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.

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?

Conventional loans

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

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.

VA loans

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.

USDA loans

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

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.