Can You Get an FHA Loan With a Cosigner?

Getting your first home loan can be intimidating, especially if you have limited credit history or income. This is where a cosigner can help. The Federal Housing Administration’s (FHA) popular mortgage program allows borrowers to add a cosigner to their loan application. With a cosigner’s help you may qualify for the competitive interest rates and low down payments that FHA loans offer.

What Is a Cosigner?

A cosigner is someone who agrees to be legally responsible for repaying your FHA mortgage loan if you are unable to make the payments yourself. The cosigner’s name goes on the mortgage contract along with yours. Their income, assets, debts and credit history will be factored in when determining your eligibility.

Cosigners do not have an ownership stake in the home like a co-borrower would. They are strictly liable for the debt. Cosigners can be relatives, romantic partners, or even close friends.

FHA Cosigner Requirements

Not just anyone can cosign on your FHA loan. The FHA has specific cosigner eligibility rules:

• U.S. citizen or lawful permanent resident – Cosigners must be American citizens or have lawful permanent residency.

• Valid Social Security number – A Social Security number is required to pull credit reports and employment history.

• Minimum 580 credit score – Cosigners need at least a 580 FICO score to qualify. The higher the better.

• 43% debt-to-income ratio or lower – Cosigners should not exceed a 43% debt-to-income ratio. Their income will help offset yours.

• Two years of steady employment – Cosigners must show at least two years at their current job or in the same line of work.

• Related to the borrower – FHA cosigners typically need to be relatives of the borrower. Partners and spouses also qualify with proof.

As long as your cosigner meets these requirements, they can be a huge help in qualifying for an FHA mortgage. Their good credit and finances make up for any shortcomings on your application.

How a Cosigner Can Help You Qualify

There are a few key ways that an FHA cosigner can help you get approved:

• Improving your debt-to-income ratio – With a cosigner’s income included in the calculation, your overall DTI improves significantly. This helps you fall under the 43% cap.

• Offsetting poor credit history – Even if your credit score is less than 580, your cosigner’s good credit makes up for it. The FHA will use the higher middle score.

• Meeting employment history rules – If you haven’t been at your job for two full years, your cosigner’s employment record helps you meet this requirement.

• Providing added assurance – For first-time buyers with minimal savings or assets, a cosigner gives extra assurance you can handle the mortgage.

As you can see, an FHA cosigner can be your ticket to homeownership if your finances need a little help qualifying. Just make sure your cosigner understands the commitment they are making.

Responsibilities and Risks for Cosigners

Cosigning an FHA loan is not without risk. The cosigner takes on the following obligations:

• Full legal liability for the mortgage debt if the primary borrower defaults
• Potential damage to their credit if payments are late or missed
• Inability to remove themselves from the loan later without refinancing
  -Difficulty obtaining their own credit or loans with the debt on their record

For these reasons, cosigners should consider their own finances carefully before signing onto an FHA mortgage. Do they have enough savings and assets to cover the payments if required? How would their credit score suffer if you were to default?

These are critical questions for potential FHA cosigners. Make sure they fully grasp the gravity of the commitment.

Alternatives to Using an FHA Cosigner

Adding a cosigner to your FHA loan application can certainly improve your chances of approval. But it also puts your loved one at financial risk. Here are a few alternatives to consider first:

• Pay down existing debts – Reduce credit card balances or other debt to lower your DTI. This also boosts your credit score.

• Wait and improve your credit – Give yourself more time to build credit history and savings for a larger down payment.

• Apply with a spouse or partner – Since spouses/partners are eligible FHA cosigners, their finances can help you qualify without the risks to others.

• Explore other loan programs – An FHA loan isn’t your only option. Consider conventional 97 or HomeReady loans which may have more flexible requirements.

• Increase your income – Take on a side job orpromotion at work to improve your debt-to-income ratio.

With some time and financial planning, you may be able to qualify for an FHA loan on your own terms without putting a friend or relative at risk.

Weighing the Pros and Cons of an FHA Cosigner

Adding a cosigner to your FHA loan application can be helpful, but also comes with drawbacks. Consider the key pros and cons before making your decision:

Pros

• Gain eligibility for low down payment FHA financing
• Improve debt-to-income ratio with cosigner’s income
• Offset poor credit history with cosigner’s good credit
• Meet employment history rules using cosigner’s job record
• Added reassurance of repayment ability for lender

Cons

• Cosigner takes on all liability if you default
• Late payments damage cosigner’s credit too
• Strains relationship if cosigner has to make payments
• Cosigner takes on debt obligation and repayment risks
• Limits cosigner’s ability to get their own credit/loans

Carefully weigh these pros and cons with your potential FHA cosigner before moving forward. Make sure they grasp the gravity of the commitment and risks involved.

Final Thoughts on Cosigners for FHA Loans

While cosigners can be a huge help in getting approved for an FHA loan, they aren’t required. Some borrowers can qualify on their own with good credit, stable income, and adequate assets.

But for those who need a little credit boost from a willing friend or family member, an FHA cosigner can make homeownership possible. Just have an open and honest conversation so they know what they are getting into.

With an FHA cosigner by your side – plus the program’s low down payments and flexible credit requirements – your dream of owning a home may finally be within reach!