Does it make a difference if a co-borrower lives in the property when you apply for a mortgage?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

In general, lenders treat a co-borrower that lives in a property the same as they do a co-borrower who does not live in a property -- which is also known as a non-occupant co-borrower.  As we explain below, however, there may be some differences depending on the loan program and how your application is underwritten.

First off, it is important to recognize that when you apply for a mortgage lenders require the same information for all borrowers and co-borrowers, regardless of if they intend to occupy the property. Lenders review the debt-to-income ratio, assets, credit score, employment history and other relevant information for all applicants to determine if you qualify for the mortgage and to assess the loan you can afford.

If a co-borrower does not intend to live in the property, then she or he is usually required to submit a separate loan application while if both co-borrowers plan to occupy the property they are typically only required to submit a single, joint application. Either way, the personal, financial and credit information provided by both borrowers is generally the same.

Additionally, in both scenarios, all borrowers are legally responsible for the mortgage even if one does not plan to live in the property.  This financial obligation also applies if the non-occupant co-borrower does not hold an ownership stake in the property being financed -- which is technically called a co-signer.  In short, if you are listed as a borrower on a mortgage note, you are responsible for repaying the loan whether you live in or own the property or not.

The main difference when you apply for a mortgage with a non-occupying co-borrower is that the housing expense for that individual's primary residence is included as monthly debt in your loan application, which impacts the loan you are eligible for. In short, the higher combined monthly debt expense for all applicants, the lower the mortgage amount you qualify for.

For example, if a parent wants to be a co-borrower for a child but not live in the property being financed, then the monthly mortgage or rent payment for the home the parent lives in is counted as a debt expense in the primary borrower's application along with the parent's other payments for credit cards and car, personal and student loans.  This effectively means that collectively the applicants need to earn enough monthly gross income to afford the payments on two homes -- the property the parent lives in and the property the child is buying -- as well as their combined personal debt expenses.

So if a non-occupant co-borrower has relatively low income and high monthly debt expenses, including their housing payment, they may actually be detrimental to the primary applicant's ability to qualify for the mortgage.  In some cases, the primary borrower may qualify for a smaller loan amount or may not be approved for the mortgage.

Use ourTwo Person Mortgage Qualification Calculatorto determine the mortgage co-borrowers can afford

Please note that if both co-borrowers intend to live in a property then the monthly housing expense -- mortgage payment, property tax and homeowners insurance -- for only that property is counted as debt.  For example, if spouses that plan to occupy a home together apply for a mortgage as co-borrowers then only the housing expense for that property is included in their debt-to-income ratio, along with their other personal debt payments.

In addition to impacting the loan you can afford, whether a co-borrower intends to live in a property or not can also affect the qualification guidelines that lenders apply.  For a conventional mortgage -- a loan that is not insured by the government -- different eligibility policies apply to loans with a non-occupant co-borrower that are manually underwritten.

While most mortgages go through an automated underwriting process to determine if you qualify, loans that require an exception to a standard qualification guideline to get approved -- such as if you have a credit or other issue with your application -- go through manual underwriting.  The debt-to-income ratio and down payment requirements for manually underwritten loans with a non-occupant co-borrower are stricter than if both borrowers live in a property.

For example, lenders apply a maximum debt-to-income ratio of 43% to only the borrower who lives in the property to determine the mortgage they can afford.  This is lower than the debt-to-income ratio used for other types of mortgages and because it only factors in the income for the occupying applicant -- effectively excluding the non-occupying co-borrower's income -- the loan you qualify for may be significantly reduced.        

Additionally, lenders also typically require a 10% down payment for manually underwritten mortgages with a non-occupant co-borrower, which is higher than the 3% down payment permitted for most conventional loan programs.  The higher your down payment, the more you need to contribute to buy a home, although your down payment can come from a gift, grant or other home buyer assistance program if you are purchasing a single unit property such as a home, condominium or co-op.

The loan program is another key consideration.  For FHA mortgages with a non-occupant co-borrower, the down payment requirement is 25% -- as compared to 3.5% for a standard FHA loan -- unless the applicants are relatives and the home purchase transaction does not involve a relative selling a property to another relative who intends to be a non-occupant co-borrower on the mortgage (in which case the standard down payment requirement applies).  In this case, the property must also be a single unit property such as a house, condominium or co-op.

In conclusion, multiple factors affect the guidelines for co-borrowers, including if they intend to live in the property being financed, the loan program and underwriting method.  If you plan to apply for a mortgage with a co-borrower, we recommend that you contact multiple lenders in the table below to determine how they would handle your unique circumstances.  Given the exceptions and potential differences in qualification requirements that we outlined above, it is important to understand the lender's approach before you submit your application.

Sources

"B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction."  Selling Guide: Fannie Mae Single Family. Fannie Mae, June 5 2018. Web.

"II.A.2.b.ii.(B). LTV Limitations Based on Non-Occupying Borrower Status."  FHA Single Family Housing Policy Handbook 4000.1.  Federal Housing Administration, January 2 2020.  Web.