How to handle non occupant borrowers

We all can relate to those hard to find answers on questions about non occupant borrowers.  This has a lot to do with how infrequent an application with these borrowers comes along.  After all who wants to put their credit on the line for another person.  Thus it causes questions in the underwriting emails boxes of the world.

Good news is that these borrowers, or co-borrowers as they are sometimes called, can help make deals that would have been a sure decline with only the original borrower.  More good news, there is a lot less rules then you think when you have a non-occupant co-borrower or as I like to call them “The NOC”!

Who can be a non occupant borrower?

First let’s break down who can be the NOC on a principal residence transaction.  That answer is easy, it can be anyone.  The only exception to the “anyone” rule the NOC can not have an interest in the property sales transaction, such as the property seller, the builder, or the real estate broker from FNMA.  FHLMC does not outline it as well, but best practice is to follow FNMA’s guidance.

That means you don’t need to be related to the person, or in business with that person, or heck even like the person!  I have seen loans with mom, dad, brother, cousin, business partner, and adult kids all as NOCs.  Keep in mind the person will have to go through all the same steps your borrower will in the loan process.  This includes review of credit, income, and assets.  In addition the NOC will be 100% responsible for the debt (and foreclosure) if the occupying borrower fails to make the payments.

Is there an income balance requirement?

Second big question, is there an income balance requirement for both borrowers?  By balance I am referring to how much of the qualifying income comes from the occupying borrower and how much comes from the NOC.  The simple answer, there is no income balance requirement.  You can literally have zero income for the occupying borrower and all the income coming from the NOC.  About one to two years ago Freddie Mac removed their rule about an income balance so those restrictions now retired.  In addition, Fannie Mae updated DU a few versions back to allow NOC income to count in the ratios, that change was a huge departure from years of Fannie Mae policy!

What about down payments?

Third big question how much of the required down payment, closing costs, and reserves can the NOC contribute? Answer 100% of the funds.  The NOC is considered a borrower therefore assets needed for the transaction follow the exact same rules as the occupying borrower.  This answer seems odd because there used to be 5% own funds restrictions from the occupying borrower with Freddie Mac.  This rule has been retired, and Fannie Mae did not have the same rule.

So those are the most frequent questions I see in underwriting on this topic.  Whenever we publish these blogs we hope they help you close one more deal, or if you’re an underwriter increase your knowledge to better your quality and speed!  If you like these small blog posts on underwriting topics you will love our training library!  We are adding more and more on demand video training that give clear, documented, and explained lessons on conventional guidelines. Check it out at www.blueprintio.wpengine.com