Using Co-Signers to Buy a HomeDaniel Dobbs2023-05-25T20:39:21-07:00
Currently there are many “starter buyers” who with just a little (family) assistance can begin the journey of home ownership.
Often termed “kiddie condo” financing (the property need not be a condo) younger buyers reside in the property while “Non Occupying Co-Borrowers” (hence referred to as: “NOCB”) often receive tax benefits.
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Typically, future appreciation is split at a future sale date or when the home is refinanced to remove the parents off the loan.
There are several distinctions depending whether the loan is a FHA, Fannie / Freddie or a VA loan.
Fannie Mae has a provision allowing properties to be classified as “owner-occupied” even if the (primary) buyer doesn’t reside in the home full-time or have any income of their own.
For example: Parents wanting to provide housing for their college student children, or physically handicapped / developmentally disabled (adult) children, CAN be considered to be owner-occupants even though the adult child may also reside elsewhere during parts of the year.
The same principle works in reverse: Many adult children who wish their elderly parents (who often have little or no income) to “have their own space” may also obtain an owner occupied loan to purchase a property for their parent(s) to live in part-time.
VA does not allow for any “NOCBs” but does lend to any veterans who choose to jointly purchase a property (provided all buyers are eligible for veterans benefits).
Down Payment Requirements
FHA requires just 3.5% down and of course there’s no down required (up to $423k) for any VA loan.
Fannie and Freddie both require 20% down. (“PMI” restrictions precludes any non-occupying co borrowers). But buyers CAN buy with 10% down with a seller carry back (10%) to avoid PMI restrictions.
Definition of NOCB
A “NOCB” is a person(s) who:
1) Is liable for the mortgage
2) Will have an “ownership “interest” in the home (name is on the title as well as the loan)
3) Has a “familial relationship” (see below)
General Guidelines:
“NOCB”s must have sufficient credit scores to qualify. Adding “NOCB”s NEVER overcomes credit challenges that pertain to the primary borrower.
“NOCB”s ARE NOT required to live in the same state of the purchase.
“NOCB”s ARE NOT required to be a “blood” relative of the borrower.
“NOCB”s can be refinanced off the loan at any point WHEN there is sufficient income for the primary applicant to qualify for the mortgage on their own.
“Related” Non Occupying Co-Borrowers
Definition: “NOCB”s are related to borrowers through “blood”, marriage and domestic partnerships (i.e. spouses, parents, grandparents, children, siblings, aunts, uncles, cousins, nieces and nephews).
FHA makes a provision for “unrelated individuals” who document evidence of a “longstanding, substantial family-type relationship” not arising out of the loan transaction.”
Fannie or Freddie do not specifically address “unrelated individuals” as “NOCB”s.
This means co-borrowers NOT related by blood would have to show evidence of a “familial” relationship and it was NOT created specifically for the purpose of acquiring investment property.
Editor’s Note: The key to remember: “ when proving a relationship with a non related co borrower “the burden of proof is on the borrower”.
1) “NOCB”s MAY NOT be a party that has a financial interest in the transaction (i.e. seller, builder, real estate agent), etc.
A RE agent can be”NOCB” but can not be receiving any compensation in their role “as an agent”.
In this case, the seller simply credits (whatever the commission is) to the buyer(s) in the form of closing costs.
2) Unless otherwise exempted (e.g., military service with overseas assignments, U.S. citizens living abroad), any “NOCB”s must have a principal residence in the United States.
3) The degree of financial contribution by the “NOCB”s, (and the number of properties similarly owned by the “NOCB”s) may indicate that the primary borrower is simply a “straw buyer”.
For example:
If Uncle Bob has cosigned for 3 other family members, all of which own 2 bed 2 bath condos in close proximity; then the loan will probably be declined as it will be determined that Uncle Bob is an investor.
In this case (for all practical reality) Bob is using family members as straw buyers for the sake of acquiring rental properties at a low down payment / and low-interest rates afforded only to primary borrowers.
Other points to consider:
4) Gift funds (if possible ) should always be in the account of the primary applicant 61-89 days before escrow is opened.The specific umber of days fluctuates depending on the date(s) the bank statement “cycle”.
Depositing the funds “seasons” the money and precludes the need for a “gift letter”.
Seasoned funds present the primary borrower(s) in a “better light” (to the underwriter) as the funds will been seen as a “history of savings” (vs a straight gift).
5) In the case of a “refi” mortgages the rules become a little murkier.
Both FHA and Fannie Mae requires “NOCB”s be “on title” to the property 12 MONTHS PRIOR TO THE LOAN BEING SUBMITTED.
Freddie Mac allows for “NOCB”s to be added “to title” just prior to the date of application but there can be “no cash out”.
Purchasing “Units”
Both Fannie and FHA limit “NOCB”s purchases to
1) Primary residence
2) Duplexes/SFR/Condos
Primary residence “triplexes and four plexes” cannot be financed using “NOCB”s participation. “NOCB”s can be used to purchase “units” as but only as “investment properties” with 20% (minimum) down (Fannie/Freddie), but the interest rate is typically .75% higher than the owner occupied rates.
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