If you are looking to take out a mortgage for a home but don’t qualify with a traditional lender, then going in with a co-signer can make the difference between an approval today as opposed to waiting a year or two paying rent and wasting your hard earned money. You can ask a friend or relative to co-sign but it can put a strain on the relationship if you take longer than expected to qualify on your own to remove the co-signer. Here are some questions that many of our customers ask about co-signers on their mortgages.
You need a co-signer when your own qualifications for a loan are insufficient. Below are common reasons;
You might not make enough money to satisfy the debt-to-income ratio.
Your time with your current employer may be insufficient
Your credit might be low thanks to some issues in your past that you have overcome but are still on your report.
Any of these situations might make a co-signer the right choice.
A co-signer is usually a close family member but it is not a requirement. Family member can be a parent, uncle, aunt, grandparent, cousin or sibling. Co-signer can also be a close friend or a business partner/associate.
Adding a co-signer to the loan can improve the overall credit score of the application, and if the co-signer has a debt-to-income ratio that is low enough, adding the debt to that consideration for them could make the application more attractive. The occupying borrower’s ratio is the primary concern for the bank, but the added income from the co-signer can still make the application more attractive.
Remember – the purpose of the co-signer is to make the loan application more attractive. A co-signer with a low credit score will not increase your chances of mortgage approval, and if your credit score is better than that of your co-signer, even if the co-signer has higher income than you do, your loan application may be more likely to get rejected than it would without the co-signer.
The co-signer also needs to provide proof of income and a credit report, in addition to other documents to support the information provided on the application. The scrutiny the co-signer will receive in terms of credit, employment history and income is no different than the primary applicant.
Your rights as a co-signer are limited. Both the applicant and the co-signer are generally registered on the mortgage and title. If the primary borrower defaults, the co-signer cannot sell the property. Co-signer need to ensure the lender keeps your most current contact information on file at all times in the unfortunate event that the main borrower starts missing payments. You don’t want a negative credit rating due to the main applicant’s troubles.
In some situations, where the friend is close enough to be considered to have the same sort of relationship as a family member, then a friend can co-sign.
In many cases, the co-signer appears on the title, as many mortgage lenders will not work with two borrowers if just one has a vested interest on the deed. However, there are some exceptions.
A co-signer needs to have a verifiable income stream, just like an occupying borrower, that shows that he or she can make the payments on the mortgage if needed. If this income stream comes from investments and is long-term, that can be acceptable, but a steady employment history is always helpful.
A co-signer cannot overcome credit scores that are too low. Every borrower needs to meet minimum requirements in order to qualify for a mortgage. If your credit is low but above the minimum, then a co-signer with better credit can make your approval more likely.
If the occupying borrower (or you, if the borrower does not) makes payments in a timely manner, then that would help your credit history. However, the risk of damage to your credit score should the borrower default is quite real.
Not all financial institutions report to the credit bureaus, but it is becoming common practice. If the occupying borrower makes payments on time, your credit score benefits if it’s reported. If he or she does not, then you need to be ready to make the payments to avoid the hit to your score.
Again, if your credit is below the accepted minimum, a co-signer cannot make the difference. However, if your credit is low but above the minimum, a co-signer with better credit can help.
The credit score requirements for a co-signer are the same as they are for an occupying borrower.
The minimum score for each borrower remains the same, no matter how many borrowers and co-signers there are on the note.
You would have to refinance the loan or apply for a loan at renewal that does not have the co-signer as part of the application process.
The estate of the deceased can then become the new co-signer. If the loan goes into default, the bank could technically go after the occupying borrower and the assets in the deceased co-signer’s estate.
A co-signer is usually on the title of the mortgage, while the guarantor does not appear on the title. Because the guarantor is “guaranteeing” the whole mortgage, he or she faces a higher credit score requirement than a co-signer would.
Many times, the guarantor is a family member, but the guarantor can be a third party outside the family as well.
Depending on the lender that you are working with, if you are someone else’s guarantor, that can affect your debt-to-income ratios on your own loan applications, as some lenders will consider the mortgage you have guaranteed part of your debt.
The same income, credit and affordability ratios need to be satisfied to determine the amount. The guarantor must guarantee the full amount of the loan.
This depends on your existing debt-to-income ratios and whether the loan you are co-signing would push you out of compliance with existing guidelines.
You have to be at least 18 years old to co-sign a mortgage.