Through the Federal Housing Administration, the Department of Housing and Urban Development insures mortgages for borrowers of modest means, increasing access to affordable homeownership for millions each year. Since its creation in 1934, FHA boasts flexible underwriting guidelines compared to conventional financing, allowing borrowers to purchase homes with a lower down payment, credit challenges and low-to-moderate incomes. To further encourage homeownership, FHA approves the use of non-occupant co-borrowers to help with credit qualifying.
FHA insurance protects lenders by reimbursing them in the event of borrower default. The extra protection decreases lender risk, increasing their willingness to lend to FHA borrowers. FHA's programs are generally geared toward owner-occupants. As such, FHA guidelines require at least one borrower move into the home within 60 days of signing the mortgage security instrument, and to use the home as their primary residence for at least the majority of the year. The admissibility of a non-occupant co-borrower is a unique feature of FHA loans.
A borrower may require a co-borrower to qualify for FHA insurance if their income is insufficient for obtaining the loan on their own. They must be related to the borrower through blood, marriage or law, or document a longstanding, family-type relationship. A classic example of non-occupant co-borrowers is parents who help their children purchase their first home. A co-borrower shares the same rights and responsibilities of homeownership with the primary borrower, including taking title to the property at settlement, signing all security instruments and being obligated on the mortgage note.
A non-occupant co-borrower may not be added to the loan application in order to qualify for a cash-out refinance—a transaction in which the homeowner taps into equity in their home, increasing their loan balance. Because this loan type involves more risk for the lender, all borrowers, co-borrowers and co-signers on the loan must occupy the home as their primary residence. A co-signer helps with credit qualifying, but holds no ownership interest in the property. Most FHA transactions generally do not require a co-signer occupy the home. A co-signer helps with credit qualifying, but holds no ownership interest in the property. Most FHA transactions generally do not require a co-signer occupy the home. The use of a non-occupant co-borrower also applies to properties with three or four units.
A non-occupant co-borrower or cosigner's good credit does not help a borrower who's credit scores don't meet FHA's benchmark guidelines. The non-occupant helps the borrower in terms of income qualifying. In May 2008, FHA began allowing the addition of non-occupant co-borrowers to refinance transactions (with the exception of cash outs and three- to four-unit properties), in an effort to help more homeowners obtain better loans through FHA.