Rarely do I re-blog but Jeff has outdone himself with this post. The rules keep changing and it is good to know what they are today.
There will always be some sort of mortgage myth in our industry or a piece of information given by a loan officer that is misleading. What I am about to talk about is regarding FHA loans and a borrower using a co-signer to help them purchase their new home. We call this a non-occupant co-borrower type of loan.
Let's first talk about co-signers for mortgages, because this term is used loosely throughout the real estate industry. When doing a mortgage, a co-signer is much different than when buying a car. When buying a car, you can still have bad credit below normal standards and bring a co-signer into the mix to solidify the deal. On a mortgage, if the primary borrower doesn't fit the normal credit score requirements and or the credit criteria, then you can't use a co-signer to help you purchase or refinance. A co-signer is used only for the purposes of qualifying with more income. The main point, the good credit of a co-signer can't be to offset the bad credit of a primary borrower, it's not allowed.
Now, there is a difference between specific types of loan products when using a co-signer. On a conventional loan, the primary borrower still needs to qualify with an income ratio, which is usually only about 6%-8% above the normal qualifying ratios of 28/36. In regards to an FHA mortgage, there is no minimum requirement. In many cases, the primary borrower wouldn't even need income, but this depends on the overall deal. As long as the primary borrower met the credit requirements and the credit scores. This kind of scenario is typically scene when doing a FHA kiddie condo loan, which can also be known as a FHA non-occupant co-borrower loan. This is when you have a college student buying a property and the parent(s) are co-signing. More details on FHA kiddie condo loans.
Summary : I had to bring this up because I just received a call from a borrower who has credit scores of 565 who was told by a large bank that they can't get a loan. But if they get a co-signer with good credit, that they would be able to get a loan. Knowledge in regards to the basics of FHA loans is so important. To me, this is actually Mortgage 101.
In regards to the word co-signer, in the mortgage industry, this is referred to as a non-occupant co-borrower. As long as the person who is co-signing is a family member or a relative and they aren't living in the property. Hence why they are called a non-occupying co-borrower. And a FHA non occupant co borrower is much easier doing this with than a conventional loan. So it's a mortgage myth if one says that you can get a co-signer no matter how your credit is. Lastly, if the primary borrower has someone that will occupy the property with them and will be on the loan, they are known as a co-borrower.
-- Update per Missy Caulk's comment # 8 - The co-signer, aka non-occupant co-borrower can have a primary home, even a home with a FHA mortgage on it. Meaning that the home does not have to be free and clear. It's considered a debt and is part of the qualifying ratios.
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