Marvin Almost Wrote a 25% Down Payment Check He Never Owed
Marvin, a father near Conway, South Carolina, sat at his kitchen table ready to write his daughter a check covering twenty five percent of her new home's purchase price. His lender had told him that was simply the rule when a parent co-signs as a non-occupying co-borrower on an FHA loan. Marvin almost believed it was his only option.
The Quote Most Families Hear First
When a parent co-signs on a child's FHA loan but will not live in the home, lenders often lead with a default figure: a maximum loan-to-value of 75 percent. That means a much larger down payment than a typical FHA borrower would ever put down. For many families, that number alone is enough to make co-signing feel out of reach, or to push them toward writing a much bigger check than they expected.
What The Guideline Actually Says
Here is the FHA rule, word for word: "For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve a Family Member selling to a Family Member who will be a non-occupying co-Borrower, or a transaction on a two- to four-unit Property."
That second sentence is the one Marvin's first lender never mentioned. The 75 percent figure is a starting point, not a universal cap. If the co-borrowers qualify as Family Members under FHA's definition, and the deal clears two specific exceptions, the loan-to-value limit can rise to 96.5 percent, the same ceiling most occupying FHA borrowers get.
The Two Exceptions That Matter
The higher limit does not apply in every family situation. It is blocked in two specific cases: first, if a family member is selling the home to another family member who will be a non-occupying co-borrower on that same purchase. Second, if the property being financed is a two- to four-unit building rather than a single family home. Outside of those two scenarios, a qualifying family co-signing arrangement can access the much higher LTV.
How Marvin's Situation Checked Out
Marvin's situation is a common one: his daughter was the buyer and would occupy the home, he was co-signing as her father and would not occupy it, the property was a single family home, and no family member was selling the home to them. That combination clears both exceptions cleanly. Rather than the 75 percent limit his first lender quoted, his daughter's file should have been evaluated at up to 96.5 percent loan-to-value, dramatically shrinking the down payment Marvin believed he had to cover.
The Question To Ask Before You Co-Sign
If you are a parent or family member considering co-signing on an FHA loan for a relative who will live in the home, do not take the first LTV number you hear at face value. Ask your lender directly: are my co-borrower and I Family Members under FHA guidelines, and does this transaction avoid both exceptions, a family sale to a non-occupying co-borrower, or a two- to four-unit property, so that the maximum LTV should be 96.5 percent instead of 75 percent?
That single question is the difference between writing a check you never owed and structuring the loan correctly from day one.
If you are weighing a co-signing decision for a family member's home purchase, I'm happy to walk through your specific situation and confirm which limit actually applies. Reach me, Jason Sharon, at Home Loans Inc, 843-LOW-RATE. Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
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