Need A Mortgage Cosigner? Here’s What to Consider
If you’re trying to buy a home but don’t qualify on your own, a mortgage cosigner could help get you approved for a loan. With housing affordability lower than it’s been at any time since the mid-1980s, many Americans are struggling to meet the minimum requirements for a mortgage loan without help.
But before you ask that benevolent uncle or generous grandma to help out, make sure you understand how a cosigner can help and what’s required of them.
What is a cosigner?
A cosigner is someone who agrees to help you get a home loan by taking on joint responsibility for repaying it. Just like you — the primary borrower — the cosigner must provide financial documents, undergo a credit check and sign the loan contract. And if you fail to make your loan payments, the cosigner is legally obligated to pay them on your behalf.
Having a second person on the mortgage contract represents extra income and assets standing between that loan and foreclosure, which is why it becomes far easier to qualify for a home loan if you find a good cosigner.
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. Parents and other family members are often cosigners.
Why would a borrower get a cosigner for a loan?
A cosigner is generally used to boost how much income a borrower can put on their mortgage application. But there are other ways they can help you, too.
|A cosigner can help if:||A cosigner won’t help if:|
You can’t get approved for a high enough loan amount. A cosigner’s income is added to yours, so it can give you a big leg up if you have a high debt-to-income ratio (DTI).
You have no credit. If you don’t have a credit score, the lender will use your cosigner’s credit score to qualify you.
You’re self-employed. If you’re self-employed, it might be unclear whether all of your income and employment history qualify. Luckily, it may be possible to qualify for a loan based solely on your cosigner’s steady employment history.
You don’t have two years of steady job history. You may be able to get around this guideline if you have strong enough “compensating factors,” like an extremely low DTI, tons of cash in savings or a very large down payment. A cosigner’s additional income or assets may get you over the hump.
You don’t have enough mortgage reserves. VA and FHA loans don’t allow you to use gifted funds for your mortgage reserves, but a cosigner can use their money without technically giving it to you.
You can’t qualify for a conventional loan because your credit is too low. Lenders use whatever the lowest score is between you and your cosigner, so in most cases a cosigner with great credit won’t actually help you qualify for a loan.
You want a lower interest rate. Lenders use the lowest credit score between you and your cosigner to determine what interest rate they’ll offer you.
You don’t have enough down payment funds. Your cosigner is allowed to contribute towards your down payment, but in most cases they could do so even without cosigning the loan.
Cosigner vs co-borrower: What’s the difference?
If you think of the mortgage loan as a play, a co-borrower is your co-star; a cosigner is more like your understudy.
- A co-borrower is anyone who applies for a loan together, like a set of spouses. They both take full responsibility for paying off the loan and, typically, both intend to live in the home and enjoy all the benefits of homeownership.
→ A co-borrower typically shares joint ownership rights to the home with you.
- A cosigner usually takes responsibility for paying off the loan only in the event that the primary borrower can’t afford to. The cosigner usually doesn’t live in the home, though, and in most cases is only involved to help a friend or family member buy their first home.
→ A cosigner doesn’t hold title to the home, which means that they don’t have any ownership rights.
What is a “nonoccupant co-borrower”?>
Some lenders may use the term “nonoccupant borrower” instead of “cosigner,” which refers to the fact that most cosigners don’t live in the home they cosign on.
How does cosigning work?
We’ve covered what a cosigner is, but what does a cosigner do? Your cosigner will approach the process for cosigning a mortgage the same way they’d apply for a regular mortgage: Their income and assets are verified, and their credit and job history are vetted for stability. The cosigner will often sign both the promissory note, a legal document that outlines your repayment obligations, and the deed of trust, which gives the lender the right to take the home if you aren’t making payments. If the primary borrower falls behind, the cosigner is obligated to make the payments to keep the loan from going into default or foreclosure.
How much can I get approved for with a cosigner?
Lenders will use you and your cosigner’s combined DTI to decide how much money you can qualify to borrow. They calculate this by dividing your combined monthly debts by your combined gross monthly income. Most loan programs set a maximum DTI ratio of 41% to 50%.
You can use a home affordability calculator to quickly estimate how much you can afford with different DTI ratios.
What loan programs allow a mortgage cosigner?
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.
Loans backed by the Federal Housing Administration (FHA) permit cosigners. You’ll see the same restrictions as conventional loans when it comes to interested parties like sellers and realtors, but you may qualify for an exception if the seller is related to you. Cosigners and co-borrowers are also required to live in the United States.
The U.S. Department of Veterans Affairs (VA) only guarantees zero-down-payment loans to eligible military borrowers and their spouses. Special approval would be required for a cosigner on a VA loan who isn’t your spouse. That’s why joint VA loans with an unmarried cosigner may end up requiring a down payment.
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. They also allow you to use a cosigner — however, the cosigner must have a DTI ratio of 41% or less.
Pros and cons of getting a mortgage cosigner
Increased buying power. You’ll qualify to buy a home you probably couldn’t otherwise afford.
Wealth-building potential. You’ll have the chance to build equity, which you can leverage in other ways later.
Future flexibility. You’ll be able to refinance, once your income is higher or your debt is lower — this will let you remove the cosigner from their obligation.
Credit building. You and your cosigner’s credit scores will benefit as long as you make regular, on-time payments.
Additional debt burden. If you can’t make on-time monthly payments, your cosigner will have to make them.
Credit issues. If the loan enters default, it’ll affect your credit and the cosigner's credit equally.
Reduced buying power. You’ll lower the amount of credit the cosigner can qualify for if they apply for another loan in the future.
Relationship problems. You could damage your relationship with the cosigner if you aren’t able to make loan payments.
Alternatives to getting a mortgage cosigner
If you need to increase your amount of qualifying income:
- Buy a multi-family home and use future rental income to qualify
FHA multi-family home loan guidelines allow you to buy a two- to four-unit home and use the rent on the units you don’t live in to qualify for the mortgage. 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.
- Choose 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 way to bump up your qualifying income.
If you have bad credit or no credit:
- Use a bad-credit loan
You might be surprised how many options you have, even with a low credit score. Carrington Mortgage Services — LendingTree’s pick for the best mortgage lender for FHA loans with bad credit — issues loans to borrowers with credit scores as low as 500.
- Use a no-credit-check loan
Many of the loan programs we’ve discussed so far allow you to apply on your own, even if you don’t have a traditional credit score. The lender will still evaluate your creditworthiness, but will use alternative methods like verifying a history of on-time rent, utility bills, car insurance or other payments. You may have to meet slightly different minimum loan requirements.