A mortgage cosigner is taking on more risk than a cosigner for a credit card or even a car loan, because the amounts are so much larger and the stakes much higher for lender and borrower alike. However, cosigners and co-borrowers can be an expedient path to the American dream of homeownership.
Sixty percent of non-homeowners surveyed in the 2019 National Association of Realtors HOME Report think it would be difficult to qualify for a mortgage. With entry-level salaries simply not climbing fast enough to match the rising cost of living in this country, the only way for many people to get a foothold on the property ladder is with a boost from older, more established relatives.
And on the flip side, many millennial and Generation X families are grappling with the responsibility of caring for aging parents who need to move in with them…perhaps necessitating a different living situation. So the question is, if you can have a cosigner help get you into a new, larger home, when is the appropriate time?
What is a cosigner?
A cosigner is a person who agrees to be the guarantor for a loan of any kind -- in other words, they guarantee it will be paid even if the primary borrower can't make payments. The following statements are true of all cosigners:
- A cosigner doesn't have ownership of any kind.
- A cosigner does not appear on the title as an owner.
- A cosigner is not the primary person responsible for paying the monthly mortgage.
However, if the primary borrower on the loan defaults, the cosigner will be held responsible for continuing to repay the loan.
A cosigner is putting their own credit and assets at legal risk, signing the dotted line on the loan documents, and not getting any ownership interest out of the deal. It's truly one of the biggest favors one person can do for another.
The difference between a cosigner and co-borrower
A co-borrower is even more involved in the home purchase, because their name goes on the title of the property, giving them ownership in it and creating an expectation that they'll help repay it. Co-borrowers have to allow their credit, assets, and income to be scrutinized in the same way as the primary applicant's are. And because of this, a co-borrower's income and assets are looked at as supplemental to the primary borrower's.
What does it mean when a cosigner/co-borrower signs a mortgage?
It almost has a seesaw effect when a cosigner or co-borrower comes into a mortgage. For the primary applicant, their credit evaluation reflects the superior status of the cosigner or co-borrower, their cash reserves are bolstered by the cosigner/co-borrower, and if it is a co-borrower situation, the amount of the loan they can get approved for increases.
For the cosigner or co-borrower, everything from their debt-to-income ratio to the total debt amount that shows up on credit reports could be affected. And if the primary borrower misses a payment, that will drag down the cosigner's credit, too.
Situations where you might need a cosigner or co-borrower
The primary borrower's credit is one of the key things that a lender looks at. The other is capacity for repayment. However, you may find out in the application process that what you thought was a pretty good credit and employment history are actually not enough to impress a lender. Here are the situations when a cosigner or co-borrower might tip the lender's decision in your favor:
When your credit is mediocre
Let's consider mediocre here as a credit score below 660, which is not a bad score in itself, but too low to qualify for some lenders' conventional loans with moderate down payments and low interest rates.
Also, note that your credit score is not the only thing underwriters look at. The following factors in your credit report may be evaluated as additional risk:
- If your credit history is newer. This general means that most of the open lines of credit are newer than two years. (Note, this doesn't just affect people who are young and just building credit for the first time. If you decided to close cards that you had for a while, the action zeroes out those lines of credit and will erase that part of your credit history and lower your credit score.)
- If you don't have too many open credit lines. Having only one or two credit cards is actually problematic when applying for a mortgage.
- If your revolving balance is high. Lenders want to see credit cards with revolving balances below 30%.
- No history of having paid a large ongoing payment. This refers most commonly to an auto loan or other home loan.
Essentially, a not-very-active credit history is a drawback, even if you have three or four years of paying a couple of accounts on time. In this case, since you can't open new accounts to quickly fix the problem, bringing on a cosigner or co-borrower with more open lines and low balances can be a quick fix.
Capacity -- ability to pay off a loan
When evaluating your ability to repay, the following factors may be so scary to a lender that you'll need to bring on a cosigner.
- You don't have a lot of assets or cash reserves. If you, like many people, don't have $50,000 in addition to your down payment sitting in a savings or investment account, certain loan underwriters will see you as risky.
- Your employment history is short. Perhaps you've recently switched jobs, taken some sort of leave, or cut back your hours, even temporarily.
- You're self-employed. This is still a huge problem for lenders, even though according to the Pew Research Center, as of 2019, 30% of the American workforce is self-employed. Proving income as a self-employed person is an arduous process, and if you have any "gaps" -- e.g., one client who paid W-2 while three others paid 1099 -- the underwriter may simply not be able to get past it. In this situation, a cosigner or co-borrower may be the only solution.
- When your debt-to-income (DTI) ratio isn't good enough. Lenders look at DTI to determine whether a person can afford to make mortgage payments. They want to see that your DTI is below 43% when the monthly payment of the property you're applying for is factored in -- including HOA fees and property taxes. So if you apply for a loan thinking your debt is only 33% of your monthly income, based on renting a place for $1,200 a month, but the home you want to buy is $1,800 a month plus $200 property taxes and $100 insurance, the monthly housing payments factored into your DTI will be $2,100, not $1,200 -- nearly doubling it and perhaps necessitating you show greater income and ability to pay by bringing in a co-borrower.
Note that that last instance requires a co-borrower. A cosigner will not help improve DTI, since their income and assets are not factored in.
The government is friendlier than ever
The FHA "family mortgage" feature allows non-occupant family (by blood, marriage, or law) to be co-borrowers. This is the government's way of encouraging families to pool resources in order to buy a home. While not all lenders are generous in their interpretations of the rule, there are many that are willing to work with it, especially if they make the majority of their money doing FHA loans or conventional loans.
Should you bring in a cosigner or a co-borrower?
First of all, are you sure you can? Here are a few things that may stand in your way:
- Many things get uncovered in the underwriting process, and you may learn that your would-be cosigner isn't in a position to help.
- They may decide that they don't want to go through the challenging and frustrating application process in order to land you a huge loan.
- Through conversations, it may become clear that neither party wants to be sharing personal financial details and then repayment responsibilities with the other.
If you have a person who will clear all the hurdles to share this financial responsibility with you, keep in mind that they'll be in the middle of your personal financial business for as long as they're on the loan documents. The ideal next step, if you want the house to be truly "yours" (well, yours and the bank's), is to refinance and have them removed. Come up with a two-year game plan now for making this happen.
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