You're ready to buy a home, but the bank said you don't qualify for a mortgage. It's all right; you still have options.
When your income, savings, or credit history falls short, adding a co-signer to your application can give you the boost you need to get approved for a mortgage.
In this article, I'll explain how to add a co-signer's good financial history to your mortgage application so you can buy the perfect home.
What is a mortgage co-signer?
A co-signer is someone who applies for a mortgage with you but who won't live in the home.
The co-signer strengthens your application by adding their income, credit, and savings and promises to repay the loan. In addition, these assurances improve the chances that the lender will give your home loan the thumbs-up.
In the mortgage biz, we call co-signers "non-occupant co-borrowers." So while you'll live at your new home, your lender knows the co-signer won't.
But even though they won't live there, the co-signer takes an ownership interest in the home and will be on the title. Let's say, for example, you've found the perfect home, but you still need to find a way to afford it. Your mom is willing and able to help you buy your first home, and you agree to apply together.
You and your mom will apply for the loan--you as the borrower and your mom as the non-occupant co-borrower. You'll live there, but your mom won't. And the lender will consider the credit history, income, and financial resources for you and your mom when processing your application.
Although you can't get the loan by yourself, your mom's additional resources and credit history shows the lender you're likely to repay it. So, with your mom's backing, the lender green-lights the loan.
When should I add a co-signer to my home loan?
When you want to buy a home but suspect you may not qualify for the loan by yourself, consider adding a co-signer to your mortgage.
Maybe you can only afford the payments if your income is higher. Or perhaps your income is enough to qualify for the home, but your debts are too high. In addition, your credit history may be limited, or you may need help with the home's 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. No one wants to be left scrambling to finance their home last minute. This is why pre-approval is crucial, especially for first-time buyers.
Planning is the best way to ensure this doesn't happen. Find out if you qualify for the loan or need someone to co-sign before you start shopping with a real estate agent.
It would help if you got a verified mortgage pre-approval when you're 30 - 120 days from buying a home. Contact NewCastle Home Loans for your verified pre-approval letter, so you feel confident about making an offer to buy a home.
You'll know exactly how much you can afford without a co-signer's help. Then we will help you decide if you want to add a co-signer to boost your buying power or increase your chances of approval.
Who can be a mortgage co-signer?
Anyone willing, financially able, and who will not live in the home is eligible to be a mortgage co-signer. But there may be additional stipulations depending on the type of mortgage you want.
For a conventional mortgage, co-signers need a social security number. In addition, the co-signer must be a U.S. citizen, a lawful permanent resident, or a legal non-permanent resident. Your co-signer doesn't need to be a relative, but they should live in the U.S.
For an FHA loan, your co-signer 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 co-signer if you provide proof of your partnership.
VA loans and USDA loans, as more specialized loan types, don't allow for co-signers.
Is there a downside to having a co-signer on my mortgage?
Co-signers take 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.
Because the debt of your mortgage is added to their credit report, it can be more difficult for co-signers to qualify for a mortgage or buy or refinance their own home. Late payments will also count against their credit and can hurt their chances of opening additional accounts for mortgages, cars, and credit cards.
A payment received 30 or more days past the due date will lower the credit scores of you and your co-signer. Lower scores trigger higher rates and payments or, worse - credit denial.
With mortgage co-signers, you benefit from someone else's good financial history and their pledges to repay if you don't, allowing you to buy a home. Being conscious of this favor can help protect your relationship with your co-signer.
Our best advice is to use co-signers as a temporary fix to help you qualify for a home loan. Then make sure you pay the mortgage on time to safeguard their credit report.
Before closing on your home, you should already have a plan to remove the co-signer. Make arrangements so you don't saddle your co-signer with your long-term mortgage debt. Set realistic expectations to preserve the relationship you have with the co-signer.
TIP: Set up an auto-pay through your bank or the mortgage lender to 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 co-signers to buy or refinance. In addition, they'll be able to exclude your home's mortgage debt if you provide bank statements or canceled checks showing that you made the last 12 consecutive payments on time.
Will a co-signer's income help me qualify for a mortgage?
Most borrowers ask someone to co-sign their mortgage because they need additional income to qualify for the loan. However, without a co-signer, 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 you can use a co-signer to help you qualify, you should make monthly payments without relying on the co-signer to chip in. In the meantime, to lower your debt-to-income ratio, focus on the following:
- Lower your monthly debt payments. Pay off or pay down a car or student loan as soon as possible. Lenders will exclude debts when you have ten or fewer payments remaining.
- Add 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.
- Maintain 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 to factor the income into your debt-to-income ratio.
Our customer Andy is an excellent example of this situation:
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. 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 independently, so he asked his mom to help him qualify. She had a high income and very little debt. Andy qualified for the loan after combining his income with his mom's. Their total income offset their combined obligations enough for him to get the condo he wanted.
My credit could be better. Should I add a mortgage co-signer?
Unfortunately, adding a co-signer won't help if your credit is terrible. All borrowers--your co-signer included--must meet the lender's minimum credit standards to qualify. So even a co-signer with perfect credit will only help your chances of approval if your score meets 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 co-signer has a credit score that doesn't meet the lender's minimum score requirements, the lender will deny the loan. If you and your co-signers have very different credit scores, the lender will use the lowest credit score to make decisions about the loan. Adding a co-signer's 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. Then, even if you add a co-signer 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 the 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 co-signer with a higher score.
I have limited credit. Can a co-signer help me get a home loan?
If you have little or no credit history--but not a low score--a co-signer can help your chances of approval.
Mortgage lenders check your credit history via Equifax, Experian, and Transunion--the 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, the lender may only be able to check one or two of the three scores. In addition, they probably can't confirm a track record of on-time payments to your creditors.
Limited credit makes it hard to get approved for your mortgage. It's not that your credit score is terrible; your lender needs more information about your payment history before approving a large loan like a mortgage. Unfortunately, the lender can't predict whether you'll repay the loan without an established credit history, so they may have to deny it.
A co-signer with good credit can make up the difference and help you get approved. For example, with another borrower listed on the loan application, you benefit from your co-signer's good credit history and established record of paying on time. And because the lender knows that one of the borrowers on loan has a positive credit history, they're more likely to approve your mortgage.
With a co-signer on your mortgage application, you can get the home you need while strengthening your 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 co-signer, leaving you the only borrower on loan and freeing your co-signer from their obligation.
Can you get a mortgage if you're already a co-signer?
Ultimately, having a co-signer 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:
Our customer Tony, for example, wanted to help his daughter buy a place in Champaign, Illinois, while she studied at the University of Illinois. Unfortunately, as a student, she didn't have much credit history, so that she couldn't qualify for the loan independently. However, with Tony as a co-signer, she benefited from his strong credit history, and we approved the loan.
Ultimately, this was an excellent deal for 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 could 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 co-signer 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.
Use future rental income from your current property to buy a new home.
How much will my down payment be if I have a co-signer?
Your down payment requirements with a co-signer 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 co-signer when 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.
How do I remove a co-signer from my mortgage?
Co-signers are responsible for the mortgage until you release them from the loan. To remove a co-signer, you have to pay off the mortgage. For example, selling or refinancing the home will pay off the mortgage and release the co-signer.
Your co-signer allows you to benefit from their positive credit history and income, but it's only a benefit to lean on for a while. Because your co-signer carries your debt, it may prevent them from being able to qualify for their mortgage or other loans. The fastest way to remove your co-signer is to refinance the mortgage using only your financial information.
Refinancing your loan doesn't mean you have to have enough money to repay the entire 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 co-signer.
Can you get a mortgage if you're already a co-signer?
Because you're applying for a new loan, you'll want to ensure you can qualify using only your income and credit.
Since so many variables come into play when you refinance, it's best to know what to expect. 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.
If you play your cards right, refinancing could be an opportunity to lower your monthly payment. Mortgage interest rates might be lower when you refinance than when you originally applied for your loan. In addition, 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 can reduce the amount you pay for mortgage insurance, lowering your monthly costs.
If you can't refinance, do your best to prevent your debt from becoming a big problem for your co-signer. Make your mortgage payments on time, and make them through your bank. When the time comes for your co-signer to apply for a mortgage of their own, provide your co-signer's lender with your bank statements proving that you make the monthly mortgage payments. Mortgage lenders will exclude the co-signed debt if you can prove that you've made the payments on time for the last 12 months.
If you have a co-signer on your mortgage, your ultimate goal should be to minimize the impact of your loan on your co-signer's finances. Your co-signer 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 co-signer before you even close on the house. This way, your co-signer can rest assured that, in time, you'll both have the financial flexibility you need.
I'm thinking about co-signing a mortgage. What do I need to know?
If you're considering co-signing a mortgage for someone else, the first step is to make sure you qualify as a potential co-signer.
If you're eligible to co-sign, it's essential to understand the potential complications of taking on this debt. For example, if you plan to become a homeowner yourself soon or if you want to refinance your current home soon, a co-signed mortgage could complicate or alter your plans.
Once you understand the impacts of co-signing, you must 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 severe risk to your credit. Make sure you and your co-borrower are on the same page. Otherwise, you could end up in a challenging situation with lasting adverse effects on your finances.
Because co-signing is often a case-by-case scenario, you should talk to a mortgage expert at NewCastle Home Loans before diving headfirst into a co-signed mortgage. A little insider perspective can go a long way to helping you make the choice that's right for you.
Schedule a time to chat with us. We're here to help.