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Low Down Payment Conventional Loan: Non-Occupant Co-Borrower Guidelines

There are plenty of 3% down conventional loan options, but what if you need a non-occupying co-borrower to help you get approved?

The bottom line is that you’ll likely need 5% down if you want to use a conventional loan with a non-occupant co-borrower. Here’s how to navigate getting a low down payment loan with someone who won’t live in the property.

What Is a Non-Occupant Co-Borrower?

A non-occupant co-borrower is someone who does not plan to live in the property but will be on the loan.

Other characteristics of a non-occupant co-borrower are:

  • They may or may not be on the title.

  • They must sign the mortgage documents.

  • The co-borrower is equally responsible for the loan.

  • They must not be an interested party to the transaction, such as the seller, the real estate agent, lender, or builder.

  • Must meet the same guidelines as any borrower.

Should you use a non-occupant co-borrower? It depends on who they are.

What Makes A Good Non-Occupant Co-Borrower?

People usually add a non-occupant co-borrower to their mortgage because they don’t have enough income to qualify by themselves.

A good non-occupant co-borrower has high income and low debts. Someone with low income or high debt payments (auto loans and student loans, for example) may not help you qualify.

The lender will add their debts to your loan application. This could put you in a worse spot than qualifying by yourself.

The non-occupant co-borrower should also have a credit score at least as high as yours. But a co-borrower’s high score may not help as much as you think.

The lender will use the lowest score of all borrowers to qualify. So if you have a 620 score and your potential co-borrower has a 740, the lender uses 620.

Finally, a non-occupant co-borrower must be okay with being fully “on the hook” for the loan. If you don’t pay, their credit could suffer. Additionally, your debt will show up on their credit report the next time they apply for credit. This could hurt their chances of getting their own mortgage, auto loan, or other credit. Make sure they are okay with this situation.

For a conventional loan, the non-occupying co-borrower does not have to be a family member.

Low Down Payment Non-Occupant Co-Borrower Rules

Following are popular low down payment loans and their non-occupant guidelines. Fannie Mae and Freddie Mac loans are available from most conventional lenders.

Fannie Mae Conventional 97

The Conventional 97 loan typically requires just 3% down. But if you have a non-occupant co-borrower, you’ll need 5%.

Fannie Mae HomeReady®

HomeReady is a loan similar to the Conventional 97 loan, but it comes with added flexibilities, like using roommate income to qualify. It normally only requires a 3% down payment. But if there’s a non-occupant co-borrower on the application, you’ll need 5% down.

Freddie Mac HomeOne®

HomeOne is Freddie Mac’s 3% down loan. It comes with no income limits, which is what sets it apart from most other 3% down conventional loans. While this loan comes with many flexibilities, it does not allow non-occupant co-borrowers.

Freddie Mac Home Possible®

Non-occupant co-borrowers are allowed, but you must put 5% down.

FHA Loan

FHA loans allow non-occupant co-borrowers as long as they are related by blood, marriage, or law. For example, a sibling, step-parent, aunt, or son-in-law would be an eligible non-occupant borrower. For an unrelated co-borrower, you must put 25% down.

USDA Loans

The USDA loan program, a zero-down loan for rural areas, does not allow non-occupant co-borrowers. Only those who plan to live in the property may be on the loan.

VA Loans

The VA loan is a zero-down mortgage for current and military members. This program allows non-occupant co-borrowers, even non-veteran ones, as long as the primary occupant borrower is an eligible veteran and meets other qualification criteria.

How To Apply For A Non-Occupant Co-Borrower Loan

Tell your lender upfront that you are using a non-occupant co-borrower. Not all lenders will allow it, even though mortgage rules say it’s permitted. Some lenders impose stricture rules around conventional loans.

You and your co-borrower should apply together over the phone, in person, or online. Both of you should have your information ready, such as income, assets, social security numbers, and other personal information required to pull credit.

Many lenders can issue a pre-approval the same day, and you can be shopping for a home soon.

The non-occupant co-borrower rule could make you a homeowner much sooner than you thought possible.

About The Author:

Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.

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