower–or reject the loan on the basis that there is a pattern of investment property purchases.

The acceptance or rejection of the non-occupying co-borrower in such cases is left partially to the discretion of the lender. The FHA gives the lender room to exercise judgement on a case-by-case basis in many situations including this one.

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