Buying a San Diego Home With a Parent or Relative on the Loan: Co-Signer and Co-Borrower Rules

The two words are used loosely. The loan programs give them different meanings.

A co-borrower is on the loan and on title. Under FHA’s rules every borrower and co-borrower takes title at closing, is obligated on the note and signs the deed of trust, whether or not that person will live in the home.

A co-signer is on the loan and not on title. A co-signer signs the note and owes the debt, holds no ownership interest and does not sign the deed of trust.

For conventional loans this guide uses Fannie Mae’s rules. Fannie Mae also recognizes a relative who is a borrower without living in the home. That person signs the note and may or may not be on title.

In every case the relative is liable for the full debt, not a share of it.

Someone has to live there. At least one borrower must move in within 60 days of signing the deed of trust and intend to stay at least a year.

The down payment depends on who the co-borrower is. When one borrower will not live in the home, FHA caps the loan at 75% of the home’s value. If the borrowers are family members, the cap goes back up to FHA’s usual 96.5%. That family rule has conditions:

• It applies to a one-unit home, such as a house or a condo.
• It does not apply when one family member is selling the home to another who will be a co-borrower without living there.
• “Family member” means what HUD says it means. The list covers a child, parent or grandparent, including step, adopted and foster relationships; a spouse or domestic partner; a brother or sister, including step-siblings; an uncle or aunt; and a son-, daughter-, father-, mother-, brother- or sister-in-law. A cousin, a niece or a nephew is not on the list.

The lowest credit score counts. FHA works out a decision score for each borrower and uses the lowest one among them. Below 500 the loan is not eligible. From 500 to 579 the loan is capped at 90% of value.

A relative’s income does not always count. When a borrower has no credit score and the loan is underwritten manually, FHA figures the qualifying ratios only from the income of the borrowers who will live in the home.

A co-borrower or co-signer who will not live in the home has to be a U.S. citizen or have a principal residence in the United States.

These are Fannie Mae’s rules. A lender selling to a different investor may apply others.

A relative who joins the loan cannot have a stake in the sale. The seller, the builder and the real estate agent are ruled out.

How the loan is underwritten changes the limits.

• Through Fannie Mae’s automated system, the income, assets, debts and credit of every borrower are considered, and the cap is 95% of the home’s value.
• Underwritten manually, with the relative’s income used to qualify, the cap is 90%. The debt-to-income ratio figured from the occupant’s income alone cannot exceed 43%. The occupant also has to put down the first 5% from their own funds, unless the loan is 80% of value or less, or the home is a one-unit principal residence and the buyer qualifies to use gift, grant or employer funds for it.

One more rule helps some families. If you buy a home for a parent who cannot work or does not have the income to qualify alone, Fannie Mae treats you as the owner-occupant even though you will not live there. The same applies to a parent or legal guardian buying for a disabled adult child who cannot work or cannot qualify alone.

A Veteran can buy with a relative who is not a Veteran and not the Veteran’s spouse. The VA calls this a joint loan, and it works differently from a VA loan to a Veteran alone.

• Both people are liable on the loan and both own the home.
• The Veteran has to certify that they intend to live in the home.
• The VA guarantees only the Veteran’s share of the loan. The lender has to confirm that its investor will accept a loan with that limited guaranty. Ask what that means for the down payment before you plan on none.
• Both people need satisfactory credit. The relative’s income cannot make up for a shortfall in the Veteran’s ability to repay the Veteran’s share.
• The lender cannot close this loan on its own authority. It goes to the VA for prior approval first, and that adds time.

The relative remains liable until the loan is paid off or the lender releases them from it. Missed payments are their missed payments.

Three questions to settle before anyone signs:

1. How will this loan count when the relative applies for credit of their own? Ask the lender.
2. If the relative goes on title, what does owning part of the home mean for their taxes and their estate? Ask a tax preparer or an attorney.
3. How does the relative come off the loan later? Usually that means paying off the loan through a refinance or a sale.

Joining the loan is one way to help. There are others, and each has its own guide.

• A gift toward the down payment: family gift money.
• Buying the relative’s own home, with a gift of equity: buying a home from family.
• Taking over an existing low-rate loan together: assuming a mortgage with a spouse, partner or family.