Can You Have a Cosigner on a Home Equity Loan? A Comprehensive Guide

To get a home equity loan or HELOC, you’ll need to be on the deed. However, your name doesn’t have to be on the deed if you cosign with someone who is on the deed.

If you have sufficient equity in your home—typically at least 15% to 20%—you may be able to tap into it with a home equity loan or home equity line of credit (HELOC) to access cash. You may want to use your home equity to fund a major home renovation, consolidate high-interest debt or for another purpose.

But what if your name isnt on the deed, the physical document that proves who owns a home? As part of the application process for a home equity loan or home equity line of credit, youll need to prove ownership of the home by having your name listed on the homes deed. However, you dont have to be on the deed to cosign for a home equity loan or HELOC.

Home equity loans allow homeowners to leverage the equity in their property to access financing. However, not everyone who applies gets approved. If your credit score or debt-to-income ratio doesn’t meet the lender’s requirements, bringing on a cosigner can improve your chances. But is it possible to have a cosigner on a home equity loan?

The short answer is yes Most lenders allow borrowers to bring a cosigner on board A cosigner with good credit and income can provide the extra assurance needed to get approved,

However cosigning a home equity loan is a big responsibility. The cosigner is equally liable for the debt and shares the risks. Defaulting can hurt their credit score too. Cosigners need to understand the implications before signing on.

This comprehensive guide covers everything you need to know about having a cosigner on a home equity loan. We’ll look at:

How a cosigner can help with loan approval
Responsibilities and risks for the cosigner
Differences between cosigning on a home equity loan vs HELOC
Tips for getting approved with poor credit
Alternatives to cosigners
The application process
Managing payments and cosigner release

Let’s dive in.

How Can a Cosigner Help With Home Equity Loan Approval?

Bringing a cosigner on board can significantly improve your chances of getting approved if your own finances fall short. Here are some of the key benefits:

Compensates for low credit scores – Lenders look for credit scores of at least 620-640 to approve home equity loans. If your score is below that, a cosigner with a high score can offset the risk.
Bolsters debt-to-income ratio – Your debt-to-income ratio should be 43% or lower. A cosigner with a healthy income and low debt can help meet this requirement.
Provides payment assurance – The cosigner guarantees the lender that payments will be made even if you run into hardship. This extra security helps approval odds.

Not everyone can be a cosigner though. The lender will assess the cosigner’s creditworthiness and ability to repay the loan if needed. Close family members like parents often cosign for their children. But friends or other relatives may also cosign after careful consideration.

What Are the Responsibilities and Risks for a Home Equity Loan Cosigner?

Cosigning a home equity loan is a major commitment. The cosigner takes on all the responsibilities and risks of the primary borrower. Key things to understand include:

Joint liability for repayment – The cosigner is equally responsible for repaying the debt. If the primary borrower defaults, the lender can seek repayment from the cosigner.
Impacts credit score – Late or missed payments will show up and hurt both your credit scores. The debt also affects the cosigner’s debt-to-income ratio.
Potential for foreclosure – In case of default, the lender can foreclose on the home if neither borrower makes payments. This can cost the primary borrower their house.
Strains relationships – Defaulting and hurting the cosigner’s credit can severely damage relationships with friends or family.

Cosigners should carefully consider these risks before agreeing to sign on. It may be helpful to create a written agreement with the primary borrower addressing contingencies like missed payments.

Key Differences in Cosigning a Home Equity Loan vs HELOC

While both are home equity financing options, some key differences exist between home equity loans and HELOCs when bringing on a cosigner:

Fixed vs variable rates – Home equity loans have fixed rates while HELOC rates are variable. Predictable payments with a fixed loan may be preferable.
Draw period – HELOCs have an open draw period where you can access funds as needed. This flexible access can make payments more manageable.
Repayment terms – Home equity loans have set repayment terms. HELOCs have adjustable terms within certain limits. More flexibility can be helpful.
Credit impact – Since HELOCs don’t require accessing the full amount, smaller withdrawals can minimize credit impact.

Consider how these factors affect risks for the cosigner when deciding between the two.

Tips for Getting Approved for a Home Equity Loan With Poor Credit

Having a low credit score below 620 can make getting approved tough. But it’s still possible in some cases. Here are tips to improve your chances:

Shop around with different lenders as approval requirements vary. Credit unions tend to be more flexible.
Reduce other debts to lower your DTI and demonstrate you can handle debt responsibly.
Consider a secured home equity loan that uses your home as collateral rather than your credit score.
Look into government-backed loans like FHA Title 1 loans that are less stringent on credit scores.
Request a lower loan amount since lenders allow higher LTV ratios for smaller loans.
Put down a larger down payment of 15-20% to offset the higher risk.
Add a cosigner with excellent credit to guarantee the payments.

Taking these steps demonstrates you are committed to repaying the debt and can help secure approval even with poor credit.

Alternatives to Using a Cosigner for Home Equity Loans

Some other options exist besides bringing on a cosigner when you have poor credit or income:

Cash-out refinance – Refinancing your mortgage lets you tap home equity while replacing your current mortgage.
401(k) or IRA loans – Borrowing against your retirement savings may provide needed cash without the risks of a cosigner.
Personal loans – An unsecured personal loan with a shorter term may fit your borrowing needs at a lower risk.
Federal home improvement loans – FHA Title 1 loans are backed by the government and easier to qualify for.
Contractor financing – Some contractors offer financing for home improvement projects tied to their services.

Each option has its own pros and cons to weigh carefully before deciding.

Step-by-Step Guide to Applying for a Home Equity Loan With a Cosigner

If you determine a cosigner is the right choice, here is a step-by-step guide to navigate the application process:

Discuss implications – Have an open talk with the cosigner addressing all responsibilities and risks before applying.
Review loan types – Decide whether a home equity loan or HELOC better suits your needs and financial situation.
Choose lenders – Compare offers from multiple lenders to find the best rates and terms.
Gather documents – You and the cosigner will need to provide pay stubs, tax returns, bank statements and other financial docs.
Submit application – Fill out the application forms for the lender with all required information. The cosigner fills out a separate application agreeing to repay the loan if needed.
Get appraisal and verify home equity – The lender will appraise the home and check available equity based on the loan-to-value ratio.
Await approval – Approval decisions take 1-2 weeks typically. Underwriting considers all aspects of creditworthiness for both applicants.
Sign loan documents – Once approved, sign the final loan agreements. The cosigner must sign acknowledging their shared liability.

Following these steps helps smooth the application process and get your home equity loan with a cosigner secured.

Tips for Managing Payments on a Home Equity Loan With a Cosigner

Once you’re approved, you’ll want to manage the loan responsibly to avoid hurting your cosigner’s credit. Here are some tips:

Stick to the agreed payment schedule to avoid late fees or other penalties. Using autopay can help.
Maintain open communication with the cosigner on your finances and ability to cover payments.
Refinance the loan in your name only if your credit improves to remove the cosigner’s liability.
Take advantage of cosigner release programs your lender may offer after 1-2 years of on-time payments.
Pay down the balance faster by making extra principal payments to reduce overall interest costs.
Monitor your credit regularly and address any errors or discrepancies right away to protect your score.

Proper loan management protects both your credit history and your relationship with the cosigner.

While bringing on a creditworthy cosigner can improve the odds of home equity loan approval, the decision should not be made lightly. The cosigner takes on major financial risk that can hurt their finances down the road. Solid communication, understanding all responsibilities, and prudent management of payments is key to making the partnership work. For borrowers with poor credit, other options like cash-out refinancing may be safer alternatives to explore as well.

can you have a cosigner on a home equity loan

What Documentation Do You Need to Apply for a Home Equity Loan or HELOC?

Just as when you applied for your original mortgage, youll need to provide your lender with some personal, income and property information when you apply for a home equity loan or HELOC. Requirements vary by lender, but here are some of the most common documents and information you must supply, including evidence that your name is on the deed.

To verify you are the person on the application, your lender will ask you for some personal information, such as:

Your name
Date of birth
Contact information
Social Security number
Drivers license or other government-issued photo ID

With your permission, your lender will likely use your name and Social Security number to pull your credit reports as part of the application process.

Your lender will want to confirm you have sufficient income to make payments on a new home equity loan or line of credit. Depending on what type of income you receive, you may be asked to provide any of the following documents:

Current pay stubs
W-2 forms for the past two years
Tax returns
Bank statements
Alimony, retirement or other types of supplemental income

Of course, your lender needs to know some basic information about your property, including who owns it, when it was built and the amount you owe on the mortgage. Be prepared to submit the following information.

Names of individuals listed on the title
When your home was completed, the date of purchase and estimated property value
Trust agreement (if applicable)
Mortgage statement showing balance and monthly payment
Property tax information
Homeowners insurance agency
Second loan and lien information (if applicable)

The Best (and Worst) Ways to Use a Home Equity Loan or HELOC

The most obvious drawback of home equity loans and HELOCs is that they are secured by your home. That means you risk foreclosure if you cant make your monthly mortgage payments for any reason. As such, you should proceed cautiously when considering using your home equity to access cash.

Cosigning a mortgage: Can a cosigner help buy you a house?

FAQ

How does a cosigner work on a home equity loan?

Your co-applicant, sometimes referred to as the co-borrower, is a trusted person who’ll share the liability for repaying your home equity line of credit. The co-applicant assumes equal ownership, payment and overall responsibility for the loan payments.

Can a parent cosign a home equity loan?

If your parents are open to co-signing a home equity loan, both parties must meet the lender’s criteria, which typically includes a solid credit history, reliable income, and sufficient home equity. As Investopedia notes, the financial standing of both you and your parents will be scrutinized.

What disqualifies you from getting a home equity loan?

High debt levels In addition to your credit score, lenders evaluate your debt-to-income (DTI) ratio when applying for a home equity loan. If you already have a lot of outstanding debt compared to your income level, taking on a new monthly home equity loan payment may be too much based on the lender’s criteria.

Can you add someone to a home equity loan?

If you want to add someone to your loan later, your lender may require you to refinance the home equity loan in both names.