Child helps parents buy foreclosure as non-occupant co-borrower
Mortgage banker: Terry
Hastings.
Home value: $500,000
Loan amount: $450,000
Loan terms: 5 percent Federal Housing Administration 30-year fixed
Backstory: Hastings received a call from a former client who had found a great foreclosure coming for sale on his street.
The price was compelling, and it would be ideal for his parents but they were on a fixed income. What were his options?
Hastings spoke to him further about his parent’s income. With a challenged credit score, they were unable to qualify for a loan.
The client explained that he was willing to pay part of the mortgage, however, no bank would use that as income since it is not guaranteed. If the son individually bought the home, it would be viewed as an income property requiring a higher down payment.
Hastings suggested a different strategy to buy the home. The son could go on the loan as a “non-occupant” co-borrower, meaning he was guaranteeing the loan with his parents even though he was not helping with the down payment.
Whatever portion he wanted to help his parents with the monthly mortgage payment would be undocumented and under a separate agreement.
Hastings collected the new information from the son to see if he would qualify. As a nonoccupant co-borrower his current income and expenses would be examined and any remaining qualifying income could be put toward the new loan. After running the num- bers, the loan worked.
Unfortunately, credit scores did not work in their favor. As a rule banks will collect the middle credit score of every borrower on the loan and use the lowest score to brand the risk level and thus the rate on the loan.
Even though the son had excellent credit, the parent’s lower score would have to be used, but an FHA loan would work.
Hastings went through the pros and cons of the loan, but two things stood out.
First, the home was an excellent price and the buyer saw immediate equity. Most important, the son could be assured that his parents were living nearby. The son quickly took Hastings’ advice and agreed to purchase the home with his parents.