Co-borrowers and co-signers: how family can help you qualify

Sometimes your income or credit alone is not enough to qualify for the home you need. Adding another person to the loan can close the gap. A parent can help an adult child buy a first home. Siblings can buy together. Two generations can pool income for a house with room for everyone. However, each loan program has its own rules about who can be added and whether they have to live in the home.

Co-borrower, co-signer, non-occupant: the terms

• Co-borrower: signs the loan and is usually on the title, so they own part of the home. Their income, debts and credit all count.
• Co-signer or guarantor: signs the loan and is fully responsible for the debt, but usually is not on the title.
• Occupying: the person will live in the home as their primary residence.
• Non-occupant: the person signs the loan but will not live there. An example is a parent helping from another town.

In every case, the lender looks at everyone’s income and everyone’s debts. A helper with strong income but a large mortgage of their own may add less than you would expect.

How a co-borrower can help

• More qualifying income, which can bring your debt-to-income ratio within limits.
• A stronger file when your credit history is short or your score is close to a cutoff. Many loans are priced or approved on the lower of the borrowers’ scores, so a co-borrower with weaker credit can hurt rather than help.
• Room for more people, such as a home with an accessory unit or extra bedrooms for multigenerational living.
• More homes to choose from, because your budget goes further.

FHA

FHA allows both occupying and non-occupant co-borrowers. The difference is in how much you can borrow:

• A family member who will not live there: you can still get maximum financing, up to 96.5% loan-to-value on a one-unit home. That is the usual 3.5% down.
• A non-family member who will not live there: the loan is limited to 75% loan-to-value. In practice, that means 25% down.

FHA defines family broadly, including parents, children, siblings, grandparents, in-laws and a domestic partner. We confirm the relationship as part of your application. See FHA purchase loans.

Conventional

Fannie Mae and Freddie Mac allow non-occupant co-borrowers, co-signers and guarantors, and they do not have to be family. A friend can qualify.

For Fannie Mae loans approved through its automated system, Desktop Underwriter, the maximum loan-to-value with a non-occupant co-borrower is 95%, which means 5% down on a one-unit home. If the loan is manually underwritten, the limit is 90%, and the person living in the home usually has to put in the first 5% of the down payment from their own funds.

Fannie Mae’s HomeReady program, with 3% down for qualifying buyers, also permits non-occupant borrowers. HomeReady has an income limit, so we check how the helper’s income counts toward it before you apply.

VA

VA loans work best when both borrowers are eligible for VA benefits, or when the co-borrower is the veteran’s spouse.

• Veteran and spouse: a non-veteran spouse can be a co-borrower on a regular VA loan. No down payment is required with full entitlement.
• Two veterans: both can use their entitlement on the same home.
• Veteran and a non-veteran who is not a spouse: this is a joint loan. VA’s guaranty covers only the veteran’s share of the loan. In practice, lenders require a down payment on the non-veteran’s share to make up for the missing guaranty. These loans also go to VA for prior approval, and not every lender offers them.

Confirm your entitlement early with a certificate of eligibility. See VA eligibility and VA purchase loans.

USDA

USDA’s guaranteed loan does not allow co-signers or non-occupant co-borrowers. Anyone on the loan has to live in the home.

USDA also counts income differently. To check the program’s income limit, 115% of area median income, the lender adds up the income of every adult in the household, whether or not they are on the loan. A working adult child or a relative moving in with you counts toward the limit even if they do not sign anything. See USDA purchase loans.

The rules at a glance

What the helper should know

Co-signing is a serious financial commitment. The person helping you:

• Owes the whole debt if you cannot pay, not only half.
• Has the payment on their credit, and it counts in their debt-to-income ratio when they apply for their own loans.
• May own part of the home if they are on the title, which affects selling and refinancing later.

It helps to discuss openly how long they will be on the loan. Many families plan for the occupying borrower to refinance into their own name once their income or credit allows.

Where to start

We recommend reviewing both people’s numbers early. Each program treats a co-borrower differently, and the best fit depends on who will live in the home, how you are related and both of your credit profiles. If credit is the obstacle, a credit plan may help you qualify on your own.

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Sources: HUD Handbook 4000.1: FHA Single Family Housing Policy. Fannie Mae Selling Guide B2-2-04: guarantors, co-signers and non-occupant borrowers. Fannie Mae Selling Guide B5-6-02: HomeReady underwriting. VA Lenders Handbook, Pamphlet 26-7. VA: purchase loan. USDA Handbook HB-1-3555, Chapter 9: income analysis.