Does a Non Occupant Co Borrower Have to Be a Family Member?

A non-occupant co-borrower is an individual who agrees to be financially responsible for a mortgage loan but does not intend to live in the home being financed. This arrangement can be a valuable option for prospective homeowners who might face challenges in qualifying for a mortgage on their own. It allows the primary borrower to strengthen their loan application and potentially achieve homeownership sooner.

Understanding the Non-Occupant Co-Borrower Role

A non-occupant co-borrower joins a mortgage application, taking on legal and financial responsibility for the loan without residing in the property. This distinguishes them from an occupant co-borrower, who lives in the home alongside the primary borrower. Lenders consider the non-occupant co-borrower’s income and credit profile, which can significantly improve the primary borrower’s ability to qualify. They are equally obligated to repay the loan.

The primary purpose of including a non-occupant co-borrower is to bolster the loan application, especially when the primary borrower’s income, credit score, or debt-to-income ratio might not meet lender requirements. By combining financial profiles, the overall application presents a stronger financial picture to the lender. While they share financial liability, non-occupant co-borrowers typically have an ownership interest in the property, unlike a co-signer who is only responsible for payments without ownership rights.

General Financial Requirements for Non-Occupant Co-Borrowers

Lenders evaluate all co-borrowers, including non-occupants, based on financial criteria. A non-occupant co-borrower’s creditworthiness is assessed, with their credit score and history meeting minimum lender requirements. For example, FHA loans often require a minimum credit score of 580 for a 3.5% down payment, and lenders may consider the lower of combined credit scores when multiple applicants are involved.

Stable income and employment verification are important for non-occupant co-borrowers, as their income contributes to qualification. Lenders review employment history to ensure a reliable income stream. The non-occupant co-borrower’s existing debts and income directly impact the combined debt-to-income (DTI) ratio. While adding their income can help lower the overall DTI, their existing debts are also factored into the calculation.

Lenders may review the non-occupant co-borrower’s assets, such as savings and investments, as part of the qualification process. These assets can serve as reserves, providing financial security for the loan. The non-occupant co-borrower’s financial strength affects the loan’s approval and terms.

Relationship Requirements by Loan Program

Whether a non-occupant co-borrower must be a family member depends on the specific loan program. Different mortgage types have varying guidelines regarding the relationship between the primary borrower and the non-occupant co-borrower.

Conventional loans, backed by Fannie Mae and Freddie Mac, typically do not require the non-occupant co-borrower to be related to the primary borrower. Friends, business associates, or other unrelated individuals can serve as non-occupant co-borrowers. However, some lenders may impose specific overlays, such as requiring a higher down payment or stricter DTI ratios for non-family co-borrowers.

FHA loans usually require a non-occupant co-borrower to be a family member. The FHA defines family members broadly to include immediate relatives like parents, children, siblings, grandparents, aunts, uncles, in-laws, step-relations, and foster relations. Limited exceptions exist for unrelated individuals who can document a long-standing, substantial family-type relationship, but these often necessitate a higher down payment, sometimes up to 25%.

VA loans have strict rules regarding non-occupant co-borrowers. A non-occupant co-borrower is generally not permitted unless they are an eligible veteran or the veteran’s spouse, and they must occupy the property. If a non-veteran, non-spouse co-borrower is included, it typically falls under a “joint VA loan,” which often requires a down payment and means the VA will only guarantee the veteran’s portion of the loan. The property must be the primary residence of an eligible borrower, limiting non-occupant involvement.

USDA loans do not permit non-occupant co-borrowers. All borrowers on a USDA loan are required to occupy the property as their primary residence. If a non-occupant co-borrower is necessary for qualification, applicants would need to explore alternative loan programs like FHA or conventional mortgages.