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How to get a home loan

Jim Quist is the president and founder of NewCastle Home Loans. He has 20+ years of mortgage lending experience as a business owner, mortgage underwriter, and loan officer. Jim's goal is to help people buy homes.

Jim Quist is the president and founder of NewCastle Home Loans. He has 20+ years of mortgage lending experience as a business owner, mortgage underwriter, and loan officer. Jim's goal is to help people buy homes.



How a mortgage cosigner can help you get approved for a home loan.


When your income, savings, or credit history falls short, adding a cosigner to your mortgage application can give you the boost you need to reach your goal of homeownership.

Much like a cosigner for a car loan or credit card, a mortgage cosigner contributes their good credit and financial history to your home loan application, helping you qualify for a loan when you would otherwise be denied on your own.

Check out our guide below to learn how to use a cosigner to get approved for a home loan.

A cosigner applies for a mortgage with you but won't live in the home.

Cosigners strengthen your application by adding their income, credit, savings, and promise to repay the loan. These assurances improve your chances that the lender gives your home loan the thumbs-up.

In the mortgage biz, we call cosigners "non-occupant co-borrowers." Although they don't occupy the property, they sign the loan agreement and the deed. The loan agreement is the promise to repay the loan. The deed is the document that transfers title to the real estate from the sellers to the buyers. Cosigners are listed on the title and take equal ownership of the property.

Let's say, for example, you've found the perfect home, but you can't reasonably afford it yet. However, your mom is willing and able to help you buy your first place, and you agree to apply together. So you and mom apply for the loan -- you as the borrower and mom as the non-occupant co-borrower. You'll live there, but mom won't.

When processing the application, the lender analyzes the credit history, income, and financial resources for both you and your mom. Even though the lender didn't approve you on your own, mom's additional resources and credit history make repayment more likely. As a result, she tips the balance, allowing the lender to green-light the loan and you to close on the house!

You and mom sign the paperwork at closing, including the deed and the loan agreement. You both own the property and are obligated to repay the loan.

Consider adding a cosigner to your mortgage when you want to buy a home but suspect you may not qualify for the loan by yourself.

Maybe you can't afford the payments because your income is too low. Perhaps your income is enough to qualify for the home, but your debts are too high. Your credit history could be limited, or you might need some help with a down payment and closing costs. 

No matter the reason, the last thing you want to receive is a denial letter from the mortgage lender just days before your closing. Plan so that you're not left scrambling to finance your home last minute. Find out if you qualify for the loan on your own or if you'll need to ask someone to cosign before you start shopping with a real estate agent.

A mortgage pre-approval is crucial, especially for first-time buyers. Interview a few mortgage lenders when you're within 120 days from the date you hope to buy a home. Choose a home loan expert -- a professional with knowledge and experience to:

  • Check your credit score and evaluate how you've managed your debts
  • Analyze your debts and income. 
  • Offer options for the down payment and closing costs based on the type of home you want to buy. 

Broadly speaking, anyone who is willing, financially able, and who will not live in the home is eligible to be a mortgage cosigner. But there may be additional stipulations depending on the type of mortgage you want.

For a conventional mortgage, cosigners need a social security number. The cosigner has to be a U.S. citizen, a lawful permanent resident, or a lawful non-permanent resident. Your cosigner does not need to be a relative, but they should live in the U.S. 

For an FHA loan, your cosigner will need a social security number, must be a U.S. citizen, and must be a relative. Your spouse or significant other can also be a cosigner, as long as you can provide proof of your partnership.

VA loans and USDA loans, as more specialized loan types, don’t allow for cosigners.

Cosigners takes on financial risk by signing on to your mortgage. They’re responsible for your loan, so the mortgage debt and payment history become part of their credit record.

Carrying your loan makes qualifying for a mortgage to buy or refinance their own home more challenging. Late payments count against their credit, lower scores, and trigger higher interest rates, fees, or worse - credit denial.

With a mortgage cosigner, you benefit from someone else’s pledge to repay if you don’t, allowing you to buy a home. Being conscious of this favor can help protect your relationship with your cosigner.

Our best advice is to use cosigners as a temporary fix to help you qualify for a home loan. Then pay the mortgage on time to safeguard their good financial history.

Before closing on your home, you should already have a plan in place to remove the cosigner. Make arrangements in advance so that you don’t saddle the cosigner with your mortgage debt long-term. Set realistic expectations to preserve the relationship you have with the cosigner.

Set up an auto-pay so that you can easily prove that you’ve made consistent and timely payments. Proof that you’re making the payments will be helpful when the time comes for the cosigners to buy or refinance. The cosigner’s mortgage company will exclude your mortgage debt if you provide bank statements showing that you made the last 12 consecutive payments on time.

Most borrowers ask someone to cosign their mortgage because they need additional income to qualify for the loan. Without a cosigner, borrowers often have too much debt and not enough income--their debt-to-income ratio is too high. 

Lenders use a debt-to-income ratio to measure your ability to repay the mortgage. Your debt-to-income ratio is all of your monthly debt payments, including the payment for the home you’re buying, divided by your gross monthly income.

While a cosigner can be used to help you qualify, you should make the payments each month without relying on the cosigner to chip in. In the meantime, to lower your debt-to-income ratio, focus on:

  • Lowering your monthly debt payments. Pay off or pay down a car or student loan as soon as you can.  Lenders will exclude debts when you have 10 or fewer payments remaining. 
  • Adding to your income. Focus on career growth or new job opportunities that will increase the amount of money you earn. Changing jobs is okay as long as your income is reliable.
  • Maintaining a consistent history of any variable income, like bonuses, commissions, or self-employment income. Lenders need to see a two-year history of consistent variable income in order to factor the income into your debt-to-income ratio. 

Andy applied for a mortgage pre-approval with NewCastle last summer. He was ready to shop for a condo, and his budget was around $400,000. He had enough money to cover a 5% down payment ($20,000), plus the closing costs. He was hoping to mortgage the other $380,000. 

Even though Andy made good money, a significant portion of his income came from bonuses. In the previous year, his employer started paying him a bonus for meeting monthly goals. But because Andy didn’t have proof of this variable income going back two full years, this income couldn’t be factored into his debt-to-income calculations. Without this income, Andy didn’t qualify for a mortgage. 

Andy knew he could afford the monthly payments on his own, so he asked his mom to help him qualify. She had great income and very little debt. Using Andy’s base income and his mom’s income combined, Andy was able to qualify for the loan. Their total income offset their combined total debts enough for him to get the condo he wanted. 

Cosigner_on_Mortgage_Example

Unfortunately, adding a cosigner won’t improve your chances of getting a mortgage if you have bad credit. All borrowers--your cosigner included--must meet the lender’s minimum credit standards in order to qualify. So even a cosigner with perfect credit won’t help your chances of approval if your score doesn’t meet your lender’s minimum requirement.

Your credit score represents your history of paying bills on time and other significant financial events like bankruptcy. A poor payment history or recent bankruptcy produces a lower score, and illustrates to your lender that your loan is risky. People with higher credit scores tend to make their payments on time more often than folks with lower scores. So your lender will want to approve borrowers with higher scores--they’re more likely to make their mortgage payments on time.

If you or your cosigner has a credit score that doesn’t meet the lender’s minimum score requirements, the lender will deny the loan. In the event that you and your cosigners have very different credit scores, the lender will use the lowest credit score to make decisions about the loan. Adding a cosigner’s much higher score won’t help you in this case.

Let’s say, for example, that your credit score is less than 620--just shy of your lender’s minimum required score of 640. Even if you add a cosigner with a higher credit score, the lender will deny the loan because your score does not meet the minimum requirement. 

Ultimately, your credit score influences your interest rate and total amount due each month. Lenders offer higher interest rates to people with lower scores, so someone with a 620 credit score will pay more than someone with a 740 score, even if the loan is identical. 

Because lenders use the lowest credit score to set the interest rate for your loan, you won’t save any money on your interest rate by adding a cosigner with a higher score.

See current interest rates and payments

If you have little or no credit history--but not a low score--a cosigner can help your chances of approval. 

Mortgage lenders check your credit history via Equifax, Experian, and Transunion--the three companies that compile your credit history and determine your credit score. These companies include credit accounts, car loans, student loans, and other kinds of debt on your credit report. 

When you apply for a mortgage, your lender will look at the three scores reported by each company, and then make decisions for your loan based on the middle score. 

If you have a limited credit history, your lender may not be able to check all three scores, since your history may not register on all three credit reports. If you’ve only recently opened your first accounts, or don’t have credit cards or other loans, your lender won’t be able to confirm a track record of on-time payments to your creditors. 

This is why limited credit can make it hard to get approved for your mortgage: it’s not that your credit score is bad, it’s that your lender doesn’t have enough information about your payment history to approve a large loan like a mortgage. The lender can’t predict whether you’ll repay the loan without an established credit history, and so they may have to deny the loan.

A cosigner with good credit can make up the difference and help you get approved. With another borrower listed on the loan application, you benefit from your cosigner’s good credit history and established record of paying on time. And because the lender knows that one of the borrowers on the loan has a positive credit history, they’re more likely to approve your mortgage. 

With a cosigner on your mortgage application, you can get the home you need while strengthening your own credit history. If you make your payments on time, in 6 months or so you can plan to refinance your home. When you apply for a refinanced loan, you can remove the cosigner, leaving you the only borrower on the loan and freeing your cosigner from their obligation.

Ultimately, having a cosigner on your mortgage when you have limited credit can be a great way to boost your credit history while also landing you the home you need:

Tony wanted to help his daughter buy a place in Champaign, Illinois while she studied at the University of Illinois. As a student, she didn’t have much credit history herself, so she couldn’t qualify for the loan on her own. With Tony as a cosigner she benefited from his strong credit history, and we approved the loan.

In the end, this wound up being a great deal for both Tony and his daughter. They bought the home she lived in while she was in college, so Tony didn’t have to worry about helping his daughter with rent. And because she was able to rent the spare rooms out to roommates, the rental income covered the mortgage payment due on the home each month. 

On top of coming at minimal costs to Tony, buying this home as a cosigner also strengthened his daughter’s credit score while she’s still in school. When she graduates, she’ll have an established history of owning a home and can go on to purchase a place of her own. If Tony chooses to keep this home, he has a steady stream of students in a college town to pay rent. Converting the home to an investment property will generate long-term income.

Your down payment requirements with a cosigner depend on your situation--specifically the type of loan you need and the type of home you plan to buy. 

Lenders will only allow you to use a cosigner when you’re buying a primary residence --the place you’ll live year-round. Per your loan agreement, you’ll have to move in within 60 days after closing, and you’ll need to live there for at least one year.

Conventional loans (link: loan types) require:

  • 5% down payment for a single-family home, condo, or townhouse
  • 15% down payment for a 2-unit home or duplex
  • 20% down payment for a 3- or 4-unit home

An FHA loan (link: loan types) requires: 

  • 3.5% down payment for a single-family home, condo, or townhouse
  • 25% down payment for a 2-, 3-, or 4-unit home

VA loans and USDA loans don’t allow for a cosigner on your mortgage.

Schedule a time to talk

As a co-borrower, your cosigner is responsible for your mortgage until the loan is totally repaid. To remove a cosigner, you have to pay off the mortgage--either by submitting payments over time, or by refinancing the property.

Your cosigner allows you to benefit from their positive credit history and income, but it’s not a benefit to lean on forever. Because your cosigner carries your debt, it may prevent them from being able to qualify for their own mortgage or other loans. The fastest way to remove your cosigner is to refinance the mortgage using just your information to qualify.

Refinancing your loan doesn’t mean you have to have enough money to totally repay the loan. Instead, refinancing replaces your old loan with a new one. When you’ve had time to make payments on your mortgage and build up your credit and income, you’ll apply for a new loan for the same property--this time without your cosigner. 

Read our Blog: Can I get a mortgage if I'm already a co-signer?

 

Because you’re applying for a new loan on your own, you’ll want to make sure you can qualify for the loan using just your income, credit history, and debt-to-income ratio. Depending on your situation and when you refinance, you may qualify for a loan on your own, but it could come with higher interest rates and a higher monthly payment. You may also have to pay closing costs or appraisal, title, and government fees depending on where you live. 

Since there are so many variables that come into play when you refinance, it’s best to know what to expect ahead of time. Use our mortgage calculator to estimate the costs for your home, and make a plan with one of our loan experts to help you refinance, so you can make sure you know what to expect.

See how much it’ll cost to refinance.

If you play your cards right, though, refinancing could be an opportunity to lower your monthly payment. 

Mortgage interest rates might be lower when you refinance than they were when you originally applied for your loan. Because property values usually appreciate over time, your home may be worth more now than it was when you bought it. If your place is worth more, you may be able to reduce the amount you pay for mortgage insurance, lowering your monthly costs.

If you can’t refinance, or if refinancing isn’t a good option right now, it’s best to be proactive. Because your cosigner carries your debt, the time may come that they need to apply for a loan and need to exclude your mortgage from their total debt to qualify. 

To prevent your debt from becoming a big problem for your cosigner, make your mortgage payments on time, and make them through your bank. When the time comes for your cosigner to apply for a mortgage of their own, provide your cosigner’s lender with your bank statements proving that you make the monthly mortgage payments. Even if your cosigner is still listed on your loan, mortgage lenders will exclude the cosigned debt if you can prove that you’ve made the payments on time for the last 12 months.

If you have a cosigner on your mortgage, your ultimate goal should be to minimize the impact of your loan on your cosigner’s finances. Your cosigner is probably someone you’re close with, and you don’t want to negatively impact your relationship because of missed payments or defaulting on the loan. 

Have a plan in place to remove your cosigner before you even close on the house. This way, your cosigner can rest assured that, in time, you’ll both have the financial flexibility you need.

If you’re thinking about cosigning a mortgage for someone else, the first step is to make sure that you qualify as a potential cosigner. (Check at the top "Who can be a co-signer")

If you’re eligible to cosign, then it’s important to make sure you understand the potential complications of taking on this debt. If you plan to become a homeowner yourself in the near future, or if you want to refinance your current home soon, a cosigned mortgage could complicate or alter your plans. 

Once you understand the impacts of cosigning, it’s important that you trust your co-borrower to make the payments on time. Though you may be helping out a close friend or family member with your good credit history or added income, their missed or late payments can pose a serious risk to your own credit. Make sure both you and your co-borrower are on the same page, otherwise you could end up in a tough situation with lasting negative effects on your finances. 

Because cosigning is so often a case-by-case scenario, we recommend consulting with a mortgage expert before you dive headfirst into a cosigned mortgage. A little insider perspective can go a long way to helping you make the choice that’s right for you. 

For questions about cosigning and refinancing, schedule a time to chat with our team. We’re here to help you get the info you need.

 


 

We’re committed to answering your questions and offering straightforward advice to help you along your path to homeownership. Schedule a call for some one-on-one with a home loan expert today. 

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