how much does a cosigner help on home loans

How Much Does a Co-signer Help on Home Loans?

Getting approved for a mortgage can be challenging, especially for first-time homebuyers. One way to boost your chances is by adding a co-signer to your loan application. But how much does having a co-signer actually help?

What is a Mortgage Co-signer?

A mortgage co-signer, also called a co-borrower or guarantor, is someone who applies for a home loan with you but won’t live in the home They agree to be equally responsible for repaying the mortgage debt.

By co-signing, they allow the lender to consider their income, assets, credit score, and debt-to-income ratio when approving your loan. Essentially, they strengthen your mortgage application with their finances.

Who Makes a Good Co-signer?

A good co-signer has:

• A high credit score – generally 620 or higher
• Low debt-to-income ratio
• Significant income and assets
• A willingness to take on financial risk

Family members like parents often co-sign mortgages for first-time homebuyers who don’t qualify on their own. But any financially responsible adult who trusts you can cosign your loan.

Benefits of Having a Co-signer

Adding a co-signer to your mortgage application offers several key benefits:

1. Increased Approval Odds

With a co-signer, you stand a better chance of approval, especially if you have limited income, high debt, or poor credit. Their good financial profile reassures lenders about getting repaid.

According to a Zillow survey, 56% of recent homebuyers who used a co-signer said it was the only way they could qualify for a mortgage.

1. Better Loan Terms

Strong co-signers may help you qualify for lower interest rates and fees. Their finances offset the lender’s risk, allowing them to offer better pricing.

Borrowers with credit scores below 620 often get stuck with high interest rates or government-backed loans with heavy mortgage insurance premiums. But a co-signer over 720 could mean a lower rate on a conventional loan.

1. Bigger Loan Amounts

With a co-signer, you may be able to afford a more expensive home. Lenders will consider your co-signer’s income when calculating the maximum loan amount you qualify for.

For instance, if your $50,000 salary supports a $200,000 loan, adding a co-signer making $100,000 could get you approved for around $380,000.

1. Lower Down Payment

On an FHA loan, having a co-signer allows you to put down just 3.5% instead of 10% as a single borrower. With conventional loans, you can likely qualify for 3-5% down versus 20%.

Less cash needed upfront makes it easier to buy sooner rather than saving for years.

Potential Drawbacks

Co-signing does come with some risks:

• Co-signers are equally responsible for the debt. If you miss payments, it damages their credit too.

• Monthly mortgage payments raise a co-signer’s debt-to-income ratio, which could prevent them from getting their own loan.

• Disagreements over late payments can strain relationships with friends or family.

• Refinancing to remove a co-signer usually requires 6-12 months of on-time payments.

To avoid problems, openly communicate with co-signers about finances and keep payments on track. Take over the mortgage solo as soon as your credit permits.

How Much Income Do Co-Signers Need?

There’s no minimum income requirement for co-signers across the board. Income needs depend on the mortgage amount, their own debts, and the lender.

As a rule of thumb:

• For FHA loans under $200,000, co-signers should make at least $2,500 per month.

• For a $200,000 – $400,000 FHA loan, aim for co-signers earning $4,000+ monthly.

• Conventional loans over $400,000 call for co-signers making $6,000+ per month.

Of course, earning more always helps. But meeting these income thresholds gives co-signers enough headroom to support mortgage payments comfortably.

How High Should Their Credit Score Be?

The minimum credit score for co-signers depends on the loan program:

• FHA loans need co-signers with at least a 580 credit score. The higher, the better the mortgage rate.

• Conventional loans require co-signers to have a 620 credit score or higher. Excellent credit (740+) unlocks the very best interest rates.

Poor credit co-signers below 580 are usually too much of a risk. Their low scores overshadow any income boost and may disqualify your application.

Can Co-signers Help with Down Payments?

Your co-signer can also pitch in on the down payment if you’re short on cash. Lenders allow this as long as they can document the source of funds.

Gift funds from relatives are a common way first-time homebuyers afford down payments. Cosigners simply wire or transfer the money as a gift rather than loan.

You’ll need a gift letter stating the funds need not be repaid. Gift amounts are limited based on the mortgage program. Your co-signer can discuss specifics with their mortgage broker.

Adding Parents or Relatives as Co-signers

Parents and family members co-sign more than half of all mortgages requiring a co-signer. Relying on relatives for help buying a first home is common.

Besides financial assistance, parents cosign because:

• They want to help their children achieve homeownership.

• They view co-signing as a good investment in their child’s future.

• They plan to pass the home down eventually.

• They get tax benefits from mortgage interest deductions.

Before recruiting parents as co-signers, consider a few tips:

• Make sure they understand the legal obligations of co-signing.

• Have an honest discussion about household finances and expectations.

• Give them plenty of time to review loan documents and terms.

• Draw up a co-signing agreement detailing exit strategies in case of disagreements later.

• Make payments on time and keep your end of the bargain.

• Show appreciation for their help and willingness to put their credit on the line.

Adding a Spouse as Co-Borrower

Married couples often apply for mortgages together. In that case, both spouses are co-borrowers (not co-signers) equally entitled to the home.

Pros of co-borrowing with a spouse:

• Combined income increases buying power.

• Two incomes make payments more affordable.

• Shared homeownership benefits both spouses.

• Co-borrowers split mortgage interest deductions at tax time.

Cons to consider:

• Both spouses are obligated to repay the debt in full.

• Missed payments hurt both credit scores.

• Co-borrowing may limit future individual borrowing capacity.

• Divorce or separation requires refinancing or selling the home.

Co-signing vs. Co-borrowing

People sometimes use the terms co-signer and co-borrower interchangeably. But there’s an important distinction:

Co-signer: Applies for the mortgage but won’t live in or own the home. Their purpose is improving the chances of approval.

Co-borrower: Equally owns the home and is obligated on the loan. Both borrowers have an interest in the property.

In other words, co-signers guarantee the mortgage but have no rights to the property. Co-borrowers are joint property owners with equal stakes.

Removing Co-signers from Loans

Ideally, co-signers should be temporary, helping borrowers qualify before exiting the mortgage. There are two ways to remove a co-signer after closing:

Refinance: After 6-12 months of on-time payments, the primary borrower can refinance the loan in their name only. This requires good credit and income.

Pay off: The borrower sells the home or pays off the mortgage balance to release the co-signer. Prepayment penalties may apply.

Until officially removed, co-signers remain responsible for the mortgage, even if borrowers make all the payments. Consult a loan officer to navigate co-signer release options.

Alternatives to High-Income Co-signers

Not everyone has a high-earning family member to co-sign their mortgage. If that’s the case, some possible alternatives include:

Federal Housing Administration (FHA) loans: Require just 3.5% down and have flexible credit requirements.

VA loans: Offer 100% financing and limited options for veterans and military members.

USDA loans: Feature zero down payments and low rates for properties in rural/suburban areas.

Down payment assistance: