In our previous blog post we discussed an FHA loan reader question about co-borrowers and their status. What is the basic difference between a cosigner and a co-borrower and how does an FHA loan work in such cases?
FHA loan rules in HUD 4000.1 differentiate between a cosigner and co-borrower; the cosigner, while liable for the loan, does not have any ownership in the property. The co-borrower has both financial responsibility and ownership. Both cosigners and co-borrowers must have a legal primary residence in the United States or be U.S. citizens.
Borrowers, co-borrowers, and cosigners all must provide basic information to the lender including Social Security numbers. Co-borrowers and cosigners are subject to the rules of HUD 4000.1 that restrict who can participate in an FHA loan transaction:
“A party who has a financial interest in the mortgage transaction, such as the seller, builder or real estate agent, may not be a co-Borrower or a Cosigner. Exceptions may be granted when the party with the financial interest is a Family Member.”
Co-borrowers may choose to occupy the property or act as non-occupying co-borrowers. Those who choose to be non-occupying co-borrowers are subject to the following rules in HUD 4000.1:
“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, provided the transaction does not involve:
– a Family Member selling to a Family Member who will be a non-occupying co-Borrower; or
– a transaction on a two- to four-unit Property.”
Some borrowers want their spouses to co-borrow with them, others do not. These decisions may be affected by the laws of your state, specifically community property laws that dictate how the financial obligations incurred in a legal marriage are handled. It’s best to discuss your needs with the lender to determine how such laws may affect your transaction.
These laws vary from state to state and there is no national standard-each loan will be handled on a case-by-case basis subject to any applicable requirements in this area.