This article covers adding a non-occupant co-borrower if your application is not strong.
If you don’t qualify for a mortgage on your own, can adding a co-borrower help you qualify?
- Adding a co-borrower to your home loan application can increase your chances of mortgage approval.
- A co-borrower can increase your qualifying income if your debt-to-income ratio is too high.
- A co-borrower with excellent credit can strengthen your application. However, all borrowers must meet minimum credit score requirements for a mortgage.
A co-borrower is on title to the property and obligated by the mortgage. Co-borrowers don’t have to live in the home. Many loan programs allow non-occupant co-borrowers. Note that non-occupant co-borrowers are not the same as co-signers. Co-signers do not go on the property title. Co-borrowers do.
Which Programs Allow Non-Occupant Co-Borrowers?
The Federal Housing Administration allows FHA and conforming (Freddie Mac and Fannie Mae) mortgage borrowers to add a non-occupant co-borrower when applying for a mortgage.
FHA non-occupant co-borrowers must be related to the borrower by law, blood, and/or marriage in order to qualify for a 3.5% down payment home purchase. If your co-borrower is not related to you, you’d have to put down 25%. And if you have 25% to put down, you’d probably avoid FHA loans anyway because of the high mortgage insurance cost.
Fannie Mae and Freddie Mac do not require non-occupant co-borrowers to be related to the primary borrowers., but the minimum down payment is 10%. The VA does not allow non-occupant co-borrowers.
Non-QM programs often allow non-occupant co-borrowers. One San Diego lender, for example, approves loans to borrowers with credit scores as low as 500 as long as they have a co-borrower with
Too Little Income or Too Much Debt: Can a Co-Borrower Help You Qualify?
A high debt-to-income (DTI) ratio is one of the biggest hurdles for mortgage applicants. Your DTI is your total monthly account payments, including the new mortgage, your credit cards, auto and student loans, and other debts (but not living expenses like food or utilities), divided by your gross (before tax) income.
The cause of a high DTI is either too little income or too much debt. In many cases, the borrower earns enough to qualify but the loan guidelines don’t count all of the income. For instance, most loan guidelines don’t count the income of a part-time job, self-employment, bonuses or commission unless you’ve been earning it for at least two years. Cash income (not declared on tax returns) is not qualified income.
The good news is FHA, Fannie Mae, and Freddie Mac allow non-occupant co-borrowers to enhance the main borrower on loan applications. Not every co-borrower will help your DTI, however. The ideal candidate has good income and not too much debt.
To see if a co-borrower would help your DTI, add up monthly debt payments for both of you and divide that by your total gross monthly income. If the DTI with both of you is lower than your DTI, a co-borrower might help you.
Can Non-Occupant Co-Borrowers Have Bad Credit?
If your co-borrower has a low credit score, you might not be able to add him or her to your loan application. That’s because every borrower must meet minimum credit scoring requirements to be eligible for a loan. Fannie Mae and Freddie Mac, for example, set their minimum credit score at 620. All borrowers must have credit scores of at least 620 (unless they have no score at all) to qualify.
Even if your co-borrower’s credit score exceeds the minimum, a low score can still create problems for you. That’s because conventional (non-government) programs base their interest rate and other requirements on the lowest qualifying score. If your credit score is 720, but your co-borrower’s is 620, Fannie Mae will charge you an extra 2.5% in fees. That’s $5,000 for a $200,000 loan.
Can a Non-Occupant Co-Borrower Help if You Have Bad Credit?
For most popular mortgage programs, like Fannie Mae, Freddie Mac and FHA, you can’t make up for a bad credit score by adding a co-borrower with good credit. If your credit scores don’t meet the minimum for a loan product, even a co-borrower with 800+ credit scores won’t help you.
However, some non-QM or “non-prime” lenders do allow very low credit scores if the co-borrower has good credit.
How Credit Scores Impact Guidelines
If you’re enlisting the help of a co-borrower because your DTI is too high, credit is important. FHA allows a maximum debt to income ratio of 56.9% for credit scores 620 or better. But that drops to 43% for credit scored under 620.
Fannie Mae allows a borrower with a 680 score to have a DTI of 43%. That drops to 36% for borrowers with lower scores.
Cautions for Co-Borrowers
Being a co-borrower is safer than being a co-signer. That’s because a co-borrower is on the title to the home. However, there are some serious downsides to being a co-borrower. If a co-borrower wants to buy a home in the future, his or her DTI may be too high to qualify. That’s because co-borrowing creates “contingent” liability.
Contingent liability is a debt that the co-borrower might have to pay if the primary borrower fails to make the payments. Most lenders require co-borrowers to prove that the main borrower has been making the payments on time for at least 12 months. In that case, they don’t count that debt.
Get Professional Help
Borrowers who need to qualify for a mortgage with a direct lender with no mortgage overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates has zero overlays on the following:
- FHA Loans
- VA Loans
- USDA Loans
- Conventional Loans
Gustan Cho Associates also are correspondent lenders on non-QM loans and bank statement loans for self-employed borrowers. There is no waiting period after foreclosure, deed in lieu of foreclosure, short sale to qualify for a mortgage with non-QM loans. 10% to 20% down payment is required. The amount of down payment depends on the borrower’s credit scores. No tax returns are required with our bank statement mortgage loans for self-employed borrowers. 24 months personal or business bank statements are used and the past 24 months of deposits are averaged to derive monthly income. Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays.
