When You Need Help From Someone Who Won't Live in the Home
Sometimes you need financial help to qualify for a mortgage from someone who won't be living in the house. Fannie Mae allows three types of helpers: guarantors, co-signers, and non-occupant borrowers.
A guarantor or co-signer signs your mortgage note and becomes legally responsible for the debt, but they don't own any part of the property. Think of a parent helping their adult child buy their first home. The parent's income and credit help the child qualify, but the child owns the house.
A non-occupant borrower is similar but may actually own part of the property. For example, parents might co-own a home with their child but let the child live there as the primary residence.
How These Arrangements Affect Your Down Payment
Here's where it gets tricky. If you're using income from someone who won't live in the house to help you qualify, you must contribute the first 5% of the down payment from your own money. This rule applies to manually underwritten loans.
Say you're buying a $300,000 house with 10% down ($30,000 total). If your parent's income helps you qualify, you must provide the first $15,000 (5% of the purchase price) from your own funds. Your parent can help with the remaining $15,000.
There are three exceptions to this rule. You don't need to provide the first 5% if your loan-to-value ratio is 80% or less, or if you're buying a single-family home and qualify to use gift funds, grant money, or employer assistance for your contribution.
Debt-to-Income Limits When Getting Help
Even with a helper's income, your own debt-to-income ratio cannot exceed 43% when calculated using only your income. This protects you from taking on more debt than you can handle if your helper stops contributing.
Let's say your monthly income is $5,000 and your total monthly debts (including the new mortgage payment) would be $2,200. That's a 44% debt-to-income ratio using just your income, which exceeds the 43% limit. Adding your parent's $3,000 monthly income brings the combined ratio down to 27%, but you still fail the occupying borrower test.
This rule applies even when the combined qualifying ratios for everyone on the loan are well below Fannie Mae's standard benchmarks.
Loan-to-Value Restrictions
When someone who won't occupy the property helps you qualify, Fannie Mae limits how much you can borrow relative to the home's value.
For manually underwritten loans, your loan-to-value ratio cannot exceed 90%. If you're buying a $400,000 house, you'll need at least $40,000 down (10% of the purchase price).
Desktop Underwriter (DU) is more flexible, allowing up to 95% loan-to-value ratios. The same $400,000 house would require only $20,000 down (5% of the purchase price) with DU approval.
These limits apply to your total financing, including any second mortgages or home equity lines of credit.
Required Documentation
Your lender will need standard loan documentation from everyone signing the mortgage note. This includes tax returns, pay stubs, bank statements, and credit reports for all parties.
The non-occupant must meet the same eligibility requirements as regular borrowers under [[B2-2-01]], except they don't need to establish ownership interest in the property.
You'll also need to document the source of your 5% down payment contribution when applicable. Bank statements showing the funds in your account for at least 60 days typically satisfy this requirement.
Why Fannie Mae Has These Rules
These restrictions exist because loans with non-occupant borrowers carry higher risk. When someone doesn't live in the property, they may be less committed to making payments during financial stress.
The 5% down payment requirement ensures you have skin in the game. If you can't save even 5% of the purchase price on your own, you may not be ready for homeownership responsibilities.
The 43% debt-to-income limit protects you from overextending financially. If your helper's circumstances change, you need to be able to afford the payments yourself.
Common Complications
Family dynamics can complicate these arrangements. Make sure everyone understands their legal obligations before signing. The non-occupant borrower or guarantor remains liable for the full debt even if family relationships sour.
Gift tax implications may arise if the non-occupant provides down payment assistance. Consult a tax professional about potential consequences.
Some lenders have additional restrictions beyond Fannie Mae's requirements. They might require higher credit scores or larger down payments when non-occupants are involved.
Property ownership structures can get complex when non-occupant borrowers take title. Work with a real estate attorney to understand how ownership affects inheritance, divorce, or other life changes.
References
For the official guidelines, see B2-2-04: Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Fannie Mae Guideline Text
B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction (09/02/2020)
Definitions
Down Payment and Qualifying Ratio Requirements for Manually Underwritten Loans
LTV Ratio Requirements for Manually Underwritten Loans
LTV Ratio Requirements for Loan Casefiles Underwritten through DU
Definitions
Guarantors and co-signers are credit applicants who
do not have ownership interest in the subject property as indicated on the title;
sign the mortgage or deed of trust note;
have joint liability for the note with the borrower;
do not have an interest in the property sales transaction, such as the property seller, the builder, or the real estate agent; and
meet the requirements in
B2-2-01, General Borrower Eligibility Requirements, except for the provisions related to establishing an ownership interest in the property.
Non-occupant borrowers are credit applicants on a principal residence transaction who
do not occupy the subject property;
may or may not have an ownership interest in the subject property as indicated on the title;
sign the mortgage or deed of trust note;
have joint liability for the note with the borrower(s);
do not have an interest in the property sales transaction, such as the property seller, the builder, or the real estate agent; and
meet the requirements in
B2-2-01, General Borrower Eligibility Requirements, except for the provisions related to establishing an ownership interest in the property.
Note: Guarantors, co-signers, and non-occupant borrowers are permitted on purchase, limited cash-out and cash-out refinance transactions.
Down Payment and Qualifying Ratio Requirements for Manually Underwritten Loans
For manually underwritten loans, if the income of a guarantor, co-signer, or non-occupant borrower is used for qualifying purposes, the occupying borrower(s) must make the first 5% of the down payment from their own funds unless:
the LTV or CLTV ratio is less than or equal to 80%; or
the occupying borrower is purchasing a one-unit principal residence and meets the requirements to use gifts, donated grant funds, or funds received from an employer to pay for some or all of the borrower’s minimum contribution. See B3-4.3-04, Personal Gifts;B3-4.3-06, Grants and Lender Contributions; andB3-4.3-08, Employer Assistance, for additional information.
Using only the income of the occupying borrower(s) to calculate the DTI ratio, the maximum allowable DTI ratio is 43%.
Note: This policy applies even if the combined qualifying ratios for the borrower and the guarantor, co-signer, or non-occupant borrower are well below Fannie Mae’s standard qualifying ratio benchmark. Minimum credit score and reserve requirements based on the LTV ratio and combined qualifying ratios of all borrowers must be met per the Eligibility Matrix. See Section B3–5.4, Nontraditional Credit History, for additional requirements that apply when the transaction includes a borrower who does not have a credit score.
For additional information, see B3-6-02, Debt-to-Income Ratios.
LTV Ratio Requirements for Manually Underwritten Loans
For manually underwritten loans, if the income of a guarantor, co-signer, or co-borrower is used for qualifying purposes, and that guarantor, co-signer, or co-borrower will not occupy the subject property, the maximum LTV, CLTV, and HCLTV ratio may not exceed 90% (unless a Community Seconds is part of the transaction, in which case the CLTV ratio may not exceed 105% where permitted in the Eligibility Matrix.
LTV Ratio Requirements for Loan Casefiles Underwritten through DU
DU analyzes the risk factors in the loan casefile for all borrowers on the mortgage loan. Regardless of whether an individual borrower will be occupying the property as their principal residence, DU will consider the income, assets, liabilities, and credit of that borrower.
For DU loan casefiles with a guarantor, co-signer, or co-borrower who will not occupy the subject property, the maximum LTV, CLTV, and HCLTV ratio may not exceed 95% (unless a Community Seconds is part of the transaction, in which case the CLTV ratio may not exceed 105% where permitted in the Eligibility Matrix.
