Cosigning a mortgage loan

If you have less than ideal credit or simply want to get the best rate possible, adding a nonoccupant co-signer to your loan could help you qualify for financing. But the decision to co-sign on a loan or add a co-signer to your mortgage isn’t one you should make without knowing all the facts.

Today, we’re looking at what it means to be a nonoccupant co-client – or co-signer – on a mortgage loan . We’ll show you what co-signing a mortgage means and when it’s beneficial. We’ll introduce you to the drawbacks of being a nonoccupant co-client and go over some of your other options as a borrower.

What is a co-signer?

A co-signer is someone who agrees to take on the financial responsibility of the primary borrower’s loan if they can no longer make payments. Co-signers can be family members, friends, spouses or parents .

Co-signing on a loan isn’t just a character reference – it’s a legally binding contract. This means that when you’re a co-signer, the lender can come after you for payments if the primary signer defaults on the mortgage . The lender has the right to hold you responsible for the missed loan payment even if you don’t live in the home.

Why would you co-sign on a loan? People co-sign on loans to help family members or friends who want to take out a loan or refinance with bad credit. If your mortgage application is weak, getting a friend or family member to co-sign on the loan makes you a much more appealing candidate.

Co-signer vs. co-borrower: What’s the difference?

From a lending perspective, there really is no difference between being a co-signer and a co-borrower . They both share the responsibility of taking out a loan and ensuring that the payments are made.

The biggest difference is that co-borrowers generally have legal ownership together of any asset tied to the loan. The most common case of co-borrowers is spouses purchasing a home together. They would be listed as co-borrowers on the loan and joint owners of the home on the house title . There are also situations where you can have a co-borrower on a mortgage that is not an occupant of the home .

What are the benefits of having a co-signer on your mortgage?

Having a co-signer on your loan can make it much easier to get a mortgage. Here are a few of the benefits that might be possible:

Potential for better loan terms

If you have bad credit, you may have trouble qualifying for a loan . However, a nonoccupant co-client with good credit on your loan may convince lenders to be more lenient with you. That includes verification of your income, since most m ortgage lenders want to see that you have reliable and steady income before they approve you for a loan. If you happen to be self-employed or have a recent gap in your resume, a nonoccupant co-client with solid employment history can help you fulfill this requirement.

Improved loan eligibility

Lenders will generally consider the incomes of both the main borrower as well as the co-signer when determining how much money you can receive in a loan. This can mean you could qualify for a larger loan with a lower interest rate.

What are the drawbacks of co-signing a mortgage loan?

While there are some benefits to the main borrower in getting a co-signer, if you’re the co-signer considering signing someone else’s loan, there are also a few potential drawbacks that you’ll want to be aware of.

Financial liability for co-signer

If the primary occupant on the loan can’t come up with a monthly payment, the co-signer is legally responsible for paying the loan. And once you co-sign on a mortgage loan, it’s very difficult to get out of it. Even if you fall out with the primary occupant, you’re still responsible for making sure there are no late payments .

Becoming a nonoccupant co-client means you’re just as legally responsible for the loan as the person living in the house. If you fall behind on coverage, the lender may sue you for legal fees and the remaining late mortgage payments.

Impact on credit scores

If the primary occupant misses a payment, your credit as the co-signer may suffer as well. It’s important that you’re aware of all the long-term negative consequences that could result from the occupying borrower’s default.

What is a co-signer responsible for?

Before you agree to co-sign on a mortgage loan, it’s important to understand the legal and financial liability you’re assuming. 1 As a co-signer, you agree to take responsibility for the loan if the primary borrower fails to make payments. This may include making payments if the primary borrower does not, and in the worst-case scenario, may leave you responsible for 100% of the remaining loan balance.

Questions to ask before becoming a co-signer

Before you agree to co-sign a loan, here are some questions you could consider asking:

• Can I afford to make the payments if the borrower cannot?
• Do I understand what collection actions could be taken against me if payments are missed?
• How long am I legally tied to this loan?
• Has the borrower shown consistent financial responsibility in the past?
• Do they have stable income and a budget to handle the payments?

What is the process of co-signing a mortgage?

If you are trying to buy a house with bad credit , you may run into an issue during the mortgage preapproval process. You might find that lenders can’t offer you the best interest rates or you may find that you have a hard time getting approved due to your credit score .

In this scenario, you might look for a close friend or family member to co-sign your loan. If you find someone who is willing, the lender will then consider the income of both you and your co-signer when they look at your application. Lenders also consider both your financial situations, debts and credit scores when they look at your application.

If your loan is approved with a co-signer, it then generally functions the same way it would if you were the only person on the loan. You make a premium payment every month to cover your principal, interest, taxes, and insurance (PITI) , and you enjoy your home. However, the lender may hold the co-signer responsible if you miss a payment. This means your lender has the right to take either (or both!) of you to court to ensure loan repayment.

Whether you can have a co-signer depends on the type of loan you take out. Co-signers are most common on two specific types of mortgages: conventional loans and FHA loans . Let’s take a look at the limitations for both types of loans.

Conventional loan co-signer requirements

Co-signers on a conventional loan must sign the home loan and agree to repay the mortgage if the primary occupant defaults. However, the co-signer doesn’t need to be on the home’s title. The lender looks at both your credit and the co-signer’s credit to determine if you can get a loan.

When they look at your application, lenders will consider your and your co-signer’s debt-to-income (DTI) ratio . Every lender has its own standards when it comes to what they consider an acceptable DTI. Knowing both your own and your co-signer’s debt-to-income ratio can make getting a loan easier.

FHA loan co-signer requirements

FHA loans , backed through the Federal Housing Administration (FHA), allow you to buy a home with a lower credit score and as little as 3.5% down. If you want to get an FHA loan with a co-signer (you can have a maximum of two), your co-client will need to meet a few basic criteria.

First, your co-signer must be a relative or close friend. Mortgage lenders consider the following relatives eligible to be co-signers on FHA loans:

• Parents and grandparents (including step-, adoptive, and foster)
• Children (including step-, adoptive, and foster)
• Siblings (including step-, adoptive, and foster)
• Aunts and uncles
• In-laws
• Spouses or domestic partners

If the co-signer is a close friend, you’ll need to write an additional letter to your mortgage lender explaining your relationship and why your friend wants to help you.

Your nonoccupant co-client must also live in the United States for most of the year. They must have a DTI of 70% or lower if you have less than a 20% down payment. On an FHA loan, the co-signer must be on the title of the home.

Alternatives to having a mortgage co-signer

If you’re struggling financially and you can’t find someone willing to co-sign on your loan, there are still a few ways you can buy a home. The following options might be a better fit than asking someone to be a co-signer.

Explore your government-backed loan options

Other types of government-backed loans can help you buy a home with lower requirements. Like the FHA, government-backed loans are special types of mortgages that have insurance from the federal government.

Government-backed loans are less risky for lenders, so they can extend them to people who normally wouldn’t qualify for a loan. FHA loans, Department of Veterans Affairs (VA) loans , and U.S. Department of Agriculture (USDA) loans each have their own qualification standards. Be sure you know all your options before you take a loan with a nonoccupant co-client.

Use a home buyer assistance program

First-time home buyers may qualify for an assistance program that can make buying a home easier. Home buying assistance can come from a state or local government, a federal program, or a charitable or employer sponsor. Depending on your circumstances, you may qualify for down payment assistance, a discount on a foreclosed home, and/or tax breaks.

Many home buyer assistance programs are available at the state and local level. The Department of Housing and Urban Development (HUD) maintains a directory of these local home buying assistance programs .

FAQ about mortgage co-signers

Co-signing a mortgage is a huge commitment. Let’s address some of the most common concerns and questions around co-signing.

Can I co-sign a mortgage if I already have one?

Yes – depending on your overall financial situation. You’ll need to make sure that your DTI remains manageable, and your income is sufficient to handle both payments.

Will co-signing hurt my credit?

The act of co-signing a mortgage in and of itself will not affect your credit. However, if the primary borrower misses a payment, it will show up on your (the co-signer’s) credit report as if you missed a payment. If the primary borrower defaults and you’re unable to make the mortgage payments, you’ll suffer the same consequences as the primary borrower. The foreclosure of the home will appear on your credit report, and you could be held liable for lender losses on the loan.

Can a co-signer be removed from a mortgage?

Whether a co-signer can be removed from a mortgage depends on the terms of the loan. In many cases, it is difficult to remove a co-signer or co-borrower from a mortgage. If that is the case, the primary borrower may have to refinance 2 – take a brand-new mortgage without a co-signer, or with a different co-signer – in order to remove a co-signer from their obligation under the co-signed mortgage.

What credit score is needed for a co-signer?

As a co-signer, you stand in the primary applicant’s place during the approval process. The minimum credit score you will need will depend on the lender and the type of loan. For a conventional loan, Visto Mortgage requires a qualifying score of 620. For a jumbo loan , the minimum credit score required is 680, depending on the loan amount and the purpose of the loan.

Can a co-signer become the primary borrower?

No. It’s important to remember that the co-signer has no rights under the mortgage, only obligations. Even if the primary is no longer making payments, the co-signer’s only “right” is to make the payments themselves or allow the foreclosure to proceed.

The bottom line: Co-signers take on risks to empower others

If you’re ready to move beyond your past financial mistakes, a financially responsible co-signer can help you rebuild your credit while also securing the financing you need to purchase a home. Taking out a loan with a co-signer or co-borrower can help you qualify for a mortgage or other loan that you wouldn’t be able to qualify for on your own. You’ll just want to make sure that you both understand your rights and responsibilities in this arrangement.

Ready to become a homeowner? Speak with a Home Loan Expert today to explore financing options and answer any questions you might have.

1 This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

2 Refinancing may increase finance charges over the life of the loan.

Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free/cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.

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