Should You Co-Sign A Mortgage With Someone?
Getting a mortgage can be a big financial decision, and not everyone’s credit and income can qualify them for the best terms. If you can have a co-signer on your mortgage, though, you can use their finances to give your application a boost.
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.
What It Means To Be A Co-Signer For A House
When you co-sign a mortgage with someone, you’re agreeing to take financial responsibility for the home loan in the event the primary borrower can no longer make their monthly payments.
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.
- 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?
Typically a co-signer on a mortgage will be parent, spouse, friend or a family member.
In theory, as long as you can qualify financially, there aren't many 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 the Federal Housing Administration (FHA) will allow you to qualify with a higher debt-to-income (DTI) ratio as an occupant and make a lower down payment if you have a family member co-sign the mortgage. Not all investors care about the co-signer’s relationship to the buyer, so be sure to speak with a Home Loan Expert before deciding how to proceed.
Unlike a co-borrower, a co-signer has no ownership over the home attached to the mortgage. As a nonoccupant, the co-signer also shares no household responsibilities with the primary borrower. The co-signer will be financially responsible for the mortgage should the borrower miss their mortgage payments or default on the loan.
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. Even if you’re comfortable with the person you’re co-signing for and trust them to hold up their end of the bargain, you should think about ways you can protect yourself if they start to miss payments.
Some ways you can protect yourself can include:
- Sign up for all notices related to the loan to have awareness of what’s going on with the mortgage.
- Ask the primary borrower for online access to their mortgage statements.
- Ask the lender to notify you immediately if the borrower misses a payment.
- Set enough money aside in case you suddenly need to make a monthly payment.
- Stay in constant communication with the primary borrower.
The Benefits Of Co-Signing For A House
Applying with a co-signer may be the only way a borrower can qualify for or afford a loan. Having a co-signer on a mortgage could benefit a borrower in some important ways, such as the following:
- Credit score flexibility: In some cases, there may be some leeway in your median credit score if you have a mortgage co-signer.
- 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.
- Looser DTI restrictions: 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.
- Employment requirement assistance: If a borrower is self-employed or has an employment gap, a co-signer with a solid employment history can help convince a lender to approve them.
Since a lender considers both the primary borrower’s and co-signers credit and income, the former has the potential to qualify for a larger loan amount than they could by themselves.
The Risks Of Co-Signing A Mortgage Loan
Having or being a co-signer can have its drawbacks too. Consider the following risks involved in a co-signed mortgage loan.
- Being responsible for the loan: If the person you co-sign for misses a payment, the lender or other creditor can come to you to get the money.
- Damage to your credit: The primary borrower’s late payment also shows up on your credit report. It's an even worse credit hit if the person goes into foreclosure.
- Something happens to your co-signer: 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.
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 DTI.
Different lenders have different policies for the occupying client’s DTI. Speak with a Home Loan Expert to discuss your situation.
The non-occupying co-signer'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 (HOA) 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-signer, 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. And in the case of FHA loans, non-occupant co-signers 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 closing, 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. A close friend may be considered if you write a letter to your lender explaining the relationship and situation.
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
FAQs About Co-Signing For A House
Can a co-signer be removed from a mortgage?
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. If the occupant has already missed payments, a lender isn’t likely to remove a co-signer from the mortgage.
Can I co-sign a mortgage if I already have one?
Having a mortgage of your own won’t keep you from co-signing for another one. Be sure your finances can handle both monthly payments if the primary borrower misses theirs, though.
How long is a co-signer responsible for a mortgage?
Co-signing on a mortgage makes you responsible for the loan for its full term. As explained above, you can remove yourself from a co-signed mortgage under certain conditions.
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 the occupant and the 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.
If you’re looking to finance a home purchase, with or without a co-signer, you can apply online today with Rocket Mortgage and see what your rates might be.