The 'Bank of Mom and Dad' in a tough housing market

If you and your spouse are still living in your parent's basement, you might feel depressed: prices keep rising, interest rates are doubled, and it’s still a seller’s market. 

The American Dream seems to be your worst nightmare. Is that reality? FOX 5 real estate expert John Adams might have a plan to help.

Adams says there may be a way for families to help youngsters get out on their own. It’s not new, but it is especially relevant in today’s market. He calls it the "Bank of Mom and Dad," but it is really called the FHA Non-Occupant Co-Borrower Loan Program for Family Members and Close Friends.

In 2021, a Realtor.com survey found that 52% of first-time home buyers received help from family or friends, including 18% from parents, 12% from siblings, 14% from extended family, and 8% from friends.

The FHA allows non-occupying co-borrowers. This means you can have a co-borrower on an FHA loan who doesn’t make the home their primary residence. However, at least one borrower must live in the house as their primary residence.

Non-occupying co-borrowers can help borrowers qualify for an FHA loan by providing additional income and improving the debt-to-income ratio (DTI). This can make the qualification process easier for those who might not meet the requirements on their loan.

It’s important to note that non-occupying co-borrowers aren’t unique to FHA loans. Other loan types, like VA loans in certain circumstances and some conventional loans, also allow for non-occupying co-borrowers. However, the FHA program seems to be the most flexible.

Here’s how it works: The FHA will allow another borrower, who will not live on-site, to co-sign on an FHA home loan. When applying for a mortgage loan with a non-occupying co-borrower, the lender will take all the income, liabilities, assets and credit scores of both borrowers into account.

Since a non-occupying co-borrower can be included in the underwriting process, the occupying borrower often sees an improvement in their approval chances. Typically, non-occupying co-borrowers have a higher income that can increase the primary borrower’s chance of achieving homeownership.

So why does Adams like the FHA program in particular? It’s all about the loan-to-value.  

Many loan programs offer the ability to include a co-borrower on the loan application. But every other loan type Adams could find required a high down payment when using a non-occupant co-borrower.

FHA allows you to borrow up to 96.5% of the purchase price when the co-borrower is a qualifying relative.  And even beyond that, FHA will make an exception for co-borrowers who can demonstrate a longstanding, substantial family-type relationship.

As far as Adams can find, no other lending program will lend up to 96.5% of the loan amount, and even your down payment can come in the form of gifts, provided there is no expectation of repayment.

To get started, you need to talk with an FHA mortgage lender to get all the details.  

Try to find a lender who specializes in FHA funding - Adams recommends shopping around.  A good place to start is with your local credit union or community bank.  According to J. D. Power, another good place to start is by looking online.  They have ranked Rocket Mortgage No. 1 in the US for customer satisfaction.

FHA loans have been helping people become homeowners since 1934.  Need advice? Call a HUD-approved housing counselor at (800) 569-4287.

Atlanta native John Adams has been a real estate broker and investor in residential real estate for the past four decades.