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Not everyone who signs on the dotted line for a home loan may intend to occupy the property as their primary residence. Some may be non-occupying co-borrowers who are still financially obligated on the loan but don’t want to use the property as their main residence.

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Credit Check Rules for Cosigners and Co-borrowers

May 26, 2016

Credit Check Rules for Cosigners and Co-borrowers
Not everyone who signs on the dotted line for a home loan may intend to occupy the property as their primary residence. Some may be “non-occupying co-borrowers” who are still financially obligated on the loan but don’t want to use the property as their main residence. Others may be considered “cosigners” or “co-borrowers” who do want to occupy the property with the other applicant(s).

Among the many common questions about FHA home loans, there is the issue of credit checks for cosigners, co-borrowers, and non-occupying co-borrowers. With many options open to the applicants in this area, it can be confusing when trying to figure out who will need to furnish income and credit information in order to apply.

FHA loan rules in HUD 4000.1 discusses who is to have credit reporting data pulled in these cases. On page 171 we learn that, “The Mortgagee must obtain a credit report for each Borrower who will be obligated on the mortgage Note. The Mortgagee may obtain a joint report for individuals with joint accounts.”

And there are additional instructions: “The Mortgagee must obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state.”

Not all states are community property states, so the procedure in such cases may vary. Do you know whether your loan is affected by such laws? It’s important for legally married couples to have a conversation with the lender to see whether community property laws will affect the transaction. State law can definitely affect how your transaction is handled.

HUD 4000.1 also says the credit report must indicate the non-borrowing spouse’s SSN, “where an SSN exists, was matched with the SSA, or the Mortgagee must either provide separate documentation indicating that the SSN was matched with the SSA or provide a statement that the non- borrowing spouse does not have an SSN. Where an SSN does not exist for a non- borrowing spouse, the credit report must contain, at a minimum, the non-borrowing spouse’s full name, date of birth, and previous addresses for the last two years.”

And what kind of credit reports are required for an FHA home loan? Page 171 addresses this issue, stating that a “traditional” credit report must be used where available. “The Mortgagee must use a traditional credit report. If a traditional credit report is not available or the traditional credit report is insufficient, the Feedback Certificate will show a Refer recommendation, and the Mortgagee must manually underwrite the Mortgage. The Mortgagee must obtain a Tri-Merged Credit Report (TRMCR) from an independent consumer reporting agency.”

Credit reports cannot be passed to the lender through the borrower, or through a third party that is not a credit reporting agency. If you have further questions about the requirements for co-borrowing spouses, non-occupying co-borrowers, etc. be sure to have a discussion with your loan officer as lender standards may apply.

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