Do I Need a Cosigner for a Mortgage?

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With entry-level salaries simply not climbing fast enough to match the rising cost of living, the only way for many people to get a foothold on the property ladder is with a boost from older, more established relatives. But a mortgage cosigner is taking on more risk than a cosigner for a credit card or even a car loan. The value (and risks) of a mortgage are much higher than other loans.

If you can have a cosigner help get you into a new, larger home, should you? Here's how to know whether or not you'll need a cosigner.

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 the loan 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 puts their own credit and assets at legal risk by cosigning a loan. 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's name goes on the title of the property. This gives them ownership in it.

Because a co-borrower has ownership, there's an expectation they'll help repay the mortgage. 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?

If you have a cosigner or co-borrower helping you take out a mortgage, you don't have to worry about your credit score or cash reserves. The mortgage lender will look at the cosigner or co-borrower's credit score and savings in addition to yours. If you are asking someone to co-borrow with you, you might even get approved for a larger loan.

The cosigner or co-borrower is affected by this process, too. The new loan will show up on their credit report. That means their debt-to-income ratio -- and ability to get other loans -- will suffer. And if you miss a payment, your cosigner's credit score will go down too.

Situations where you might need a cosigner or co-borrower

A lender looks at your credit and capacity for repayment (for example, how much income you earn) in deciding whether or not to give you a loan. However, what you think is a pretty good credit and employment history might not be 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

In this situation, we'll consider "mediocre credit" to be a credit score below 660. That's not a bad score, but it's too low for some conventional loans with moderate down payments and low interest rates. If your credit score falls in this range, you might get a lower rate or a better loan with a cosigner.

What if your credit score is much lower? If your credit is below 580, many lenders could refuse you even with a 10% down payment and cosigner. Bad credit can't necessarily be saved by a cosigner or co-borrower. If your credit score is low, you might want to check out our list of best mortgages for bad credit.

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. If most of your credit lines are two years old or younger, you might need a cosigner. This doesn't just affect people who are young and just building credit for the first time. Closing old credit cards zeroes out those lines of credit and will erase that part of your credit history.
If you don't have many open credit lines. Having only one or two credit cards is actually problematic when applying for a mortgage.
If you're using most of your available credit. Lenders want to see your credit utilization ratio at or below 30%, at least when it comes to your credit card balances.
No history of having paid a large ongoing payment. If you've never had an auto loan or other home loan, you might benefit from a cosigner.

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. And you can't open new accounts to quickly fix the problem.

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 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. Don't worry -- you're not alone in this. Most people, especially first-time homebuyers, don't have savings of that size.
Your employment history is short. This applies if you've recently switched jobs, taken some sort of leave, or cut back your hours -- even temporarily.
You're 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. Take a look at our guide to getting a mortgage while self-employed if you're struggling with this situation.
When your debt-to-income (DTI) ratio isn't good enough. Lenders look at your existing debt, then compare it to your income. This helps them determine whether you can afford 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. You can find your DTI by dividing your debt by your income, then multiplying the decimal you get by 100. If the number you get is above 43, you might need a co-borrower. Make sure you include your estimated mortgage payment as part of your debt when you calculate DTI.

Note that that last instance requires a co-borrower. A cosigner will not help improve DTI. That's because cosigner's income and assets are not factored into your mortgage application.

Consider government-backed mortgages

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. Look for lenders who specialize in FHA loans to find lenders who will be willing to work with your situation. See our guide on the best FHA lenders to learn more.

Should you bring in a cosigner or a co-borrower?

A cosigner or co-borrower might help you get a mortgage, but they are risking their financial well-being by doing so. Carefully consider whether it's worthwhile to ask someone to cosign on your loan, or if it would be better to wait a few years before buying a house.

If you do ask someone to cosign or co-borrow with you, make sure you can make all your new mortgage payments easily and on-time. Use a mortgage calculator to get an estimate of how much your monthly costs will be with different types of mortgages before you ask someone to cosign or co-borrow.

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 final step, once you have a mortgage with a cosigner or co-borrower, is to refinance and have them removed as soon as possible. Come up with a game plan for making this happen -- ideally within the first two years of the loan. Not everyone needs a cosigner for the life of a loan, and your cosigner will appreciate your efforts to reduce their risk.

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