How a mortgage co-signer can help you buy a home

If your income or credit history isn't enough to secure a mortgage, adding a co-signer to your application can improve your chances of approval.

This article will guide you through how a co-signer's strong financial background can help you purchase the perfect home.

 

What is a mortgage co-signer?

A mortgage co-signer, or non-occupant co-borrower, applies for a mortgage with you but does not live in the home. They strengthen your application by adding their income, credit, and savings and commit to repaying the loan if necessary, increasing the likelihood that the lender will approve your home loan.

 

If you find a home but cannot afford it alone, your mother can help by co-signing. You will live in the house, and your mom will not. The lender will consider both your financial information and your mother's. Her additional resources and credit history can help you get the loan approved.

 

It's important to note that a co-signer shares ownership of the property and signs the loan agreement, assuming liability for the loan, even though they do not reside in the home.

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 helpful in certain situations, especially if you might not qualify on your own. Consider a co-signer if:

• Your income is too low to qualify for the loan alone.
• Your income is sufficient, but your debts are too high, or your credit history is limited.
• You need assistance with the down payment and closing costs.

To avoid last-minute loan denial, plan ahead. Get pre-approved before shopping for a home to understand how much you can afford, with or without a co-signer. A verified pre-approval letter from a loan decision maker at NewCastle Home Loans will give you confidence in your home-buying journey.

Who can be a mortgage co-signer? 

A mortgage co-signer can be anyone willing, financially qualified, and not planning to live in the home. However, certain restrictions apply. The co-signer cannot be the property seller, builder, real estate agent, or anyone with a financial interest in the sale.

Conventional loans require the co-signer to:

• Have a Social Security number.
• Be a U.S. citizen, lawful permanent resident, or non-permanent resident.
• Have a credit score of 620 or higher. 
• Reside in the U.S. (though they don't need to be a relative).

FHA loans have slightly different requirements:

• The co-signer must have a Social Security number.
• They must be U.S. citizens and relatives, spouses, or significant others (with proof of relationship).
• Their credit score must be at least 580.

Co-signers also need a strong financial profile, including suitable income, manageable debts, and a solid credit history.

Check current rates, payments, and closing costs for conventional and FHA loans.

Is there a downside to having a co-signer on my mortgage? 

Having a co-signer comes with risks, especially for the person co-signing. Here are some key considerations:

• Shared Financial Responsibility: A co-signer is equally responsible for your loan. The mortgage debt and payment history will appear on their credit report.
• Impact on Their Financial Future: The added debt can make it harder for co-signers to qualify for their own mortgage, refinance, or take on other loans, like car or credit card debt.
• Risk of Credit Damage: Late payments, even by 30 days, will harm your credit score and that of your co-signers. Lower credit scores can lead to higher interest rates or loan denials for future financial needs.

Tips for Protecting Your Co-Signer

• Use a Co-Signer Temporarily: Plan to remove your co-signer from the mortgage once your financial situation improves. Paying the mortgage on time consistently will help you refinance later and relieve your long-term obligation.
• Pay on Time: Timely payments safeguard your credit score and co-signer's.
• Help Your Co-Signer Exclude the Debt: Once you've made 12 consecutive on-time payments, provide proof (like bank statements or canceled checks). This documentation allows your co-signer to exclude your mortgage debt from their credit profile, making it easier for them to qualify for their own loans.

It is crucial to be mindful of your co-signer's financial risk. Clear communication and realistic plans will protect your relationship and their creditworthiness.

Will a co-signer's income help me qualify for a mortgage? 

A co-signer with a higher income can help you qualify for a mortgage.

When you apply for a loan, lenders consider your income, credit score, and other factors to decide if you can afford the monthly payments. If your income doesn't meet the lender's requirements, a co-signer's additional income can strengthen your application.

Many homebuyers face challenges because their debt-to-income ratio (DTI) is too high. DTI measures your total monthly debt payments (including your new mortgage) compared to your gross monthly income. A high DTI can make qualifying harder, but a co-signer's income can help lower that ratio.

While a co-signer can help you qualify, managing the monthly payments on your own is essential.

If my credit is bad, will a co-signer help me get approved for a mortgage? 

A co-signer can only help you qualify for a mortgage if both you and the co-signer meet the lender's minimum credit score requirements. Lenders base their decisions on the lowest credit score between you and the co-signer.

Lenders also use the qualifying credit score to determine your mortgage interest rate. Borrowers with lower scores are considered riskier and typically pay higher rates. For instance, a borrower with a 620 score will usually pay a higher rate than someone with a 740 score for the same loan.

Adding a co-signer with a higher score won’t reduce your interest rate since lenders still base rates on the lowest score. However, adding a co-signer with a lower score could raise your rate and monthly payment. It’s important to carefully review the impact of credit scores when deciding to use a co-signer.

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 if you have little or no credit history.

When you apply for a mortgage, lenders review your credit history to see if you’ve made payments on time in the past. Without enough credit history, it’s harder for lenders to assess your ability to repay the loan, which often leads to a denied application.

Adding a co-signer with good credit can make a big difference. If the lender sees that one borrower has a strong track record of repaying debt, they are more likely to approve the loan.

A co-signer allows you to secure the home you need while building your own credit. By making on-time payments, you can strengthen your credit profile and refinance the mortgage in as little as six months to remove the co-signer from the loan. This frees the co-signer from future financial obligations. 

• Can you get a mortgage if you're already a co-signer?

• Use future rental income from your current property to buy a new home.

How much do I need for a down payment when I have a mortgage co-signer?

The down payment amount depends on the property type, loan type, and whether a co-signer is part of the application. Here's what you need to know:

• Conventional Loans: You can buy a 1-to-4-unit home with a co-signer and a minimum 5% down payment.
• FHA Loans: Using a co-signer, you can purchase a 1-unit property with as little as 3.5% down. However, if you're buying a 2-to-4-unit property, the minimum down payment increases to 25%.

The chart below outlines the down payment requirements for conventional and FHA loans when using a co-signer. Note that adding a co-signer to an FHA loan for a multi-unit property significantly raises the down payment requirement from 3.5% to 25%.

How do I remove a co-signer from my mortgage? 

A co-signer remains responsible for the mortgage until you remove them from the loan. To release the co-signer, you must pay off the mortgage by selling or refinancing the home.

The most common way to remove a co-signer is to refinance the property in your name only. Refinancing replaces the current loan with a new one issued solely in your name. This process involves applying for a new mortgage and using it to pay off the existing loan.

Your ability to refinance depends on your financial profile, including your credit score, income, and debt-to-income ratio. Once you've made consistent payments, improved your credit, and increased your income, you can apply for a new mortgage to keep the property under your name without the co-signer.

Keep in mind that the ability to remove a co-signer may also depend on the terms of your mortgage agreement. Talk to your lender and, if needed, a real estate attorney to fully understand the process and legal considerations.

• Can you get a mortgage if you're already a co-signer?

What should I know about co-signing a mortgage?

If you're considering co-signing a mortgage, it's essential to understand the potential risks and impacts. For example, a co-signed mortgage could complicate your plans to buy a home or refinance your existing property soon.

Co-signing also requires trust in the borrower to make payments on time. Even if you're helping a close friend or family member with your strong credit or income, their missed or late payments can damage your credit. Before committing, discuss with the borrower to ensure you align your responsibilities and expectations. Otherwise, you could face financial consequences that last for years.

Since every situation is unique, it's a good idea to consult a mortgage expert at NewCastle Home Loans. We can help you weigh your options and decide if co-signing suits 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
  requirements