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Debt Ratio Too High? Add a Non-Occupant Co-Borrower.

May 22, 2016

PMC back 2016

You may not show enough or make enough income to buy the home that you really want, but you don’t want to settle for a smaller home.  There is a solution.  It is possible to add a Non-Occupying Co-Borrower to the mortgage loan in order to qualify due to income and asset requirement in order to qualify for the loan. There are two options through Conventional or Government financing. This would be ideal for a college graduate who has student loan debt that is out of deferment and the debt ratio may be too high. For self-employed borrowers that have filed two or more years of business tax returns (Schedule C, 1120 or 1065) this can help an Occupying Borrower that shows low income due to write offs.

FHA Non-Occupying Co-Borrower

FHA requires 3.5% down if the Non-Occupying Co-Borrower (s) is  related to the borrower(s) by marriage, blood or law which includes parents, siblings, grandparents, uncles, aunts, nieces, nephews, and step-relationships. Interesting enough, cousins are not allowed. There is an option to add a Non-Occupying Co-Borrower that is not related by marriage, blood or law to be on the mortgage loan, but when the Non-Occupying Co-Borrowers are not related to the borrowers the mortgage requires a 25% down-payment to qualify. They must also have some type of document-able long-relationship to the borrowers. For example, a long-time family friend or co-worker, employer of the borrower of the mortgage loan. Be prepared to fully document the relationship in these types of cases as FHA wants to make sure that people are not being used as straw-borrowers for illegitimate or fraudulent purposes.  The down payment can come from family or the non-occupant co-borrower.

One draw back of an FHA loan is that the loan requires an upfront mortgage insurance premium, which  be financed in the loan or paid upfront and there is monthly PMI on the life of the loan.  Saving up to put 10% down will help reduce the term to 11 years.  If 10% down isn’t possible, then putting 5% down will at least help reduce the monthly PMI rate.

FHA allows a college graduate who just began a job qualify with the base salary of a new job with 30 days of check stubs, a verification of employment and an (signed/dated) executed offer of employment letter (on company letterhead). FHA requires the Non-Borrowing Spouse’s debts be added into the ratios. Also, if the Non-Occupying Co-Borrower is married, the debts of the Non-Borrowing Spouse would also be factored into the ratios. It is okay for both to be on the loan if needed.

FHA is easier to qualify with credit requirements; such as having only one FICO score being reported with Transunion, Equifax and Experian due to a lack of credit. FHA requires a minimum of 580 Mid FICO for the 3.5% down requirement or 10% down with 500-579 a Mid FICO. Non-Traditional trade-lines are allowed. An account history for 12 months will be required on the creditors letterhead listing the name of the borrower, address and account number.

Freddie Mac Non-Occupying Co-Borrower

Freddie Mac differs from FHA both in that the Non-Occupant Co-Borrowers must be related to the occupants of the home, and the Freddie Mac program requires a minimum of 5% down. In addition, the Freddie Mac program will not have the up-front Mortgage Insurance Premium that you will find with the FHA mortgage program. Conventional loans can pay for private mortgage insurance in one lump sum outside of loan, it can be absorbed in the rate (lender paid PMI) or it can be paid monthly (borrower paid PMI). The down payment must come from the Occupying Borrower. Conventional only requires the borrowing spouses debt be added into the ratios. Freddie Mac requires a 620 Mid FICO score and most lenders require a minimum of 3 tradelines reporting on a tri-merge credit report with over $1000 limit reported over 12 months.

Down Payment Requirement

The funds to close for the down payment and any closing costs not paid by escrow must be sourced and seasoned for 60 days in a US bank account. The last 60 days of asset statements will be required (all pages and nothing crossed out). Copies of all checks deposited in the accounts shown on the asset statements other than payroll direct deposits will be required along with a letter of explanation for each.   If unable to source the funds will be omitted and not allowed for the purchase transaction. The closing costs/pre-paid fees can be paid with gifted funds.

Sources of Down Payment Funds

  • Checking Account
  • Savings Account
  • Money Market Account
  • Surrendered Life Insurance Accounts
  • Certificates of Deposit
  • Stock and Bond Investments
  • Retirement Account Funds (terms of the withdrawal must be supplied)

Mortgage Credit Certificate (MCC Tax Program)

One last way to lower the debt ratio is to use a MCC program (federal income tax credit), which can be used with a Conventional or Government loan.  There may be an additional lender fee to utilize this program and not all lenders offer this.  You may also be required to take a in-person or an online (First Time Home Buyer) housing counseling course (certificate is required as proof).  The fee for this program is usually about $50 and can take up to 8 hours to complete.  Email PMC for more information: info@pmccanhelp.com.

PMC offers 2 to 24 month bank statement loans (single account – using average monthly deposit averages-100% from personal and 50% from business) and also has other low doc home loans for 500+ FICO borrowers.

Our goal is to find you the best financing available to save the most money.  As the experts.  Email your scenario to info@pmccanhelp.com.

Make sure to visit our website:   www.pmccanhelp.com

FOR A FAST PRE-APPROVAL: Complete a loan application on our website APPLY ONLINE

Job Opportunities? PMC has been a premier CA & WA brokerage for over 27 years.  Visit our Careers website and apply online today! www.pmccareers.com

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