Co-Signing A Mortgage Loan: A Look At The Process
Imagine you want to buy a home with a mortgage loan, but you have bad credit.
In this scenario when you apply for preapproval, you find that lenders can’t offer you the best interest rates or you may find that you have a hard time getting approved due to your credit score. However, you know that your mother has an 800 credit score, so you ask her to co-sign your loan application. She agrees and signs her name on the applications.
Suddenly, you’re a much more appealing candidate for a mortgage. The lender considers both your income and your mother’s when they look at your application. Lenders also consider your mother’s finances, debt and credit when they look at your application, and decide to approve you for your loan.
From here, your mortgage generally functions the same way it would if you were the only person on the loan. You make a premium payment every month to cover your principal, interest, taxes and insurance (PITI), and you enjoy your home. However, the lender may hold the nonoccupant co-client responsible if you miss a payment. This means your lender has the right to take your mother to court and force her to repay the loan.
Co-signing isn’t just for mortgage loans. You may have a co-signer on personal loans, student loans and auto loans as well.
Whether you can have a co-signer depends on the type of loan you take out. Co-signers are most common on two specific types of mortgages: conventional loans and FHA loans. Let’s take a look at the limitations for both types of loans.
Conventional Loan Co-Signer Requirements
If you’re looking to apply for a conventional loan with a co-signer, they’ll need to sign the home loan and agree to repay the mortgage if the primary occupant defaults. However, the co-signer doesn’t need to be on the home’s title. The lender looks at both your credit and the co-signer’s credit to determine if you can get a loan.
When they look at your application, lenders will also consider you and your co-signer’s debt-to-income (DTI) ratio. Every lender has its own standards when it comes to what they consider an acceptable DTI. Knowing both your own and your co-signer’s debt-to-income ratio can make getting a loan easier.
FHA Loan Co-Signer Requirements
FHA loans are government-backed loans through the Federal Housing Administration (FHA) that allow you to buy a home with a lower credit score and as little as 3.5% down. If you want to get an FHA loan with a co-signer (you can have a maximum of two), your co-client will need to meet a few basic criteria.
First, your co-signer must be a relative or close friend. Mortgage lenders consider the following relatives as eligible to be co-signers on FHA loans:
- Parents and grandparents (including step-, adoptive and foster)
- Children (including step-, adoptive and foster)
- Siblings (including step-, adoptive and foster)
- Aunts and uncles
- In-laws
- Spouses or domestic partners
If the co-signer is a close friend, you’ll need to write an additional letter to your mortgage lender explaining your relationship and why your friend wants to help you.
Your nonoccupant co-client must also live in the United States for most of the year. They must have a DTI of 70% or lower if you have less than a 20% down payment. On an FHA loan, the co-signer must be on the title of the home.
