When buying a home, some couples ask a parent or other close relative to help out by co-borrowing on the loan. Lenders often accept non-occupant co-borrowers or co-signers to help offset the risk in lending to buyers with insufficient income and credit history who cannot qualify on their own. You may keep a non-occupant co-borrower or co-signer on board to complete a cash-out refinance later on; however; lenders place restrictions on adding a non-occupant borrower.
Non-Occupant Co-Borrowers and Co-Signers
A co-borrower differs from a co-signer in ownership rights. A co-borrower is usually a spouse who shares an ownership interest in the property and helps the primary borrower qualify for the loan. A co-signer is a family member with strong credit and income who acts as a guarantor for the loan if you default; co-signers have no ownership rights. Co-signers do not live in the home; co-borrowers usually do. A non-occupant co-borrower or non-occupant co-signer who helped you buy the home may need to move into the home and take title to qualify for a cash-out refinance.
Lenders set more stringent qualifying rules for cash out refinances than other refinance types, such as no-cash out rate-and-term refinances and streamline refinances. These transactions simply pay off a previous loan with a new loan that has better terms and conditions. The cash out refinance poses a higher risk, as it involves cash back to the borrower at closing, a higher loan balance than the previous loan and a higher payment. Due to the additional risk involved, lenders are careful about who they allow on the loan. It's generally easier to remove borrowers than to add borrowers in a cash-out transaction.
Borrowers use non-occupant co-borrowers or non-occupant co-signers to meet lender debt-to-income (DTI) guidelines. DTI ratios indicate how much of your gross income goes toward your housing payment and your total obligations each month. A healthy housing DTI is about 33 percent, and a healthy total-debt DTI is about 43 percent. Lenders hesitate to add non-occupants to the loan when your DTI indicates you cannot afford to cash out on your own. When you tap into your home's equity through a cash-out, it becomes harder to sell and pay off the loan if you get into financial trouble.
Conventional lenders may allow you to keep a non-occupant buyer on the cash out refinance if you have sufficient equity in the home or the non-occupant makes the home his primary residence -- becoming an occupant borrower. For example, Fannie Mae, which sets guidelines for a majority of conventional home loans, requires the co-borrower or co-signer to live in the home if the cash out refinance results in equity of less than 10 percent, but does not require move-in with equity of 10 percent or more. The lender's underwriter must also evaluate the refinance application manually, rather than automatically, to ensure the loan scenario meets risk standards. The Federal Housing Administration, which insures loans for owner-occupants with credit challenges and modest incomes, allows non-occupant co-signers on purchases, but prohibits adding them to cash-out refinances.
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