How to Qualify for a Mortgage With a Non-occupant Co-borrower

Parents co-signing their son's mortgageCo-borrowers and co-signers. Is there a difference? Which is better? The main difference between co-borrowers and co-signers for loans offered indirectly by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) is who owns the loan.

What is a Mortgage Co-borrower?

An extra borrower on a mortgage is known as a co-borrower, which is also often referred to as a co-applicant. When two people are applying for a loan together, this is known as co-borrowing. The mortgage lender will evaluate not just your qualifications but also the qualifications of the co-borrower, taking into account their assets, credit history, and income. In most cases, the borrower who has the more favorable credit profile is the one who gets to decide the conditions of the loan.

Importantly, you and the co-borrower may hold ownership of the property at the same time; that is, both of your names can be on the title of the property. However, this does not relieve either of you of the need to repay the mortgage.

What is a Non-occupant Co-borrower?

A non-occupant co-borrower is a person who is not going to live in the property that is being purchased with the loan, but who is willing to sign the loan documents and be held responsible for repaying the loan. This can be a family member or friend who wants to help the buyer qualify for a mortgage, or it can be someone who is investing in the property with you.

What is a Co-Signer?

Man holding a cosigner signCo-signers or guarantors are people who sign a mortgage or deed of trust on behalf of someone else.

They are both responsible for the promissory note. Non-occupant borrowers are people who apply for credit on a primary home but don't live there. They sign the mortgage or deed of trust and are responsible for the loan along with the borrower (s). Co-borrowers who are not occupants may or may not have a part in the subject property, as shown on the title.

It may appear as though guarantors, co-signers, and co-borrowers who do not live in the property are all the same thing. But, they are not. The deed is not signed by co-signers or guarantors (title to the property). The deed is the legal ownership of the property.

Even though they don't own the property, they are still financially responsible for the mortgage note if the principal borrower can't make the required payments on a monthly basis.

The Risks Of Co-Signing A Mortgage Loan

It might seem like a good idea to help a borrower by being a non-occupant owner, but here's what can happen. It happened to me, so I should know . . .

I wanted to buy a house from a seller who was very close to losing it to foreclosure. We agreed on a price for the sale, and we both signed the contract. A few days after that, the title insurance company called me and told me that the home was partially owned by a distant cousin.

As it turned out, the seller and her aunt, who was a non-occupant co-borrower were both enjoined on the deed. The aunt passed away and her interest in the home passed to her heirs. Every one of the heirs, except for one relative who did not get along with the seller, signed a release for their share of the earnings from the sale.

The cousin refused to sign the sales contract or release her equity in the home. Now what? I had to retain an attorney and had to resolve the ownership interest decided by a judge. The judge knew that the aunt was only on the mortgage and deed to help her niece get a mortgage.
The cousin was using the sale as an opportunity to put it to her cousin. The cousin had a financial stake in the sale, but the judge waived his hand and signed the papers to remove the cousin's interest in the property. Shortly thereafter, I closed on the house.

Being a non-occupied (or occupied co-borrower) has it's risks. My advice is to have an attorney review the paperwork. Otherwise, you might need a judge to resolve an inheritance issue.

Co-borrower vs. Cosigner: What’s the difference?

Very nice interior of a new homeBoth co-signers and co borrowers share in the responsibility of taking out a loan. “Non-occupant co-borrower” means you committed to pay the mortgage but don't live in the house.
Co-signers are the same as co-borrowers. The phrases are identical in terms of lending.
From a legal standpoint, there is a substantial distinction. A co-borrower will often show on the property's title, but a co-signer would not. Being on the title confers several privileges and duties. If your name is on the title and a visitor is hurt on your property, you may be responsible for the damages.

Ask your attorney how to structure the transaction if you to co-sign a mortgage loan.

Applying for a Loan with a Co-signer

Mortgage lenders will look at your income, credit, and other finances. These items are also needed from your co-borrower (spouse or partner). If your co-borrower doesn't have these items, you may need a co-signer. Co-signers are like co-borrowers, but have distinct obligations. In the event that you default on your loan, the lender will hold them responsible for repaying the debt.

What are the Co-signer Responsibilities?

Co-signers are synonymous with co-borrowers (someone who is on the loan with you). They are equally liable for repaying the debt and for any future issues that may arise. If the principal borrower defaults on the loan. The cosigner is responsible for making payments. The co-signer may request a Release of Co-Signer from the lender if he or she want to withdraw from the loan. The cosigner has nothing to worry about if the principal borrower makes all payments on schedule. If the primary borrower defaults, the lender may pursue the co-signer.

Advantages of Having a Co-Signer on Your Mortgage for Your Home

A co-signer can also help the primary borrower qualify for a larger loan. Lenders may be willing to give the primary borrower a larger loan with a co-signer. This may help the primary borrower get a lower interest rate on the loan.

Looser Credit Score Requirements

Co-borrowers with better credit can help the main borrower get a bigger loan. This might cut the loan's interest rate.

In return, the main borrower is expected to pay back the co-borrower. A co-borrower can be an adult child, spouse, parent, grandparent, friend or relative. A co-borrower is called the secondary borrower and the main borrower is called the primary borrower. How does a secondary borrower benefit from a co-borrower? A secondary borrower with better credit can help the main borrower get a bigger loan.

The Possibility Of A Larger Loan At A Lower Interest Rate

The potential for a larger and cheaper loan is an enticing proposition for many people. After all, who wouldn't want to save money on their borrowing costs? However, it's important to remember that not all lenders are created equal. Some may offer larger loans at cheaper rates, but they may also be less reliable or have worse customer service. As such, it's important to do your research before choosing a lender. Fortunately, there are many online resources that can help you compare different lenders and find the best option for your needs.

Ready to buy a home, but worried about your credit?

Your debt-to-income ratio may be too low if you have weak credit and no co-borrower. Having a co-signer on your mortgage loan can turn a “no” into a “yes”.

The Drawbacks Of Co-Signing A Loan

Couple standing in front of a judgeWhen you co-sign on a loan, you take full responsibility for it, even if the lender doesn't send you any notices. If the main borrower doesn't make their payments, you won't find out either. This can be a problem if the primary borrower loses their job or gets behind on payments. If the main borrower can't make their payments, you will have to start making payments on their loan. This could result in your having less money each month. If you don't have enough money to make both payments, you could end up getting sued by the lender.

Potential Responsibility For Payments

If the main borrower doesn't pay, the lender will look for other ways to get the money back. They may start by contacting the co-signer first. If they don't receive payment, they'll likely start to take legal action. The co-signer could be responsible for paying the loan in its entirety.

Difficulty Getting Out Of The Loan

If the primary borrower loses their job and can't make payments, it could take a long time to get out of the loan. If you want to get out of the loan early, it can be difficult. The lender may you to refinance the loan or pay it off in full before allowing you to get out of the loan.

Should I Add a Co-borrower to My Mortgage Application?

There are a few things to consider when deciding whether to add a co-borrower to your mortgage application. One is whether your credit score will improve with the addition of a co-borrower. Another is whether you can afford the monthly payments on your own. If you are confident that you can afford the mortgage and that your credit score will not be adversely affected, then it may be worth considering adding a co-borrower.

So how is this unique situation treated by lenders? In many cases, lenders are willing to work with people who are in difficult financial situations due to the coronavirus. They may be willing to offer deferment or forbearance on loan payments, or even provide additional financing.

What options do you have if you want another person to have property rights but you don't want them to be financially responsible for the mortgage?

If you want someone to have property rights but don't want them to be financially liable for the mortgage, you can create a trust. The trustee will hold the property in trust for the benefit of the beneficiary, who will have the right to use and enjoy the property but will not be responsible for paying the mortgage.

Does the FHA Allow Non-occupying Co-borrowers?

The FHA guidelines allows a non-occupant co-borrower. However, a co-borrower who does not live in the home must be a "family member."

Conclusion

Having a co-signer on your mortgage loan can be helpful in certain situations. Before choosing if you need a co-signer, consider your money and future goals.

If your finances aren't terrific, a co-signer may help you buy a cheaper home. Cosigning on a loan is a big deal, and if the main borrower doesn't make their payments, it could be very bad for you.

A co-signer signs a loan for someone else and assumes responsibility if they don't pay. Cosigning a loan for someone is a kind thing to do, but it could hurt your finances.  Before co-signing a loan, it's important to understand the potential consequences.