First-Time Homebuyers – Now is The Time

While most people are sheltering in place mentally as well as physically, there are some smart ones who are TAKING ADVANTAGE OF THIS CRISIS. Yes, if life gives you Lemons you can make Lemonade. In this case, so many people have pulled themselves out of the buying-selling market that Sellers who do need to sell are making deals! And we all know how Interest Rates are at the lowest amount since Abraham Lincoln bought his first log cabin. Of course the biggest hurdle – coming up with the down payment – still exists, there are several ways of turning this from a “high hurdle” to a “bump in the road.” Read on to find out what a “NOCB” is and why your favorite letters are F, H and A.

OVERVIEW

Currently there are many “starter buyers” who with just a little (family) assistance can begin the journey of home ownership.

Often termed “kiddie condo” financing (the property need not be a condo) as younger buyers reside in the property while the “Non Occupying Co Borrower” (hence referred to as: “NOCB”) usually receives tax benefits. Typically future appreciation is split at the sale date.

There are several NOCB distinctions depending whether the loan is a FHA, Fannie / Freddie or a VA loan. One obscure exception allows certain properties to be classified as owner-occupied even if the (primary) borrower doesn’t reside in the place full time.

• Fannie‘s guidelines state: parents wanting to provide housing for their college student children, or for physically handicapped / developmentally disabled adult children, CAN be considered to be owner-occupants.
• VA does not allow for “NOCB” but two (unmarried) veterans may choose to jointly purchase a property (provided both are eligible for veterans benefits).

Down Payment Requirements

• FHA requires just 3.5% down.
• Fannie and Freddie both require 20% down. (“PMI” restrictions precludes any non-occupying co borrowers).

Buyers can avoid having to pay PMI (mortgage insurance) by purchasing with only 10% down plus a 10% seller carry back loan.

The Definition of “NOCB“

A “NOCB” (“Non-Occupying Co Borrower”) is a person(s) who:

• 1) Is liable for the mortgage.
• 2) Will have an “ownership interest” in the home (name is on the title).
• 3) Refinance: Enables the primary applicant to obtain the loan but does not allow for “cash out” loan proceeds.

GENERAL GUIDELINES. NOCBs-

• must have sufficient credit scores and income to qualify as a homeowner.
• cannot overcome credit issues pertaining to a primary borrower.
• ARE NOT required to live in the same state of the purchase.
• ARE NOT required to be a “blood” relative of the borrower.

Refinance Transactions: Enables the primary applicant to refi the loan but does not allow for “cash out” .

“NOCB”s can be refinanced off the loan at any point when there is sufficient income for the primary applicant to qualify for the mortgage on their own.

 “Related” Non Occupying Co-Borrowers

Definition:  “NOCB”s are related to borrowers through “blood or marriage” (i.e. spouses, parents, grandparents, children, siblings, aunts, uncles, cousins, nieces and nephews).

• Domestic partnership agreements for “NOCB”s are acceptable.
• FHA makes a provision for “unrelated individuals” who document evidence of a “longstanding, substantial family-type relationship” not arising out of the loan transaction.”
• FHA makes a provision for “unrelated individuals” who document evidence of a “longstanding, substantial family-type relationship” not arising out of the loan transaction.”
• Fannie or Freddie do not specifically address “unrelated individuals” as “NOCB”s. This means co-borrowers NOT related by blood would have to show evidence of a “familial” relationship and it was NOT created specifically for the purpose of acquiring investment property.
• Key point: “when proving a relationship with a non related  co borrower “the burden of proof is on the borrower”.

1) “NOCB”s MAY NOT be a party that has a financial interest in the transaction (i.e. seller, builder, real estate agent), etc.

A  Real Estate Agent can be”NOCB” but can not be receiving any compensation in their role “as an agent”. In this case, the seller simply credits (whatever the commission is) to the buyer(s) in the form of closing costs.

2) Unless otherwise exempted (e.g., military service with overseas assignments, U.S. citizens living abroad), any “NOCB”s must have a principal residence in the United States.

3) The degree of financial contribution by the “NOCB”s, (and the number of properties similarly owned by the “NOCB”s) may indicate that the primary borrower is simply a “straw buyer”.

For example: If Uncle Bob has cosigned for 3 other family members, all of which own 2 bed 2 bath condos in close proximity; then the loan will probably be declined as it will be determined that Uncle Bob is an investor. In this case (for all practical purposes) Bob is using family members as straw buyers for the sake of acquiring rental properties at a low down payment / and low interest rates afforded only to primary borrowers.

4) Gift funds (if possible ) should always be in the account of the primary applicant 61-89 days before escrow is opened.The specific umber of days fluctuates depending on the date(s) the bank statement “cycle”.

Depositing the funds “seasons” the money and precludes the need for  a “gift letter”. Seasoned funds are then viewed presents the primary borrower(s) in a “better light” (to the underwriter) as the funds will been seen as a “history of savings” (vs a straight gift).

To avoid IRS penalties and gift tax issues, click here for a complete explanation of these issues.

5) In the case of a “refi” mortgages the rules become a little murkier.

• Both FHA and Fannie Mae requires “NOCB”s be “on title” to the property 12 MONTHS PRIOR TO THE LOAN BEING SUBMITTED.
• Freddie Mac allows for “NOCB”s to be added “to title” just prior to the date of application but there can be “no cash out”.

Purchasing “Units”

Both Fannie and FHA limit “NOCB”s purchases to

• 1) Primary residence (SFR/Condo)
• 2) Duplexes.

**Primary residence “triplexes and four plexes” cannot be financed using “NOCB”s participation.

“NOCB”s can be used to purchase “units”,  but only as “investment properties” with 20% (minimum) down (Fannie/Freddie). The interest rate is typically .75% higher than owner occupied rates.