February 25, 2018

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FHA Loan Rules: Non-Occupying Co-Borrower Requirements

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In a recent blog post we discussed the rules for FHA loans where a non-occupying co-borrower was involved. The scenario we discussed specifically was a parent buying a home with a child (FHA loan rules permit this under the right circumstances), but in general there are FHA mortgage loan rules that apply whenever a non-occupying co-borrower is present.

In general, unless the non-occupying co-borrower is a family member, FHA loan rules in HUD 4155.1 say, “When there are two or more borrowers, but one or more will not occupy the property as his/her principal residence, the maximum mortgage is limited to 75% loan-to-value (LTV).”

The rules provide an exception to that restriction when the co-borrower is:

“related by blood, marriage, or law, such as

− spouses
− parents-children
− siblings
− stepchildren
− aunts-uncles, and − nieces-nephews, or
– unrelated individuals who can document evidence of a longstanding, substantial family-type relationship not arising out of the loan transaction.”

What other restrictions may apply in a loan where one co-borrower won’t occupy the property? According to HUD 4155.1, Chapter Two, “If the LTV exceeds 75%, a mortgage with non-occupying borrower(s) is limited to a one-unit property.”

There are also rules that prohibit the co-borrowers from treating the home purchased with an FHA loan as an investment property. “The non-occupying borrower arrangement may not be used to develop a portfolio of rental properties. The financial contribution by the non- occupying borrower and the number of properties owned may indicate that the family members are acting as ‘strawbuyers.'”

Chapter Two also addresses credit issues in these circumstances. “FHA does not require that additional underwriting criteria, such as specific qualifying ratios, be met by either

• non-occupying borrowers, or
• occupying borrowers with sufficient credit.

However, additional FHA underwriting criteria do apply to occupying borrowers with insufficient credit. Lenders must judge each transaction on its merits.”

As with all FHA loans, each transaction–including those with non-occupying co-borrowers–is handled on its own merits.

Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.

Joe Wallace - Staff Writer

By Joe Wallace

January 28, 2014

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was managing editor for www.valoans.com for (8) years and is currently the "Associate Editor" for FHANewsblog.com for over (3) years.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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