What Is a Co-signer on a Mortgage?
A mortgage co-signer is a person willing to co-sign your loan with you and agrees to assume the financial burden of repaying the mortgage if you cannot. A mortgage co-signer must have good credit and financial credentials to qualify because the lender will also include them in the underwriting process. So, if you stop making payments for whatever reason, it becomes the co-signer’s responsibility to take over, or they may also face the consequences.
A co-signer is not just vouching for your character; they are entering a legally binding contract that can severely affect their credit report if the debt is not repaid. A co-signer will typically be a close friend or family member who understands your financial situation and feels confident in your ability to make the payments. So, before you get a co-signer, make sure you have a solid plan to make the payments and inform the person of their responsibilities.
Co-signer Requirements For Mortgage
The specific requirements to be a co-signer on a mortgage depend on the type of loan you’re paying for, but all lenders will require a co-signer to have a good credit score and a low debt-to-income ratio to qualify.
1. Conventional Loan Co-signer
Co-signers for a conventional mortgage must sign the loan and agree to have their credit pulled but aren’t required to be on the title. Co-signers must also have a good credit score, typically 670 or better. It doesn’t do much good if you and your co-signer have bad credit, but it will help you make up for a lower score if they have a stellar financial history.
The DTI ratio also varies depending on the lender, but in general, co-signers like to see a number that is lower than 43%. If your co-signer is overleveraged, it may make a lender doubt whether or not they can take on the additional responsibility.
2. FHA Loan Cosigner
FHA loans have slightly different rules for co-signers. An applicant for an FHA loan can have up to two non-occupant co-signers on a loan. But they must be a US resident and agree to be included on both the loan and the title.
Co-signers are also typically required to be close relatives. If your co-signer is not related to you, they must provide a letter explaining why they’re willing to help.
The FHA considers the following to be acceptable relatives:
- Spouse or domestic partner
- Aunt or uncle
- Parent or grandparent
But they don’t necessarily have to be related by blood; step, foster, or adoptive relatives can also qualify.
3. VA Loan Cosigner
VA loans have even stricter requirements when it comes to co-signers. VA loans are not available to the public. They are a benefit of military service. So, your co-signer is limited to either a spouse or someone else eligible for a VA loan, meaning a veteran or active duty military service member.
The good news is that VA loans have very lax requirements, so most applicants don’t need a co-signer. But if you do, they will have a credit score of at least 580 and a DTI no greater than 41%.
4. USDA Loan Cosigner
USDA loans also have unique requirements when it comes to co-signers. USDA loans typically require an applicant to have at least a 640-credit score. But a co-signer cannot make up for a low credit score; they can only help to improve your debt-to-income ratio.
USDA loans typically require a DTI of no more than 41%. If you have substantially more debt, you can get a co-signer with low debt and a high monthly income to help you balance it. So, the co-signer must have good credit and a low DTI to qualify. But the exact requirements will vary depending on the lender and your personal credit situation.
How Does Cosigning a Mortgage Work?
As a co-signer, you agree to be held financially responsible if the primary borrower cannot repay the loan. But in most cases, you will not enjoy any of the benefits of owning and occupying the home; you are simply assuring the lender that if anything happens, you will step in and keep the mortgage from default.
If you refuse or cannot, you will face the same consequences as the primary borrower if the home goes into foreclosure – meaning it will ruin your credit score, and you may be forced to declare bankruptcy. So before agreeing to become a co-signer, ensure you’re fully prepared for the responsibilities of doing so.
The process is not much different than applying for a loan for yourself. You will gather your financial documents and submit them to the lender. They will pull your credit score and analyze your employment history, income, and debts to determine if you would make a good co-signer.
As long as the primary borrower continues to make the payments on time, you may never have to do anything beyond the application process. But if they miss a payment, it’s your responsibility to step in to assume the debt before the home goes into foreclosure. So, make sure you can trust the person you’re vouching for and don’t agree to anything you can’t handle.
Can a Co-signer Be Removed From a Mortgage?
Yes, it’s possible to be removed as a co-signer, but it can be tricky. So be sure to read all the fine print before you sign.
Some contracts allow for co-signer release, which means that after certain conditions are met, the co-signer may be relieved of their duties. For example, a contract may state that a co-signer is eligible for release after three years of on-time payments. So, once the borrower has made 36 payments on time, you can be released from the loan. But not all loans have these stipulations, so read the contract carefully and consult the lender if you’re unsure.
Another option is to refinance the loan and exclude yourself from the new loan. If the primary borrower’s credit or financial situation has changed since they first applied and no longer need a co-signer, they can refinance and get a new rate. They will have to go through the underwriting process again and pay additional closing costs. But if you are tired of assuming the responsibilities, you may suggest it’s time for them to refinance.
What Rights Does a Mortgage Co-signer Have on a House?
Unfortunately, co-signers don’t have any rights to use or occupy the property, even though your name is on loan. For instance, if you co-sign a loan for your children, you have no more right to enter the property than if your name was not attached to the loan.
As a co-signer, you are assuming the liabilities without any privileges, which is why you should weigh the pros and cons before you agree to take on the responsibilities. Even if you are helping pay some of the bills, you don’t have any legal rights to access or sell the property without the permission of the primary resident. So, don’t become a co-signer if you have some ulterior motive other than simply helping a friend or relative.
Cosigning a Mortgage Pros
1. Increase Chances Of Getting Approved for a Loan
The primary benefit of co-signing a mortgage is to help someone close to you get approved for a loan they couldn’t get on their own. It can be a rewarding experience to help someone purchase their first home, especially if the borrower is a child or a close family member.
2. Help a Friend or Relative Build Credit History
Many younger mortgage applicants need a co-signer because they haven’t built enough credit on their own. It often leads to a situation where they can’t be approved for a loan without credit but can’t build their credit without being approved for a loan. So, by co-signing their mortgage, you are helping them build their credit so they can participate in the financial system in the future without needing help.
3. Help the Applicant Get a Better Rate and Loan Terms
Applicants with bad or no credit typically get stuck with a high-interest rate and may be limited in terms of how much money a lender will give them. A solid co-signer can help the borrower level the playing field, so they don’t get stuck with an exorbitant rate and can access the funds they need to buy the right home.
Co-signing a Mortgage Cons
1. You Might Have to Prepay the Loan
The biggest disadvantage of co-signing a loan is that it may fall on your shoulders to pay it back one day. So, if you aren’t prepared for that responsibility, don’t agree to be a co-signer. Even if you think you can trust the person whose name is on the loan, there is always a possibility that they could fall behind and leave you to pick up the tab.
2. Risks Damage Your Credit
Since your name is on the loan, any missed payments or potential foreclosures will also impact your credit score. Plus, the additional liability may limit your ability to apply for a loan because the lender will count it as potential debt. So, if you’re planning on buying your own home a time soon, you may not want to become a co-signer.
3. Could Harm Your Relationship with the Borrower
Being a co-signer is a big responsibility. If the other person doesn’t take their obligations seriously, it will create tension that could ruin your relationship. Even if it’s a close family member, make sure you are both on the same page about your level of commitment, or it may get awkward if they suddenly stop paying the mortgage.
Mortgage Co-signer FAQ
How Long Does a Co-signer Stay on a Mortgage?
The co-signer will stay on the mortgage for the duration of the loan unless otherwise stipulated. So, if it’s a 30-year fixed-rate mortgage, the co-signer will remain on the loan for 30 years. The co-signer can only be removed if the contract allows for co-signer release and the necessary conditions are met or the borrower chooses to refinance.
Can You Co-sign a Mortgage if You Already Have One?
Yes, you can be a co-signer even if you already have a mortgage on your own home, although you must be able to prove that you have the income to pay both mortgages if needed. That’s why you must have a low DTI ratio to become a co-signer because you must prove that you could cover the additional liability on top of your own expenses.
What Are the Tax Implications of Cosigning a Mortgage?
If the primary borrower upholds their end of the bargain and pays on time, then unfortunately, there are no tax benefits to co-signing a mortgage. As a co-signer, you are not considered the owner, so you can’t claim any benefits typically associated with homeownership. But if you take over the monthly payments, you can deduct any interest you paid on your personal income taxes.