Nobody’s perfect, and sometimes we need a little help accomplishing our financial or lifestyle goals. For those with higher debt levels, sometimes it’s easier to get approved for a mortgage with a co-signer.
Whether you’re looking for someone to co-sign a mortgage or you’re being asked to be the co-signer, this article will go over what you need to know.
Why Co-Sign On A Mortgage?
If you’re being asked to co-sign on a mortgage for someone who’s looking to buy a home or refinance their current one, it’s helpful to understand some of the reasons they might ask you to do so.
- Income is a big deal: The main reason to co-sign on a mortgage has to do with including your income on the loan. The business of lending is all about risk mitigation. The more income someone has access to, the more likely they’ll be to be able to make payments on the loan. This translates to better terms.
- It may help with credit: Although you’ll still have to meet minimum credit standards for a loan, there may be circumstances in which having someone with a higher credit score on your application may help you secure better financing terms.
- Employment is key: In some instances, you may be perfectly capable of making payments on a loan, but your income can’t be used to qualify. This might happen if you recently made a career change to a different field or have an insufficient history to use self-employment income.
Who Can Co-Sign For A Mortgage?
In theory, as long as you can qualify financially, there aren’t any restrictions on who can co-sign with or for someone. However, for some types of loans, including some mortgages, lenders want to know that there’s a close relationship between the signers so that the person doing the co-signing has a stake in helping you get the property.
The logic here is that sometimes if you’re dealing with family, they’ll be willing to help you out when someone else wouldn’t, including with your mortgage payment. Some mortgage investors like FHA will allow you to qualify with a higher DTI as an occupant and make a lower down payment if you have a family member co-sign the mortgage.
It’s important to note that not all mortgage investors care if there’s a familial relationship, so a Home Loan Expert would be able to go through options with you.
Co-signing can really help someone out, but it’s also a big responsibility. When you co-sign for someone, you’re putting your own name and credit on the line as security for the loan.
Because co-signing 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 co-signing for and trust them to hold up their end of the bargain.
If you enter into a co-signing agreement with someone it’s important to think about ways you can protect yourself. If they miss payments, it comes back on you. However, there is the option for a co-signer to ask for a release from obligations under the loan.
Normally, the person occupying the property has to sign off on this, but there may be a way around this. Consider drafting an agreement with the occupant of the home that says that in exchange for you co-signing, you have the right to request removal from the loan if they stop making payments.
Still, the lender then has to sign off on your removal from the loan, which they aren’t likely to do if the occupant is already missing payments. In other words, you’re between a rock and a hard place, and there’s not a lot you can do. This makes trust going in that much more important.
The one thing you can do to at least have awareness of what’s going on with the loan as a co-signer is to make sure you sign up for all notices related to the loan so that you’re included.
The Risks Of Co-Signing
If the person you co-sign 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. It’s an even worse credit hit if the person goes into foreclosure.
On the co-signer side, there’s definite risk because you’re putting your name and good credit rating on the line in order to help this person qualify. If they default and don’t make payments, you’re also hurt.
From the perspective of the primary occupant, qualifying with your own credit and income would be ideal, but particularly when you consider what happens if something happens to your co-signer.
As with any mortgage, the income of everyone on the loan is used to determine qualification factors. If your co-signer passes away, you might not be able to qualify for a new mortgage if it came time to refinance. If you can, you might wait until you can be approved on your own.
On the other hand, applying with a co-signer may be the only way a borrower can qualify or afford a loan in some cases. For instance:
- Lower down payment: A co-signer may be the only way a client can qualify for a lower down payment of between 3.5% – 5% for a conventional or FHA loan.
- Credit score flexibility: In some cases, there may be some leeway in your median qualifying FICO® Score if you have a mortgage co-signer.
- Debt-to-income ratio (DTI): Depending on the type of loan you have and other factors, you can qualify with a higher DTI as an occupant than you would be able to if you were trying to qualify on your own.
Let’s say you’re looking to apply for a mortgage, and you’ve found a co-signer 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 co-signer who’s not occupying the property, there are some restrictions.
Whether or not you can apply with a co-signer will depend on the type of loan you’re trying to get. Non-occupant co-borrowers are most commonly seen on conventional loans and FHA loans.
For Conventional Loans
In order to apply with a non-occupant co-borrower for a conventional loan, the co-signer 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 ratios.
At Rocket Mortgage®, 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 fees. Taken together, these five elements of a mortgage payment make up the acronym PITIA.
For FHA Loans
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 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
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
- It’s a non-arm’s length transaction (the co-client is also the seller)
- A 2-unit property is being purchased
The Bottom Line
Having a co-signer can be very helpful if you have credit trouble in your past or a higher level of debt. At the same time, it’s very important that both occupant and co-signer know what they’re getting into.
Because a co-signer is putting their good credit on the line to help someone qualify, that means they also take an equal share of the responsibility for the loan. If the homeowner falls behind on the loan or gets foreclosed on, those things also go on the record of the co-signer.
In addition, once you’re on a loan, it can be hard to get off if things go sideways. Because of this, trust is important. At the same time, having a co-signer can really help someone in the purchase or refi of a home. For example, co-signing can offer DTI lenience on conventional or FHA loans.
For even more great content on the mortgage process, feel free to check out more articles on the Rocket Mortgage® Learning Center.