If your income isn’t high enough to qualify for the mortgage you’re applying for, a cosigner can help. But how does cosigning a mortgage work? A cosigner can help you qualify because their income will be included in the affordability calculations. In some cases, a cosigner may also be able to compensate if you have a less-than-perfect credit. Overall, the cosigner is guaranteeing to the lender that your mortgage payments will be paid.
Of course, you shouldn’t use a cosigner to get approved if you don’t make enough income to pay the mortgage on time. However, if your income is stable and you have a solid employment history, but you still don’t make enough for a mortgage, a cosigner can help.
Let’s take a deeper dive into how cosigning a mortgage works.
What Exactly is a Cosigner?
A mortgage cosigner takes on the responsibility of ensuring a mortgage loan is paid. Some borrowers need help from a more financially secure cosigner in order to qualify for a mortgage, and those who help out should understand exactly what they’re getting into.
A cosigner can be anyone who promises to take on the responsibilities of paying the loan if the other signers default. When mortgage qualifications are analyzed, the lowest credit score from all the applicants may be used. For that reason, a cosigner isn’t usually valuable for their credit. Much of the reason for having a cosigner is because the borrower doesn’t have enough income, or has a debt-to-income ratio that’s too high to qualify for a mortgage on their own.
Oftentimes mortgage cosigners are parents who want to see their adult children living comfortably in a house. In some cases, they’re occupant co-signers who will also live in the house.
The Advantages of Cosigning a Mortgage
When you cosign on a mortgage loan, you’re putting your financial resources behind the loan. This can help the borrower get much better interest rates and loan terms than they could achieve on their own. Your support and attention to ensuring payments are made on time can also help your family member build a good credit rating.
Another important advantage is the pleasure derived from helping a close family member and providing a home for your loved ones to live in. There’s an intangible benefit to helping children and other close family members achieve their dreams.
The Disadvantages of Cosigning a Mortgage
Cosigning for a mortgage loan carries a significant financial risk. A cosigner is taking on the legal obligation to be a backup repayment source for your loan and, as such, reduces the risk for the lender and helps the borrower obtain a loan.
No matter how much a cosigner trusts the borrower, issues can come up that may keep them from paying, like losing a job or going through a divorce. If that happens, they must take over payments. And, they may be impacted by negative information appearing on your credit report, a foreclosure and possibly even a lawsuit brought by the lender.
It’s also important to consider the impact that cosigning could have on the relationship with the borrower if anything were to go wrong.
A Look at the Process
Imagine you want to buy a home with a mortgage loan, but you have bad credit. You may have a hard time getting approved due to your credit score. You know that your mother has an 800 credit score, so you ask her to co-sign your loan application. She agrees and signs her name on the applications.
Suddenly, you’re a much more appealing candidate for a mortgage! The lender considers both your income and your mother’s when they look at your application. Lenders also consider your mother’s finances, debt and credit when they look at your application, and decide to approve you for your loan.
From here, your mortgage generally functions the same way it would if you were the only person on the loan. You make a premium payment every month to cover your principal, interest, taxes and insurance (PITI), and you enjoy your home. However, the lender may hold the non-occupant cosigner responsible if you miss a payment.
Whether you can have a co-signer depends on the type of loan you take out. Co-signers are most common on two specific types of mortgages: conventional loans and FHA loans.
The Bottom Line
If you’ve been turned down for a mortgage, be sure to ask the lender how you can make yourself a more attractive loan candidate. With time, patience, hard work, and a little luck, you should be able to turn the situation around and become a residential property owner.
The Hadley Team is here to help you understand the full range of mortgage options and decide which financing option is best for you. And, depending on the direction you choose to go, we can speed up your loan process by getting you pre-approved. So, let’s connect!