Getting a cosigner for a mortgage may strengthen your loan application and allow you to buy a home if you have bad credit, a short credit history, or a lot of debt. The cosigner won’t appear on the house’s title, but their income and credit can make your application more favorable to a lender.
Read on to learn who may make a good cosigner for a mortgage and how a cosigner can improve your chances of getting a mortgage.
Can you have a cosigner on a mortgage?
When you apply for a mortgage, the lender will look at your credit score, income, and debt-to-income (DTI) ratio to determine whether you qualify for a loan. If you fall short in any of these areas, you can have a cosigner on a mortgage to help you qualify for the loan.
When there’s a cosigner on your mortgage application, the lender will consider the cosigner’s credit history, income, and DTI ratio along with yours. For instance, you might not have enough income by yourself to meet the lender’s requirements, but when the lender adds the cosigner’s income to yours, you may be able to qualify for the mortgage. The cosigner also serves as a guarantee that the mortgage will be paid, because if you miss a payment or stop making payments, the cosigner is responsible for paying.
Cosigners are usually relatives or friends of the applicant, such as a parent cosigning to help an adult child buy a home. The cosigner doesn’t have to live in the property. Ideally, you want a cosigner who has good credit and a solid income to make your application stronger. If the person who cosigns your home loan has bad credit, they could endanger your loan application because the lender often bases their decision on the lowest credit score. If you’re applying for an FHA loan, for instance, the minimum credit score for a mortgage with a cosigner is 500 if you make a 10% down payment, and 580 if you want to make a smaller down payment.
During the preapproval process, the lender will ask for the same sort of financial information from the cosigner as from the primary applicant. Both will have to submit pay stubs to prove income, tax returns, W-2 forms from the last two years, and bank statements. The lender will also check the credit reports of all applicants.
What does it mean to be a cosigner on a mortgage?
A cosigner is usually a relative, such as a parent, grandparent, or sibling of the applicant. Friends may also act as a cosigner. However, FHA loans prevent someone who could make money from the transaction from being a cosigner. This rule is designed to keep builders, sellers, and real estate agents from assisting an unqualified buyer in getting a loan.
The FHA also requires cosigners to live in the United States unless they are on overseas assignment for the military or are U.S. citizens living abroad.
It’s important to understand what it means to be a cosigner before agreeing to participate in the mortgage process. When you cosign a loan, you become responsible for the debt if the homebuyer doesn’t make the payments. However, your name isn’t typically on the title to the property, so you have no right to the home. Being a cosigner has the potential to hurt your credit score because the loan will appear on your credit report. If the buyer makes late payments or doesn’t pay the mortgage, the lender will report those actions to the credit bureau. This could cause damage to your credit.
With someone else’s mortgage is on your credit report, you also might not qualify for loans you want. In other words, being a cosigner may affect your ability to buy a new home or car.
Cosigner rights and responsibilities
When you cosign on some loans, the lender must send you a Notice to Cosigner that explains the responsibilities of being a cosigner. However, federal law doesn’t require this notice for mortgage cosigners.
As a cosigner, your name isn’t on the title to the property, but you are responsible for paying the debt. Because of this responsibility, only cosign for someone you know is trustworthy and will be conscientious about paying their debts. Even if you trust the borrower, you should monitor the debt. For instance, you may:
- Ask the borrower for access to the online account for the mortgage so you can see that it’s being paid. Or, you could ask the lender to send you monthly statements.
- Talk to the borrower frequently to see if they’re experiencing any financial issues that could limit their ability to pay the mortgage.
- Check your credit reports often to see if payments are being made on time.
Cosigner vs. co-borrower
The difference between being a cosigner for a mortgage and a co-borrower comes down to your ownership interest in the property. In either case, however, you agree to make payments if the primary borrower doesn’t pay.
As a cosigner, your name doesn’t appear on the title to the property, meaning you don’t have an ownership interest in the home. The cosigner is still responsible for paying the debt if the primary borrower doesn’t make payments, though.
As a co-borrower on a loan, you are also responsible for paying the mortgage if the primary borrower doesn’t make payments. However, the co-borrower’s name is on the title to the property, and thus they have an ownership interest in the house.
Cosigner on a mortgage FAQs
Can I cosign a mortgage if I already have one?
You can cosign a mortgage if you already have one as long as you have the income needed to qualify for the new loan. The lender will include your existing mortgage when calculating your debt-to-income ratio. If your DTI is too high, you may not help the primary borrower qualify for the loan by acting as a cosigner.
What’s the minimum credit score for a mortgage with a cosigner?
Different loan programs and lenders have varying minimum credit score requirements. Some programs are specifically intended for buyers with a low credit score. For example, FHA loans accept buyers with a minimum credit score of 500 with a 10% down payment. For other loan programs, including VA loans, USDA loans, Fannie Mae HomeReady, and Freddie Mac Home Possible, the minimum credit score required can range from 620 to 660.
When choosing a cosigner for a mortgage, look for someone who has a higher credit score than yours to make your application stronger. A cosigner who only meets the minimum credit score for a mortgage isn’t likely to help you qualify.
To learn more about your home mortgage options, talk to a local Finance of America Mortgage Advisor today.