While it is possible for you to qualify for a mortgage to buy a house that a relative lives in, you are the sole borrower for the mortgage and the sole owner of the property unless you add your relative to the property title after closing. If you add your relative to the property title through a grant deed or quitclaim deed, you remain solely responsible for the mortgage, even if the relative makes the monthly mortgage payment.
The only way to include your relative on the mortgage is if the relative applies with you as a co-borrower or co-signs the mortgage. If a relative is a co-borrower then she or he is listed on the mortgage note and the property title as an owner. If a relative co-signs your mortgage, she or he is listed on the mortgage but does not own the property.
Additionally, if you apply for a mortgage on a property that you intend to rent out to a relative, the mortgage is classified as non-owner occupied, which is different than a mortgage on your primary residence that you live in. In short, a non-owner occupied mortgage applies to rental and investment properties.
Non-owner occupied mortgage rates are typically higher than the rate for a mortgage on the home you live in. The higher your mortgage rate, the higher your monthly payment and lower the loan amount you qualify for.
The table below outlines non-owner occupied mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to find the lowest rate and fees. There tends to be wider variation in non-owner occupied loan terms which makes shopping for your mortgage more important.
In addition to more expensive loan terms, the qualification requirements for a non-owner occupied mortgage are also different. You are usually required to make a larger down payment to qualify. For example, to qualify for a rental property mortgage, you are required to make a 15% down payment as compared to only a 3% down payment (or lower depending on the loan program) for a mortgage on your primary residence.
When you apply for a non-owner occupied mortgage, lenders also include the housing expense (rent or mortgage, property tax and homeowners insurance) for your primary residence in your debt-to-income ratio, which usually reduces the loan amount you qualify for. In short, if you buy a home for your relative to live in, you must earn enough income to afford the monthly housing expense for two homes instead of one.
Review How to Get a Mortgage on an Investment Property
Additionally, if you want to include rental income from your relative in your mortgage application, lenders typically require that you provide the Schedule E from your tax returns for the prior two years to verify the income. If you do not have two years of tax returns to confirm the income, lenders typically use the lessor of 75% of rental income according to a rental property appraisal report or 75% of income according to a signed lease agreement.
So even if your relative agrees to pay monthly rent that equals or exceeds the mortgage payment, the lender may only include a portion of the payment in your debt-to-income ratio, which makes it more challenging to qualify for the loan or reduces the loan amount you can afford.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan amount you can afford
It is important to highlight that if you apply for the mortgage as a sole applicant, even if your relative lives in the property and pays the mortgage (or rent), you are the legal owner of the property and solely responsible for the mortgage.
As we outlined above, if you want your relative to be legally responsible for the mortgage, in addition to yourself, you both are required to apply for the mortgage as co-borrowers or your relative could co-sign the mortgage.
If you apply for the loan with your relative as a co-borrower or co-signer and the lender uses standard underwriting, then her or his credit score, monthly gross income and debt expenses are included in the mortgage application. If your relative has a good credit score, high income and relatively low monthly debt expense, you may be able to qualify for a higher mortgage amount.
Please note that when two people apply for a mortgage, the lender uses the lower credit score between the applicants to determine your loan terms and ability to qualify for the loan. If either you or your relative has a low credit score, this may be problematic.
Additionally, if you and your relative apply for the mortgage as co-borrowers, then your loan may be classified as owner occupied which means your interest rate and closing costs may be lower. The table below shows rates and fees for owner occupied mortgages. As you can see, the rates are lower than for non-owner occupied loans. We recommend that you compare multiple proposals to find the best mortgage terms.
In closing, although it is certainly possible to buy a home for a relative to live in, it is important to consider how this approach impacts your loan terms, who is responsible for the mortgage and who owns the property. In some cases it makes financial sense to apply for the mortgage as a sole borrower while in other cases having the relative be a co-borrower or co-signer is a better approach. The right option depends on your and your relative’s financial, credit and employment profile.
"Rental Income Matrix." Freddie Mac Learning. Freddie Mac, December 2019. Web.« Return to Q&A Home About the author