Work-around a BAD Co-Sign to Assume an FHA?

Question

Hey BP ~

Long (horrible) story kept short, I co-signed/co-owned on a property YEARS ago. I signed when I was about 22 (should have known better), and it remained open on my credit for years. After not refinancing me out (as agreed), the primary co-signer/owner then also missed consecutive payments in recent years. I had to push to sell the home over the past two-to-three years. I did not ever pay towards the mortgage, only helped with co-sign, and received some equity share. When I pushed for the sale, the co-owner stopped paying the mortgage completely -- for 12 months straight (basically all of '2024'). He drained some equity, and the home was sold, closing a few months ago, in January 2025.

*My own credit, work history, debt-to-income, savings, etc. otherwise, is excellent -- all strong, zero negative marks. I have since thankfully been approved for non-QM mortgages (with high deposits and rates) and hard-money. I have not used any yet.

I found a duplex that I would like to buy, as a primary residence; the FHA loan is assumable at 2-3%.

Unfortunately, the lender, of course, automatically denies me because the person for whom I co-signed did not pay the mortgage for 12 months, with the final month being December 2024.

I take my accountability for not knowing better and for not forcing a sale much earlier.

Does anyone have any ideas how I can work-around this to assume the 2-3% FHA mortgage?

I understand that it looks wild. It's also evident the entire rest of my credit is great. I do have bank statements that reflect the co-owner paying for it as agreed, while it was being paid.

**Any possibility of opening an entity (LLC or otherwise) that I could use to assume the mortgage & close? Again, my credit score is great, but if anyone digs into the profile, the missed payments from the co-signed property are clearly reported. Also, I realize FHA mortgages are intended for primary residences, not investments/businesses (LLCs). Although, I do believe there are some rare occasions in which an LLC could be approved for an FHA?

The situation is unfortunate. I know this is a long shot, but I figured I'd put it out here and see if anyone has some insight and/or ideas for a work-around. Thank you in advance for any feedback!

john

Lauren Robins · Answer

Hey John!

First off, thank you for laying out your situation so clearly. A lot of people have faced similar issues after co-signing, especially at a young age, and it’s commendable that you’ve managed to maintain a strong financial profile despite the fallout. The fact that your credit score, work history, savings, and debt-to-income ratio are all solid — and that you’ve already been approved for non-QM and hard money loans — shows you’ve handled this responsibly. Still, it’s incredibly frustrating that a decision made years ago continues to impact you, especially when you never missed a payment yourself.

Now, regarding FHA assumptions: yes, FHA loans are assumable, and the terms you're looking at (2-3%) are phenomenal, especially in today's market. However, FHA requires that anyone assuming a loan meets their full underwriting guidelines — and that includes an evaluation of your recent mortgage history. Since you were legally responsible for a mortgage that was delinquent for 12 consecutive months (even if you weren't the one making payments), FHA lenders are bound by their guidelines to treat that as a serious credit event. Unfortunately, it's usually an automatic disqualification, regardless of context.

There are a few potential paths forward. The most straightforward — though not ideal — option is to wait until the 12-month window has passed from the last missed payment. If the final late was December 2024, that would make you eligible around January 2026. This is the cleanest route in terms of meeting FHA standards without complications, but it obviously doesn’t help if you want to move on this duplex now.

That said, there’s a very slim possibility of success if you prepare a compelling appeal for an exception. This would require thoroughly documenting the fact that the co-borrower was making all payments (bank statements, deposit records, etc.), that you never personally paid or benefited from the mortgage, and ideally showing some legal or written agreement proving it was always their responsibility. Some lenders may submit that to FHA for a manual underwrite or exception, though this is rarely approved — it depends a lot on the lender’s willingness to advocate on your behalf.

As for the idea of using an LLC or entity to assume the FHA loan — unfortunately, FHA does not allow loan assumptions by entities. FHA loans are strictly for owner-occupied properties, and assumptions must be taken over by an individual who will reside in the home. An LLC or trust (even a disregarded one) can't assume the mortgage in this case.

So, short term, your best shot is either a manual underwrite exception (with strong documentation and a persuasive story), or pursuing the duplex using a different financing route — perhaps non-QM or hard money — and then refinancing into a conventional loan or assumption down the line once the 12-month window clears. It’s not the easiest route, but there is still a path forward if you're willing to get a little creative and flexible.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

John Winters · Answer

Hey Stephanie ~ Thank you! I appreciate it.

Yes -- I hear you about the 'same responsibility.' I definitely learned that the hardest and longest way available. I do hope sharing prevents other people from making the same costly mistake. I teach high school history classes, for years now, and I always take time to share a few words about this 'co-sign' lesson - and a few others learned along the way.

I didn't realize that a co-signer with good credit does not negate negative credit for someone else - just boosts the income. Interesting. ...and honestly, that makes me feel a little less bad for not having someone to co-sign at the time.

Thanks for sharing...

Edward O'Neil · Answer

@John Winters I don't sugar coat things with clients or potential clients so with all do respect to other professionals' ideas and opinions, you are not getting that done FHA even with the most compelling of letters. If the property is a good deal at a good price I would try to work out a rent to own type situation with the owner to buy you time or give up the hope of the 3% rate and buy now as the investment and refinance year or so later. You also need to know if any foreclosure type filings were filed if you haven't looked into that already.

Stephanie Medellin · Answer

Good to hear you were able to move forward and purchase your own home! Having a co-signer would not have changed the outcome - adding someone with good credit history does not negate another borrower's negative credit history. Co-signers are generally added to raise the qualifying income. All borrowers still need to meet the credit requirements.

Hopefully others can learn from your experience with co-signing. Co-signers have the exact same responsibility to repay the loan as the main borrower. In fact there is really no distinction between a primary borrower and co-borrower or co-signer. If you aren't prepared to step in and make a payment, you may want to reconsider.

John Winters · Answer

Hey Ryan,

Wow...my apologies -- I missed your reply. Thank you for inquiring. This is months later now, I realize. I may have been able to do that. Unfortunately, at the time, I did not have anyone available to do the co-sign.

I am glad to share, I am 'in the clear' now. I was not able to assume that loan and title, but I am working on my first home now - renovations. I am a few months from completion.

Thanks again, and be well!

Ryan Thomson · Answer

@John Winters have you asked if you can get a co-signer for yourself?

John Winters · Answer

Thank you Lauren, Patrick, and Mike. I appreciate your honest, experienced feedback.

I apologize for my delayed reply. Lauren, thank you for taking time to respond with such detail as well! As soon as I read your post, I took the long-shot and offered an abundance of documentation along with a detailed letter of explanation for the potential manual underwrite exception. I appreciate learning through your response.

Sadly, but as expected, the lender was not going for the exception. Upon further dialogue with them, I was informed that specifically for an assumption, their specific 'matrix' (for approval) does not allow for any late payments for a whole 24 months, not even just the 12 months required for a new mortgage. That was a hard 'no' for my circumstance. As you mentioned Lauren, even though I can prove that I never paid towards the home nor ever lived in it, they pointed out that I was still legally responsible for the payments. From their perspective, I can understand. If they have a paying client, why take the risk to allow someone else to assume it...

It's disappointing, but I'll see what I can responsibly do with a non-QM loan -- and continue to maintain my credit in the interim, of course.

Ultimately, I still take my accountability in the matter. ...though, I must add, it seems kind of 'criminal' in some way to go through all K-12th grades plus four years of college and an entire approval and signing process for the mortgage and STILL not be fully aware of the severity such a choice (as a co-sign) can be! Even years after the fact, when speaking with a few attorneys, not one attorney or lender (or website) at the time, told me, as a co-signer and co-owner, I can legally force the sale of the home. I only found that out a few years ago - and quickly moved on it, using it as leverage for an agreed sale.

...then, adding to it all, my choice to co-sign also disqualified me from 'first-time homeowner' grants. Although the fine-print reads, 'must not have owned your primary residence in the previous three years,' as soon as I shared that the mortgage was active (or active within three years), I was disqualified -- even after explaining (and offered to prove) that I had worked and rented my primary residence in a different state and never lived in the home for which I co-signed (and co-owned). I have never owned my primary residence, but no one would move forward with the grants after seeing/hearing about the mortgages.

I teach history at the high school level, for twenty-six years now. However, there's not a year that passes during which I don't share this story (in brevity) with my students, with the hope that they learn from my mistake. I also include few other finance lessons often not taught in schools.

At least the co-signed mortgage is now finally closed, for almost three months, and I now have to wait it out. I'm grateful that it is closed and that I have some flexibility with non-QM and hard money loans.

Lauren, Patrick, and Mike -- thanks again, truly!

Mike Grudzien · Answer

I concur with Robin and Patrick!

Patrick Roberts · Answer

More than one mortgage late in the past twelve months is almost always a dealkiller. There are one off exceptions and extenuating circumstances, but these are typically extreme long shots and usually do not pay off. I dont know of any way to get into an FHA loan with 3 or more mortgage lates within the past twelve months.

Work-around a BAD Co-Sign to Assume an FHA?

Work-around a BAD Co-Sign to Assume an FHA?

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