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. A co-signer is also called a non-occupant co-borrower.
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.
A mortgage co-signers takes an ownership interest in the property, signs the loan agreement, and shares the liability but doesn't live there.
Let's say you've found the perfect home but 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.
Talk to a mortgage expert at NewCastle Home Loans to assess your situation and help you decide whether to add a co-signer.
When should I add a co-signer to my home loan?
Adding a co-signer to your home loan can be beneficial in certain situations. Consider adding a mortgage co-signer when you want to buy a home but suspect you may not qualify for the loan by yourself. Here are a few scenarios:
- Your income is too low to qualify for the loan on your own
- Your income is enough, but your debts are too high, or your credit history is limited
- You need help with the 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. Planning is the best way to ensure this doesn't happen.
Get pre-approved for the loan before shopping for a home to know how much you can afford with or without a mortgage co-signer. A verified pre-approval letter from a loan decision maker at NewCastle Home Loans will help you feel confident about buying a home.
Who can be a mortgage co-signer?
Mortgage co-signers can be anyone willing, financially able, and who will not live in the home. However, they cannot be the property seller, the builder, the real estate broker, or anyone with a financial interest in the property's sale.
There may be additional stipulations depending on the type of mortgage you want. Also, co-signers must be creditworthy—their income, debts, and credit history are suitable.
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 non-permanent resident. Your co-signer doesn't need to be a relative, but they should live in the U.S. Finally, the co-signers credit score must be 620 or higher.
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. The co-signers credit score must be 580 or higher.
View current rates, payments, and closing costs for conventional and FHA loans.
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 of your mortgage debt, 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. So any late payments will 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 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 ensure you pay the mortgage on time to safeguard their credit report.
Before closing on your home, you should plan to remove the co-signer. Make arrangements to not saddle your co-signer with your long-term mortgage debt. Set realistic expectations to preserve the relationship you have with the co-signer.
Your co-signer can exclude your home's mortgage debt if you provide bank statements or canceled checks proving you made the last 12 consecutive payments on time. Excluding your debt makes it easier for your co-signer to get approved for a loan to buy or refinance their home.
Will a co-signer's income help me qualify for a mortgage?
Having a co-signer with a higher income can help you qualify for a mortgage.
When you apply for a mortgage, lenders will assess your ability to make payments based on your income, credit score, and other factors. If you don't meet the lender's income requirements independently, having a co-signer can provide additional income to help you qualify for the loan.
Some homebuyers have too much debt and need more income--their debt-to-income ratio is too high. Lenders use a debt-to-income ratio (DTI) to measure your ability to repay the mortgage. Your DTI is all your monthly debt payments, including the home you're buying, divided by your gross monthly income.
To lower your debt-to-income ratio, consider the following:
- Lower your monthly debt. Pay off or pay down your car loan. Mortgage lenders exclude obligations when you have ten or fewer payments remaining.
- Add to your income. Changing jobs for a pay increase may help. But taking on a second job or working extra hours for overtime might not. You need a two-year history before using any income from a second job. And lenders average variable pay, like bonus, commission, and overtime income over two years.
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. Our customer Andy is a good example:
We pre-approved Andy for a $380,000 mortgage last summer. He wanted to buy a $400,000 condo and had enough money to cover the 5% down payment and closing costs.
Even though Andy made good money, a significant portion of his income came from bonuses starting last year. Because Andy had less than a two-year history of receiving bonus income, he couldn't use any to qualify for the mortgage. As a result, his debt-to-income ratio was too high.
Andy knew he could make the monthly payments independently and asked his mom for help. She had a high income and low debt and agreed to co-sign the mortgage. After combining his income with his mom's, Andy qualified for the loan and bought the condo.
If my credit is bad, will a co-signer help me get approved for a mortgage?
Having a co-signer will only help you qualify for a mortgage when you and the co-signer meet the minimum credit score requirements. Lenders make loan decisions based on the lowest score—the qualifying credit score.
For example, suppose your credit score is 619, and the loan you applied for requires a 620 score. Then, even if you add a co-signer with perfect credit and a higher score, the lender will deny the application because the qualifying credit score of 619 is too low.
Lenders use the qualifying credit score to determine the mortgage interest rate they offer you. They think lower-score loans are riskier than higher-score loans. Therefore, you should expect to pay more for a mortgage when your credit score is low.
For instance, someone with a 620 credit score typically pays a higher interest rate than someone with an identical loan and a 740 score.
Because lenders use the qualifying credit score to set the mortgage interest rate, adding a co-signer with a higher score won't lower your rate. But, then again, adding a co-signer with a lower score could increase your interest rate and monthly payment.
If I have no credit, will a co-signer help me get approved for a mortgage?
A co-signer can help you qualify for a mortgage when you have little or no credit history.
After you apply for a mortgage, the lender considers your credit history when making a loan decision. First, they need to confirm a track record of timely payments to your creditors. Limited credit makes it difficult to predict whether or not you'll repay the mortgage. As a result, the lender will probably deny your application.
A good credit co-signer can make a difference and help you get approved. For example, suppose the lender knows that one of the borrowers has a well-established history of repaying debt on time. In that case, 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, you can refinance after six months.
By refinancing, you can remove the co-signer from the mortgage, freeing your co-signer from their obligation.
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:
Regan, a full-time student at the University of Illinois, wanted to buy a house. First, however, she had to establish a credit history to qualify for the mortgage.
Tony, her dad, wanted to help. With her dad co-signing, Regan benefited from his strong credit history, and we approved the loan. It turned out to be a good deal for Tony and Regan.
She lived there while in college, so Tony didn't have to pay rent. Moreover, she rented the spare rooms to roommates. As a result, she collected enough cash to cover the mortgage payments and some of her living expenses.
Regan also strengthened her credit score while she was in school. So when she graduated, she was ready to buy a place independently.
They still own the house, which they converted into an investment property. As such, Tony and Regan collect a steady income stream for the students renting it.
How much for a down payment if I have a mortgage 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.
You may use a co-signer when buying a property that will be your primary residence - where you'll live year-round.
When adding a co-signer to a conventional mortgage, you can buy a 1-unit property, a single-family, townhome, or condominium with a minimum 5% down payment. For a 2-unit, you'll need at least a 15% down payment. And a 3-to-4-unit property requires a 20% down payment.
When using an FHA loan, you and your co-signer can buy a 1-unit with as little as 3.5% down. However, you'll need 25% for a down payment to buy a multi-unit, 2-to-4-unit property.
The following chart shows the minimum down payment requirements when you have a mortgage co-signer depending on the property and loan types—conventional or FHA.
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.
A co-signer allows you to benefit from their positive credit history and income. Still, 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.
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 typically appreciate over time, your home may be worth more now than 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. First, make your mortgage payments on time, and make them through your bank. Then, 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 someone you're close with. 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.
What do I need to know about co-signing a mortgage?
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 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 be 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 help you make the right choice for you.
Rules for mortgage co-signers and non-occupant co-borrowers
- Fannie Mae non-occupant co-borrowers
- Freddie Mac non-occupant co-borrowers
- FHA borrower, co-borrower, and co-signer eligibility