Cosigning a Mortgage Loan: What to Consider

If you’re trying to buy a home but don’t qualify on your own, your loan officer may ask whether a relative might cosign on the mortgage with you. Before you ask that benevolent uncle or generous grandma to help out, make sure you understand what’s involved if they cosign on a mortgage.

What is cosigning a mortgage?

Cosigning on a mortgage is when you agree to be responsible for a loan and contribute your financial resources to help someone else get a home loan. You’ll provide financial documents, have your credit pulled and sign the loan paperwork.

In most cases the cosigner won’t actually enjoy any benefits of owning the home — they simply provide financial support to the person who will live in the home full time. Family members are often cosigners.  Some lenders may also use the term “non-occupant borrower” which refers to the fact that most cosigners don’t live in the home they cosign on.

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

A co-borrower is an additional person applying for a loan to buy a home, such as a husband and wife. They take full responsibility for paying off the loan and typically intend to live in the home and enjoy all the benefits of homeownership.

A cosigner takes responsibility for paying off the loan only in the event the primary borrower can’t afford it.  The cosigner usually doesn’t have any stake in the home itself and is typically only on the loan to help a friend or family member buy their first home.

How does cosigning work?

The process for cosigning a mortgage is the same as applying for a regular mortgage: Income and assets are verified, and the cosigner’s credit and job history are vetted for stability. The cosigner will often sign both the note and security instrument. If the primary borrower falls behind, the cosigner can make the payments to keep the loan from going into default and foreclosing.

Here’s an example of how cosigning might help a borrower qualify if you make $50,000 per year ($4,167.67 per month) and owe $750 per month for student loans. We’ll assume you have an aunt who is willing to cosign with you who earns $36,000 annually ($3,000 per month) and has no other debt except a small monthly car payment of $250.

Using the home affordability calculator here’s how much home you could afford with and without a cosigner.

*Based on a 10% down payment, 3.0% mortgage rate, $800 annual mortgage insurance and a 1.20% property tax rate

What loan programs allow a cosigner on a mortgage?

Conventional. Anyone who meets the basic lending requirements can be a cosigner on a conventional mortgage.  However, they can’t have any interest in the home, which means the seller of the home, the builder, or a real estate agent wouldn’t be acceptable cosigners.

FHA. Loans backed by the Federal Housing Administration (FHA) permit non-occupant co-borrowers, with the same restrictions as conventional loans when it comes to interested parties like sellers and realtors.

VA. The U.S. Department of Veterans Affairs only guarantees zero down payment loans between eligible military borrowers and their spouses. Special approval would be required for an unmarried cosigner on a VA loan. One note about joint VA loans with an unmarried cosigner: Because the VA only guarantees the portion of the loan made to a VA borrower, you may end up needing a down payment.

USDA. The U.S. Department of Agriculture (USDA) backs mortgages that allow low- to moderate-income borrowers to purchase homes in designated rural areas with no down payment using a cosigner.  However, the cosigner must have a debt-to-income (DTI) ratio of 41% or less.  Lenders calculate your DTI ratio by dividing your total debt, including the new mortgage payment, by your gross or “pretax” income.

Pros and cons of cosigning on a mortgage

Pros

  You’ll qualify for a mortgage to buy a home you probably couldn’t otherwise afford

  You’ll be able to refinance the cosigner off once your income is higher or debt is lower

  You’ll build equity in a home

  You’ll enjoy the benefits of owning your own home

Cons

  You could hurt the cosigner’s credit if you default on the loan

  You could damage your relationship with the cosigner if you default

  You’ll lower the amount of debt the cosigner can qualify for

Alternatives to cosigning on a mortgage

There are some other ways to add qualifying income for a mortgage besides asking someone to cosign.  They include:

Buying a multi-family home and using rents to qualify.  FHA multi-family home loan guidelines allow you to buy a two- to four-unit home and use the rents on the units you don’t live in to qualify. You’ll only need a 3.5% down payment for this option, but you’ll have to live in one of the units for at least a year as your primary residence.

Choosing a loan program that permits “boarder” income. You may qualify for a home if you have a parent or friend living in your home and can document they’ve paid part of your house expenses in the past. This is called “boarder” income and could include an elderly parent that lives with their children and contributes fixed income, or a roommate who has shared part of the rent. The Fannie Mae HomeReady® and Freddie Mac Home Possible® loan programs offer this special income-qualifying exception.

FAQs about cosigning on a mortgage

• Does cosigning affect your credit? Yes. You’ll add more debt to your credit and inherit any late payments if the primary borrower can’t repay the loan. 
• Can I cosign a mortgage if I already have one? Yes, as long as you qualify for the payments on both mortgages.
• Can I take over my parent’s mortgage? Maybe. If your parents have an assumable mortgage backed by the FHA, VA or USDA, you may be able to take it over, if you qualify. However, if you just make payments on their behalf without getting a new mortgage, your parents are still responsible for the loan until it’s paid off.
• Does cosigning affect first-time homebuyers? If the cosigner doesn’t currently own a home, it could affect their ability to qualify for down payment assistance programs or other first-time homebuyer programs in the future. Many of those programs don’t allow you to own any other real estate at the time of closing.
• Does a cosigner have to have good credit? Yes. Cosigners must meet the minimum mortgage requirements for the program they are applying for.  Keep in mind that the cosigner’s credit can’t be used to improve a poor credit borrower.
•  Does cosigning build credit.  Yes. The cosigned mortgage will appear on the cosigner’s credit report for as long as the loan is paid. However, cosigning can also wreck credit if the primary borrower gets behind and mortgage late payments show up.
• How many cosigners can you have on a mortgage? Traditional loan programs don’t set a maximum number of cosigners for mortgages. However, each cosigner must meet the minimum requirement of the mortgage program you’re applying for.
• Can a cosigner be removed from a mortgage? Yes, but usually only if the primary borrower proves they qualify for the loan on their own. If the current loan servicer won’t release the cosigner, the only option is to refinance them off the loan.