FHA Co-signer/borrower rules changed?

9 Replies

So... I was slapped with a mortgage denial from the lender. The whole FHA 203k project is fantastic on paper, with the total purchase price + 203k standard rehab totaling to 565k on a 2 unit to 3 unit (legal) conversion. The mortgage broker last week told me that all the necessary vetting and requirements, such as income verification, W2's, taxes, DTI, etc etc was approved and looked great.

Project scope:

- 2 to 3 unit conversion with an addition added in the back in order to utilize the maximum square footage allowed on the lot. The floor plan schematic equals to 3600 sqft max floor space for an RT-4 zoned lot with 3 units total which is what the self-certified architect confirmed himself and ultimately what the zoning allows for. 

- Purchase price = 173k.. The property is in a fantastic neighborhood but is in crap condition, which is what I was looking for to build that sweet equity.

- Construction costs with material + labor + contractor fees, with the final work write up APPROVED and signed off by the 203k consultant = 336k with the 15% contingency, totaling = 406K (plus architect fees, closing costs and permits).

- So, 173K purchase price + 406K construction costs (with all the bells and whistles I wanted) = to about 565K total loan amount.

Here's the kicker:

With my DTI I could not get the loan, I was about 100k shy. So I used my father as a co-signer. Since he owns 3 properties.. his primary residence, a business building, and a summer home which have been all paid off for years now, he virtually has zero debt with about $1MM in total assets and NO MORTGAGE. Also no credit card debt, no car loans, and no other personal debt. Plus, he is a union contractor and is making a fantastic income. Our DTI's together are well below the limit in order to close this deal as far as DTI goes.

Not to mention, the total rental income from the 2 larger units on my property = 4k a month. After I move out in the 1st year, the third garden unit has potential to rent out for around $1500.00 a month. This amounts to $5,500 a month in total rental income with 3 units minus my overhead of $3664.00 a month (Principal + interest + property taxes + home owners insurance + PMI) = to about $1800.00 a month profit minus some minor expenses like garbage, commons area, etc. Oh and need I forget that the after repaired value is looking at around 700 - 750K for the total property. If you seriously doubt these numbers, I suggest you take a look at the Chicago market because these numbers are not made up and the mortgage broker + lender approved it and verified it. I would never get this far if that wasn't the case.


When I was told the "Conditional Lender Approval" was coming today, I instead got a call from the mortgage broker with bad news. Apparently, FHA HUD recently changed their rules... and I mean recently recently, that a 'non-occupant co-signer/borrower' now only applies if it's a single family residence. So, in order to fall under FHA guidelines, the co-signer/borrower has to also "live there" along with the primary home owner for the first year if it's a 3 or 4 unit building. but not if it's a single family residence... maybe a 2 unit under the right circumstances.

If this is true, the mortgage broker, the 203K consultant and my attorney never brought this to light and it points to a system where they were not properly informed because had they been, this deal would've been killed in its infancy. In the mortgage brokers defense, they were shocked and could not fathom this "new rule" and thus, no one would waste their time or effort if they knew otherwise.

I cannot find or verify this information on any website, wether it's a .com or .gov site, to be true. This is a crossroads situation and I want to find out if there's any foul-play, misinformation, or downright manipulation at work here by any involved parties.

Everything about this deal makes sense. The contractor documents along with his profile, references and proof of insurance all checked out along with my DTI + my fathers DIT. But the new so called "rule" is totally left field and it seems suspicious that I cannot find this anywhere online adds to the fact…

I wish I could make this story up but I don’t have the ingenuity, nor does my rage, to do so. 

What. The. F.....

There is no rule/guideline that states the co-borrower must occupy the property. If they do not, however, the down payment is 25%, not 3.5%.

That defeats the whole purpose of FHA in order to use 3.5%. My understanding is LTV is determinedly by the appraisal. If the appraisal comes back more than the total loan amount, isn't there a possibility that a 75% LTV can be met? So if the appraisal comes back at $750,000 divided by the total loan amount $565,600, that equals 75%.

Would this then green light the deal? Or am I missing something.

Thank you

I agree that the primary benefit of an FHA loan is the low down payment. It also has more lenient guidelines in terms of DTI, credit score, credit history, etc.

The lender is going to finance the lower of the sales price or appraisal price. For sake of argument let's say that's $100,000. 75% LTV is $75,000. You must come up with the remaining $25,000 as a down payment.

Then why even do FHA at that point when you can do conventential.

And this is the LTV of the purchase price plus work write up in total correct?

Originally posted by @Mark Cison :

Then why even do FHA at that point when you can do conventential.

And this is the LTV of the purchase price plus work write up in total correct?

As I said, FHA allows for more lenient DTI, credit history, etc. So someone might be eligible for FHA but not conventional. Your down payment would be 25% of the total loan. The total loan amount is the purchase price + renovation costs + contingencies + closing escrows/prepaids + fees.

Unfortunately, with a non-occupant co-borrower on a multi-family, the Loan-to-Cost (acquisition and rehab) is indeed 75%, whether you go FHA or conventional. Only way to get this done is with 25% down with these rehab programs. If property is in Chicagoland, I might be able to get 80% on a portfolio product. But there is no way to get 3.5% on 203k due to the cosigner on a mulit-family. This is not a new rule change, the other lender just might not have known it though.

Thank you all for the swift and accurate responses. After conducting my own research and making some phone calls, this indeed checks out and is true. 

I am AMAZED that my broker had no clue and after informing me, the FHA 203k consultant and my attorney were perplexed when I passed along the news. In their defense, I believe them because the deal would not have gotten this far otherwise... no one involved would have put in their time and effort had they been aware. Naive on my part? I guess experienced individuals would have come a long ways.

I myself researched FHA guidelines, articles and forum posts for almost a year on my own and this was never brought to light or made obvious.

I don't want to make a big stink about the rules because rules are rules. Cool. However, I wish I knew or was made aware before we got this far along in the process. 

Not all is lost though, the appraisal comes in tomorrow. 

The equity is there for us to borrow the 25% down payment against one of the paid off properties, so we might do that and say screw it, lets go commercial. This eliminates the high PMI right off the bat.

An alternative approach is using the after repaired appraisal value vs. the total loan amount and using that equity as leverage to get the loan via conventional + construction with a lower down payment.. and pay the difference via the equity loan on the paid off property. We can potentially have another viable renovation loan option (correct me if I'm wrong and forgive me for assuming!) 

This is starting to gravitate away from me being a first-time-home-owner type of situation towards starting-a-business-with-my-pops type of situation. 

Silver lining???

Whether this deal goes through or not, it's an important lesson to learn and arm yourself with for future deals. Equity is leverage to buy more property to get more leverage to buy more property to get more leverage to buy more property. 

Whats the point of having properties that you pay taxes for out-of-pocket every year? Take that sitting money that's a liability and invest a portion of it towards an asset (or assets) that pays for itself and pays for your liabilities and THEN some. Yes, that means you can take your Cancun vacation this thanksgiving weekend after all. 

Hot Damn. 

Hey @Mark Cison . Found this thread when I googled the same exact question. Looks like your lender wasn't very familiar with FHA Guidelines. Seems the last time the doc was updated was over a year ago.

How did the deal go? Interested if you were able to creatively fund this project.

I've grown to accept the 25% rule with the non-occupying co-signer. Two lenders who are experienced with these loans failed to inform me, this was brought to light once I paid for appraisal, put earnest money down, payed for architects floor plans and FHA consultant to do the work writeup. So I'm already in too deep.

My parents were able to take out a Home Equity Line of Credit on their primary residence to cover the down payment. Also, grandparents are retired and have Social Security income and agreed to co-sign. So the deal is still alive and we are working on the final closing date, it looks like we'll be alright. 

Fingers crossed though.. It's been 5 months now since going under contract and the sellers are beyond impatient. Hopefully they won't pull the deal before we finally set a closing date... aghhhh

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