A mortgage cosigner takes on the responsibility of ensuring a mortgage loan is paid. Some borrowers need help from a more financially secure cosigner in order to qualify for a mortgage, and those who help out should understand exactly what theyre getting into.
A cosigner can be anyone who promises to take on the responsibilities of paying the loan if the other signers default. When mortgage qualifications are analyzed, the lowest credit score from all the applicants may be used. For that reason, a cosigner isnt usually valuable for their credit. Much of the reason for having a cosigner is because the borrower doesnt have enough income, or has a debt-to-income ratio that’s too high to qualify for a mortgage on their own.
Mortgage cosigners may be parents who want to see their adult children living comfortably in a house. In some cases, theyre occupant co-signers who will also live in the house.
Cosigners are slightly different from co-borrowers because they dont have an ownership interest in the property. Not all lenders allow co-signers.
Buying a home is one of the biggest financial decisions most people will make in their lifetime. With home prices continuing to rise across the country, it can be challenging for many buyers to qualify for a mortgage loan on their own. This is where having a cosigner can help.
But what exactly is a cosigner and how does getting one work when buying a house? As an independent mortgage broker, these are common questions I get from clients. In this article, I’ll explain everything you need to know about having a cosigner on a home loan.
What is a Cosigner on a Mortgage?
A cosigner (also called a co-applicant or co-borrower) is someone who joins you on the mortgage loan application. They don’t have to be on the title or deed of the home but they are equally responsible for repaying the mortgage debt.
Essentially by cosigning a mortgage the cosigner is agreeing to take over payments if for some reason the primary borrower can’t pay. For example, if you lose your job or your income significantly drops, your cosigner would be obligated to make the monthly mortgage payments to avoid default and foreclosure.
Cosigners are most commonly parents, family members or close friends with good credit and finances who want to help you buy a home. But it’s important to understand that cosigning is a big legal and financial commitment. Before getting a cosigner or agreeing to be one yourself, carefully consider the risks and responsibilities involved for both parties.
Cosigner vs. Co-borrower: What’s the Difference?
These two terms are often used interchangeably, but there is a slight distinction. A cosigner doesn’t have to be on the property title or deed, while a co-borrower does.
As a co-borrower, you become a legal owner of the home along with the primary buyer. Your name will be listed on both the mortgage loan and the home title documents. Co-borrowers have equal rights and responsibilities for the home.
The key things to understand are:
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Cosigners are liable for the mortgage debt but have no ownership rights.
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Co-borrowers are liable for the debt and legally co-own the home.
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On most loans, you can be a cosigner without being a co-owner. But for certain loan types like VA and USDA loans, cosigners must live in the home and be on the title.
How Getting a Cosigner Works
Adding a cosigner to your mortgage application is a straightforward process. Here are the basic steps:
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Find someone willing to cosign. This is often a parent, family member or close friend who wants to help you out.
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Apply together. You and your cosigner will both need to complete the mortgage application and provide personal and financial documents to the lender.
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Get approved together. The lender reviews both applicants’ credit scores, income, assets and debts. As long as you meet the lending guidelines together, you can move forward.
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Close the loan together. At closing, you and the cosigner will both sign the mortgage note agreeing to repay the loan and any other required paperwork.
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Make payments together. You as the primary borrower will make the monthly mortgage payments. But the cosigner is equally responsible for making sure payments are made on time.
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Refinance to remove the cosigner. Once you’ve built up enough credit and equity in the home, you may be able to refinance the loan just in your name. This releases the cosigner from liability.
The specific cosigner requirements depend on the mortgage program and lender. But in general, getting a cosignor is straightforward and can help you qualify for a better mortgage.
Benefits of Having a Cosigner on a Home Loan
There are several potential benefits to having a cosigner on your home loan:
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Better approval chances – If your credit or income alone isn’t quite strong enough, a cosigner with better finances can help you meet mortgage underwriting guidelines.
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Lower interest rate – Including someone with excellent credit as a cosigner can help you qualify for a lower rate. Rates are primarily based on credit scores.
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Lower down payment – Certain loan programs like FHA allow looser qualification terms with a cosigner, so you may not need as large of a down payment.
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Higher home buying power – Cosigners help lenders feel assured you can afford a more expensive home. Your mortgage amount approved could be higher with a cosigner than without.
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Build your credit – As long as payments are made on time, being on a mortgage with a cosigner helps build your credit history and score for future home loans in just your name.
For home buyers who need a little boost qualifying, cosigning can be an excellent solution. But make sure you fully understand the risks and plan for eventually refinancing into your own name.
What Types of Mortgages Allow a Cosigner?
The most common types of home loans that allow cosigners are:
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Conventional loans – Fannie Mae and Freddie Mac conventional loans allow non-occupying cosigners, meaning they don’t have to live in the home. Cosigners help you meet debt-to-income and credit requirements.
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FHA loans – FHA is one of the easiest loan programs to qualify for with a cosigner. They can help you meet the 31% debt ratio and get approved with poor or no credit. Cosigners must be relatives.
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VA loans – For VA loans, cosigners must be a spouse or qualified veteran themselves. All co-borrowers must occupy the home.
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USDA loans – Cosigners on USDA loans must occupy the home as co-borrowers. Income from non-occupants can’t be counted.
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Portfolio loans – Local banks and lenders offering portfolio loans outside of government programs may allow cosigners to help you qualify. Ask potential lenders about their policies.
Jumbo and non-QM loans typically don’t allow non-occupying cosigners. The property type also matters – cosigners on investment or second home loans face greater restrictions from most lenders.
Cosigner Credit Score and Income Requirements
To successfully help you qualify for a mortgage as a cosigner, your cosigner will need:
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A good credit score – Usually at least 620 FICO or higher. The exact score depends on the loan program. Conventional loans often want cosigner scores of at least 700.
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Stable income – Most lenders require two years of steady employment and income. Retired cosigners can provide retirement account statements and social security income.
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Low debt-to-income ratio – Their own debts and monthly obligations should be minimal so income is available to cover the mortgage if needed. Lenders look at their total DTI too.
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Good payment history – Few or no late payments on current obligations, no collections or charged-off accounts, and limited credit inquiries.
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Enough reserves – Money in the bank beyond whatever they use for your down payment. Lenders want to see cosigners have their own emergency fund and cash reserves.
Meeting these standards ensures your cosigner has the means to actually help you repay the mortgage if required. Weaker cosigner profiles get rejected by lenders.
Risks and Downsides of Cosigning a Mortgage
While using a cosigner has benefits, there are also important risks and downsides to understand before moving forward:
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Legal liability – As a cosigner, you’re equally legally obligated to repay the mortgage as the main borrower. The lender can pursue you for missed payments.
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Impact to your credit – If the primary borrower is ever late or defaults, it damages your credit too. This could prevent you from getting your own future loans.
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Limits on taking out new credit – Having this large mortgage obligation already can make getting approved for additional financing difficult for cosigners.
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Strained relationships – Mixing money and family/friends has inherent risks. Any issues with payments can cause tension in the relationship.
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Difficulty removing your name – Removing yourself as a cosigner typically requires the borrower to refinance in just their name. This has costs and the borrower must now qualify alone.
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Competing financial goals – The cosigned mortgage obligation could impact your own goals, like getting your future mortgage, car loan, or funding retirement and college savings.
Weigh these considerations seriously before cosigning. Never cosign out of pressure or without fully grasping the commitment.
Alternatives to Getting a Cosigner
Some options to buy a home without needing a cosigner include:
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Improve your credit – Build your credit history and score before applying. On-time payments, lower balances, and mix of credit help.
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Save a larger down payment – Putting down more upfront creates equity and shows you’re financially committed. Some loans need just 3% down.
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Reduce debt – Pay
How will cosigning a mortgage affect my finances?
If the borrower on the loan makes payments on time, you may never notice that you have an additional financial obligation.
However, if they make late payments or skip them, you’ll see that reflected on your own credit report. A single late mortgage payment could lower your credit score, so its nothing to ignore. That can move you down to a lower credit tier, such as from excellent to good, and make it harder to get the best interest rates on credit cards, auto loans and other money you borrow. You may even see rates on your existing accounts edge upward if your credit score takes a turn for worse.
In the short term, your additional financial obligation could alter your debt-to-income ratio. This will be a concern primarily if you plan to borrow money for your own real estate or vehicle purchase.
Should the borrower stop paying, and you’re unwilling or unable to make payments, the default may eventually show up as a foreclosure. This significant black mark on your credit may dramatically impact your credit and reduce your ability to get a loan in the future.
The disadvantages of cosigning a mortgage
Cosigning for a mortgage loan carries a significant financial risk. No matter how much you trust the borrower, issues can come up that may keep them from paying, like losing a job or going through a divorce. If that happens, you must take over payments, or you may be impacted by negative information appearing on your credit report, a foreclosure and possibly even a lawsuit brought by the lender.
Its also important to consider the impact that cosigning could have on your relationship with the borrower if anything were to go wrong.
Cosigning a mortgage: Can a cosigner help buy you a house?
FAQ
What are the requirements to be a co-signer on a mortgage?
Is it a good idea to cosign on a mortgage?
Can you get denied a mortgage with a cosigner?
Can you have a cosigner when buying a home?
Can you have a co-signer on a mortgage loan?
You can have a co-signer on most mortgage loans, but the requirements vary by loan type and lender. Check with your loan officer to see what qualifications your co-signer will need to meet to qualify. Molly Grace is a mortgage reporter at Business Insider with over six years of experience writing about mortgages and homeownership.
Can a co-signer get an FHA loan?
The co-signer must be a United States citizen. If the primary borrower’s down payment is under 20%, the co-signer’s DTI must be 70% or less. The co-signer cannot have a financial interest in the property. If you’re considering co-signing for an FHA loan, you’ll need to speak with the primary borrower’s lender to see if you’re a good fit.
Can a cosigner take ownership of a house?
No, you will not take on ownership if you’re only a mortgage cosigner and not an actual co-borrower. As a cosigner, you’re only guaranteeing the loan payment. Your name will not be on the title to the property. Can I stop being a cosigner in the future? It’s not easy to end your obligation as a cosigner.
Can a co-signer sign a conventional loan?
In theory, as long as a co-signer can qualify financially, they’re good to co-sign a conventional loan. However, some lenders might want to know the nature of the relationship between the borrower and co-signer.
Who should co-sign a home loan?
Co-signers should be people rooting for you to pay off the loan without a hitch, not someone with an interest in owning the house—a possibility if they take over paying off the property. The co-signers to avoid are those who could make a buck by facilitating this real estate transaction—think the home seller or the builder/developer.
Can a cosigner pay off a home loan?
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.