September 30, 2015
A reader asked us a question recently about purchasing rental property with an FHA mortgage:
“I’m considering cosigning on a rental property for my son so he can move in with friends. He has no credit established yet. My husband and i are also in the process of looking to move. How will cosigning affect us if we want to buy in the next 2-6 months and go with an FHA loan?”
Is the reader question referring to a situation where the parent wishes to co-borrow with the child to purchase a residence for the child to occupy? Or does it refer to co-signing on a lease to help the child, with the parents later applying for an FHA loan for themselves?
In the case of an FHA borrower who has a “contingent liability” by co-signing a lease or other financial instrument prior to applying for an FHA mortgage, HUD 4000.1 is clear:
“The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrowers monthly obligations unless the Mortgagee verifies and documents that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default or the other legally obligated party has made 12 months of timely payments.”
For the second possibility–where the parent wants to co-borrow with a son or daughter, let’s examine the FHA loan rules that govern the use of FHA single family mortgage loans for investment properties–which is not allowed under the terms of FHA Single Family Home Loan policy. According to HUD 4000.1:
“An Investment Property refers to a Property that is not occupied by the Borrower as a Principal or Secondary Residence.”
So depending on circumstances, an FHA loan may or may not be possible. Is the rental property being purchased for use as a primary residence and not a rental/investment property? The answer to that question may help determine the outcome of the loan application.
Then there is the question of credit qualifying. In this case one borrower has no credit established yet as per the reader question. FHA loan rules in HUD 4000.1 state:
“The qualifying ratios for Borrowers with no credit score are computed using income only from Borrowers occupying the Property and obligated on the Mortgage. Non-occupant co-Borrower income may not be included.” So the details there are also important. FHA loan rules add:
“The underwriter must determine the creditworthiness of the Borrower, which includes analyzing the Borrowers overall pattern of credit behavior and the credit report…The lack of traditional credit history or the Borrowers decision to not use credit may not be used as the sole basis for rejecting the mortgage application. Compensating factors cannot be used to compensate for any derogatory credit.”
The lender would be required to handle circumstances like these on a case-by-case basis, so circumstances would play a bit role in determining what might be possible. The reader in this case should have a discussion with a loan officer to see what options are available based on the borrower/co-borrower’s financial qualifications and income.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It’s designed especially for real estate websites–a widget that displays FHA loan limits for the counties serviced by those websites.
It’s simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today: http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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