Prospective home buyers sometimes delay applying for a home loan for various reasons. Some individuals may be waiting until their income increases or their credit history improves. Rather than waiting, however, potential home buyers can seek mortgage approval sooner by applying for an FHA loan with a co-borrower.
The terms of most types of mortgage loans generally require all borrowers to become occupants of the newly purchased home. An exception to the occupancy requirement is available on loans guaranteed by the Federal Housing Administration. With an FHA-guaranteed mortgage, you can allow certain non-occupants to serve as a co-borrower.
The reason for financing a home with a co-borrower is that the other individual might have greater earnings or a stronger credit history. A co-borrower is more than just a cosigner on a financial obligation. A co-borrower is also a co-owner of the home and is listed on the property title. Because of the joint legal liability, close family members are typically the only persons willing to cosign for a home loan.
Immediate family members
The underwriting guidelines for FHA mortgage loans are published in a document referred to as the HUD Handbook. Chapter 2, Section B of the HUD Handbook contains a list of allowable non-occupant borrowers who may help you qualify for maximum FHA financing. The list of qualified co-borrowers includes immediate blood relatives such as parents, children, and siblings.
Extended family members
The list of potential co-borrowers also includes the following family members, regardless of whether related by blood or marriage:
- aunts and uncles
- nieces and nephews
- stepchildren
Unrelated co-borrowers
A co-borrower on an FHA mortgage doesn't necessarily have to be a family member. According to Chapter 2, Section B of the HUD Handbook, FHA-guaranteed financing is limited to 75 percent of a home's value if the co-borrower is not a family member. In contrast, the maximum funding for an FHA mortgage normally requires a down payment of as little as 3.5 percent of the purchase price.
Allocation of mortgage interest tax deduction
FHA mortgage co-borrowers are equally responsible for the outstanding debt, but either borrower can make payments on the loan. In fact, the IRS allows you to allocate the tax-deductible mortgage interest if necessary. If any portion of the mortgage payments are paid by your co-borrower, you can calculate your respective amounts of interest and attach an explanation statement to your tax return.
The best time to apply for a mortgage loan is right before you start your home search. That way, you are ready to make an offer when the right opportunity comes along. Contact a mortgages specialist for more information on home loans.
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