Are You A Starter Buyer?
Currently there are many starter buyers who with just a little (family) assistance can begin the journey of owning their own home. Often termed “kiddie condo” financing because younger buyers reside in the property while the Non-Occupying Co-Borrower (NOCB) receive the tax benefits. Of course, it doesn’t have to be a condo at all, but the vast majority of purchases just happen to be condos.
Typically the future appreciation is split at sale date between the starter buyer and the relative providing assistance. A true win-win situation.
There are several factors affecting qualification depending on the type of financing obtained; whether the loan is a FHA, Fannie Mae, or Freddie Mac loan.
- VA does not allow for NOCB.
- FHA requires just 3.5% down.
- Fannie Mae and Freddie Mac both require 20% down; due to Private Mortgage Insurance (PMI) restrictions that preclude any non-occupying co borrowers.
- Buyers can buy with just 10% down with a seller carry back of 10%.
What is Non-Occupying Co-Borrower?
A Non-Occupying Co-Borrower (NOCB) is the person(s) who:
- Is liable for the mortgage.
- Will have an ownership interest in the home (name is on the title).
- Enables the primary applicant to obtain the loan but does not receive the loan proceeds (in the case of “cash out refinance”).
- NOCBs must have sufficient credit scores and income to qualify.
- Lenders still go by the lesser of applying applicants’ credit scores.
- Adding NOCBs never overcomes credit challenges that pertain to the primary borrower.
- NOCBs are not required to live in the same state of the purchase.
- NOCBs are not required to be a blood relative of the borrower.
- NOCBs can be refinanced off the loan at any point when there is sufficient income for the primary applicant to qualify for the mortgage on their own.
RELATED NON-OCCUPYING CO-BORROWERS
Definition: NOCBs are related to borrowers through blood or (i.e. spouses, parents, grandparents, children, siblings, aunts, uncles, cousins, nieces and nephews). FHA makes a provision for unrelated individuals who document evidence of a “longstanding, substantial family-type relationship not arising out of the loan transaction.” This means co-borrowers not related by blood would have to show evidence of a familial relationship and that it was not created specifically for the purpose of acquiring investment property.
The key to remember: burden of proof is on the borrower. It would be better that we consult about your specific situation than try to cover every scenario in this article. (Fannie & Freddie do not allow for unrelated individuals as NOCBs).
- NOCBs may not be a party that has a financial interest in the transaction (i.e. seller, builder, real estate agent), etc.
- Unless otherwise exempted (e.g., military service with overseas assignments, U.S. citizens living abroad), any NOCB must have a principal residence in the United States.
- The degree of financial contribution by the NOCBs, (and the number of properties similarly owned by the NOCBs) may indicate that the primary borrower is simply a straw buyer.
If Aunt Mary has cosigned for 3 other family members, all of which own 2 bedroom 2 bath condos in close proximity; then the loan will probably be declined as it will be determined that Aunt Mary is an investor. In this case (for all practical reality) Mary is using family members as straw buyers for the sake of acquiring rental properties at a low down payment / and low interest rates, afforded only to primary borrowers.
- Gift funds should always be in the account of the primary applicant 60 days before escrow is opened on the buyer’s (future) property.
- In the case of a refi mortgages the rules become a little murkier.
Both FHA and Fannie Mae requires NOCBs be on title to the property 12 months PRIOR TO THE LOAN BEING SUBMITTED. Freddie Mac allows for NOCBs to be added to title just prior to the date of application.
Both Fannie and FHA limit NOCBs purchases to primary residence duplexes. Primary residence triplexes and four-plexes cannot be financed using NOCBs participation (low down payment / and low interest rates are afforded only to primary borrowers).
NOCBs can be used to purchase “units” as investment properties with 20% down (minimum) and an interest rate that is typically .75% higher than the owner occupied rates.
To learn more and see if you might be a starter buyer, contact me, Royce Kemp, Owner of Royce Realty & Property Management, today at 858-480-5570.