There are times when we need a little help getting started in life. Doing something like adding your child’s name to your credit card can help them build credit quickly if you pay it off every month.
It’s a big decision to cosign a loan for someone because you’re taking on a lot of responsibility if things go south. If you’re the one getting a mortgage with a cosigner, there are factors and restrictions that go along with the transaction.
The Responsibilities of Being a Cosigner
Cosigning can really help someone out, but it’s also a big responsibility. When you cosign for someone, you’re putting your name and credit on the line as security for the loan.
If the person you cosign for misses a payment, the lender or other creditor can come to you to get the money. The late payment also shows up on your credit report.
Because cosigning a loan has the potential to affect both your credit and finances, it’s extremely important to make sure you’re comfortable with the person you’re cosigning for. You both need to know what you’re getting into.
Applying for a Mortgage with a Cosigner
Let’s say you’re looking to apply for a mortgage and you found a cosigner who’s willing to give you a little extra boost to help you qualify. While it’s definitely doable to apply for a mortgage with a cosigner who’s not occupying the property, there are some restrictions.
Whether or not you can apply with a cosigner will depend on the type of loan you’re trying to get. Non-occupant co-borrowers are most commonly seen on conventional loans and certain types of FHA loans.
Conventional Loan Requirements
In order to apply with a non-occupant co-borrower for a conventional loan, the cosigner has to sign the loan, but they don’t need to be on the title of the property. The co-borrower’s credit will be pulled, and the score will be used along with the occupying client to determine loan qualification.
With conventional loans, things start to diverge based on who owns the loan when looking at debt-to-income (DTI) ratios.
At Quicken Loans, the occupying client DTI ratio can only go up to 70% if a client has a down payment of 20% or less. If the down payment is greater than 20%, there’s no cap to the ratio. Different lenders may have different policies.
The non-occupying co-borrower’s income and debts are added to the housing expense- to-income ratio (HTI). A client’s HTI is the percentage of their monthly income that goes toward housing expenses including principal, interest, taxes and insurance. This also sometimes includes homeowners’ association dues. Taken together, these five elements of a mortgage payment make up the acronym PITIA.
If you’re looking to get an FHA loan with a non-occupant co-borrower, there are a few other special restrictions.
First, you can have a maximum of two non-occupying co-clients. Their primary residence needs to be in the U.S. If you’re occupying the property, you can have a maximum DTI of 70% with a down payment or equity of less than 20%. If you have a higher down payment or equity stake, your DTI is unlimited. Finally, non-occupant co-borrowers are required to be on both the title and the mortgage.
In order to take full advantage of the FHA program and only bring a 3.5% down payment to the close, there are a couple of additional guidelines.
The property you’re buying must be a single-family residence. The non-occupant co-borrower must be a relative or a close friend as well. For the purpose of your mortgage, the following are considered relatives:
- parent or grandparent (step, foster and adoptive)
- child (step, foster and adopted)
- sibling (step, foster and adopted)
- aunts or uncles
- spouse or domestic partner
If the non-occupying co-client is a close friend, you’ll have to provide some extra documentation describing the length of your relationship and their interest in helping you.
There are a few instances in which you must have a down payment or an equity stake of at least 25%:
- The non-occupying co-client is not family or a close friend
- It’s a non-arm’s length transaction (the co-client is also the seller)
- A two-unit property is being purchased
Before cosigning on a property with anyone, be sure you both understand what you’re getting into.
Do you still have questions about applying for a mortgage with a cosigner? Leave them in the comments below.
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