If you’re having a difficult time qualifying for a loan, a cosigner may be just the ticket that will get you into a home of your own. Adding a cosigner doesn’t make a mortgage possible in every situation, but it can often help.
What exactly is a cosigner?
A cosigner goes on the mortgage with the primary borrowers. If the borrowers don’t fully qualify for the loan on their own (usually due to deficiencies in income, credit, down payment, or all three) the cosigner’s better credit and financial situation make the mortgage application stronger.
The borrowers still need to meet minimum loan requirements. But a cosigner helps strengthen an application when the borrower meets the bare minimums but has a weak application.
Who might benefit from a cosigner?
There are a few groups of people who are most likely to benefit from having a cosigner on the application.
- Young borrowers: If you’re too young to have an established credit history, you haven’t yet proven that you’ll be responsible enough to make monthly payments.
- Those with uncertain or irregular income: Freelancers and others with uncertain or intermittent income may benefit from a cosigner who could theoretically make payments in the event of an especially lean income month.
- People with financial instability: People with financial red flags like a past bankruptcy or high debt may benefit from a cosigner.
How does a cosigner improve your application?
Lenders approve loans based on different criteria, including credit scores, debt compared to income, and how much of a down payment you have.
For instance, if a borrower has just 5% down, a credit score of 620, and a 42% DTI, they are weak in all three of these important qualification areas, and the lender may not approve the loan (even if it technically meets minimum qualifications).
A cosigner with good credit and a low DTI may add strengthen this application enough for it to get approved.
What limitations does cosigning have?
Cosigning does have some limitations.
- If your credit score is lower than the 620 minimum for conventional and the 580 for FHA, a cosigner can’t help. A cosigner also can’t make up for a recent bankruptcy or foreclosure.
- You still need a down payment—in most cases, at least 3 to 5%, depending on the loan type. The minimum has to be paid by the occupying borrowers (unless there is some kind of allowable gift money involved).
- You still can’t go above 43% debt-to-income. If you have a DTI of 60%, that’s going to be too high no matter what your cosigner’s financial qualifications are.
No matter the cosigner, you still need to meet minimum qualification standards for down payment, credit, and income.
Who can be a cosigner?
The cosigner must have a familial relationship with the primary borrower. This would be a grandparent, parent, sibling, aunt, uncle, child, or something similar. It can also be someone who you’ve had a close, long-term relationship with but who isn’t necessarily related to you by blood (this might require some extra paperwork).
Cosigners also must be U.S. citizens or resident aliens, and lenders may require the consigner to live in the same state as the primary borrower and/or the property. This is usually the case if state law would make it difficult to pursue an out-of-state cosigner if the loan went into default.
Does the cosigner own the home, too?
The cosigner will usually be on all the documents relating to the loan, but they are not on the title to the property. They don’t own the property, and they have no legal right to the home. They can’t use it to pay off the mortgage debt in the case of a default, either.
What is the cosigner responsible for?
The cosigner is legally responsible for the mortgage until it’s paid off. If the loan goes into default, the cosigner is responsible for payments until the primary borrower resumes payments. Late payments or a loan default will impact the cosigner’s credit.
Cosigning for a mortgage could impair their own ability to get a loan in the future because it will likely be counted as debt by a future lender.
How do I remove a cosigner?
There’s no easy way to remove a cosigner from the loan. You’ll almost always have to refinance in order to do it.
If you’ve been in the home for a couple of years and have made all your payments on time, you should be able to refinance and remove the cosigner from the loan and from all responsibility for that loan.
Have more questions about using a cosigner?
If you have any more questions about potentially using a cosigner or about qualifying for a loan, please reach out via phone or email! I’ve worked through many complicated loan scenarios and am happy to help you with yours.