There's something about owning a home that seems to call us, a deep-seated yearning. Unfortunately, life hasn't always given everyone an easy path to homeownership. If you've held off on buying a place because of your credit, we have good news. Using a non-occupant co-borrower could help you qualify for a mortgage, even if you've failed to in the past.
1. FHA Loans Allow Up to 2 Non-Occupant Co-Borrowers
A non-occupant co-borrower is anyone who doesn't live in the home and is on the loan documents. It's similar in concept to a co-signer, but there are key differences.
Co-borrowers act as loan guarantors, making the monthly payments if you miss them. The FHA has long been a favorite among aspiring homeowners with poor credit history. They've designed programs to improve homeownership accessibility. By lowering credit and down payment requirements, it's easier to qualify for mortgages.
Even after using their program, not everyone qualifies for a mortgage, though. That's why we've told everyone about the FHA's co-borrower standards. If your co-borrow meets their criteria, you can use up to 2 of them. The FHA will still approve the loan as long as everyone passes the criteria they've set.
If your credit score is above 580, an FHA loan might help. You'll have a 3.5% down payment as long as it's above that when you apply. Plus, they let you get one with scores down to 500 if you put down 10%.
However, if your DTI rises above 41%, their qualifications bar you from getting one. That's when a co-borrower can come in handy.
If you're applying for an FHA loan, co-borrowers must be relatives or close friends of yours. They also have to live in the United States. Finally, they have to pass the FHA's typical credit standards.
2. Using a Non-Occupant Co-Borrower Could Improve Your DTI
Often, people try a co-borrower after being told they're unqualified due to poor credit. But, using one isn't going to change your credit score or help you qualify for a mortgage. They're useful if there's an issue with your debt-to-income ratio, though.
By adding a co-borrower, you can include their income along with yours on the application. Since you've added more income, it usually decreases the DTI ratio on your application, too. That can help you qualify for a mortgage when you wouldn't have before.
But, it won't do much about the interest rates on your loan. Underwriters use the lesser score between yours and the co-borrowers. Whoever has the lowest will be what the bank uses to set interest rates.
3. They Can Also Boost Your Income to Increase Loan Limits
Another way one might benefit an application is by increasing how much the bank lets you borrow. Whenever applying for a loan, the limits given to you are partly set according to income. If you've increased the income on the application, normally you see larger loan limits.
So, let's say you've found the ideal house, somewhere perfect. The only issue is that its price is slightly higher than what's on your pre-approval letter. With that being the case, using a co-borrower could seal the deal.
Adding their income to the application would allow the bank to lend more to you. Their income would decrease the relative size of the loan compared to your income level. Any time this ratio has lowered, loan limits rise in proportion.
If you've been told a dream home isn't affordable, consider asking someone to be a co-borrower. They could be what's needed to get your family in the house of your dreams.
How a Non-Occupant Co-Borrower Could Help You Become a Homeowner
Becoming a homeowner is a noble dream, one everyone wants to attain. But, it's not always easy to buy a home living in today's economy. So many things can crop up and destroy an otherwise impeccable credit record. Even losing income can stop your home search if the bank feels iffy about it. Thankfully, by adding a co-borrower, things don't have to be so tough. They've made it easier to qualify for mortgages as their incomes add to yours.