Do you know what the FHA loan rules are for borrowers, co-borrowers, and/or co-signers? What are the requirements for each and how is your lender required to proceed with each?
The FHA home loan rule book for single family mortgages, reverse mortgages, and refinance loans is HUD 4000.1 It instructs the lender that borrowers have an occupancy requirement-the borrower must agree to take ownership of the home and use it as her or his primary residence after loan closing.
Usually the borrower will have to move in within 60 days of closing. HUD 4000.1 also tells the lender that borrowers may only purchase homes with FHA loans within the United States or its’ territories. Purchase of non-U.S. real estate is not permitted with an FHA mortgage.
All parties to be obligated on the FHA home loan must credit qualify. When there are multiple borrowers on the loan, HUD 4000.1 instructs the lender:
“An Minimum Decision Credit Score (MDCS) is determined for each Borrower. Where the Mortgage involves multiple Borrowers, the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers. Where the Mortgage involves multiple Borrowers and one or more of the Borrowers do not have a credit score (non-traditional or insufficient credit), the Mortgagee must select the lowest MDCS of the Borrower(s) with credit score(s).”
In order to be approved for the loan, FHA loan rules instruct the lender as follows:
“To be eligible, all occupying and non-occupying Borrowers and co-Borrowers must take title to the Property in their own name or a Living Trust at settlement, be obligated on the Note or credit instrument, and sign all security instruments.”
For those living in community property states, where state law has a say in how debts incurred in a legal marriage are handled under the law, FHA loan rules state:
“In community property states, the Borrowers spouse is not required to be a Borrower or a Cosigner. However, the Mortgage must be executed by all parties necessary to make the lien valid and enforceable under State Law.”
For co-signers, FHA loan rules state these parties are “liable for the debt and therefore, must sign the Note. Cosigners do not hold an ownership interest in the subject Property and therefore, do not sign the security instrument.” Non-occupying co-borrowers also have some specific requirements:
“Non-occupying co-Borrowers or Cosigners must either be United States (U.S.) citizens or have a Principal Residence in the U.S.”
Talk to a loan officer to learn more about how these FHA requirements affect your loan application if you need further clarification. State law and lender standards often apply above and beyond FHA home loan minimum requirements.