The Federal Housing Administration was created to benefit low and moderate-income borrowers. Its insurance guarantee promises the lender repayment if a loan goes into default. Because the FHA absorbs some of the risk, lenders can finance borrowers with credit challenges and minimal equity in their home. The FHA prevents investors from benefiting from its government insurance program by limiting the amount of FHA loans a borrower can have. Certain exceptions apply for non-occupant co-borrowers.
The FHA insures loans made on one- to four-unit principal residences. A principal residence is a property that is occupied by at least one of the borrowers for a majority of the year. The agency generally does not insure more than one principal residence loan for any borrower.
A non-occupying co-borrower holds title to the property and is responsible for the loan's repayment, but does not occupy the home as his principal residence. A non-occupant co-borrower can have up to two FHA mortgages -- one on the home he occupies and another loan on the home he co-borrowed on.
A borrower may be eligible for another FHA-insured mortgage if he is vacating a primary residence that will remain occupied by a co-borrower spouse or ex-spouse. For example, in situations where a couple is divorcing, a borrower may move out and buy a new principal residence with an FHA loan. The borrower does not need to be removed from the previous FHA loan to qualify for the new loan.
A non-occupant borrower can buy or refinance his own primary residence with an FHA loan. For example, a parent who helped his child purchase her first home using an FHA loan because she did not qualify initially on her own can get another FHA loan. The lender considers how long the non-occupant co-borrower owned the previous home with his child and his motivation for refinancing or buying a new home using an FHA loan. Circumstances which compel the co-borrower to acquire another FHA loan must make sense to the lender. The lender may reject the new loan if it appears the borrower is trying to finance investment property.
When a non-occupant co-borrower buys another home, the FHA may require that the previous home have substantial equity. When relocating to another area, the maximum mortgage on the previous home must represent a 75 percent loan-to-value (LTV) ratio. The LTV ratio compares the loan balance to a home's value. A loan with a non-occupant co-borrower can exceed 75 percent LTV if the borrowers are related by blood, marriage, or law, or they can document evidence of a longstanding, family-type relationship. Such loans can only be used for the purchase or no-cash-out refinance of a one-unit property.
- HUD: Handbook 4155.1: Chapter 4,Section B: Eligibility Requirements for Principal Residences: Exceptions to the FHA Policy Limiting the Number of Mortgages Per Borrower
- HUD: Handbook 4155.1: Chapter 2, Section B: Non-Occupying Borrowers
- HUD: Handbook 4155.1: Chapter 3,Section B: Cash Out Refinance Transactions
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