If you thought qualifying for a home loan was difficult, you’re not alone. Almost a quarter of all home buyers need help from friends and family as co-signers on a mortgage to qualify for a home loan, according to a recent report.
Of all of the home purchase loans in the United States during the second quarter of 2017, 22.8 percent included a co-borrower — also called a co-signer — up from 21.3 percent in the second quarter of 2016, according to a study by Attom Data Solutions, a property database in Irvine, Calif.
There are two types of non-spousal co-signers, which are commonly called co-borrowers by lenders. The most common are non-occupant co-borrowers who don’t live in the home being purchased. The second are occupant co-borrowers who will live in the home.
Non-occupant co-borrowers are borrowers listed on the mortgage or deed of trust who won't reside in the property. They’re often parents of buyers who don’t have enough income or credit to qualify for a home loan. They can also be friends or other family members who are buying a house together but not planning to live under one roof.
Whatever the relationship, a co-borrower should be aware of a few things before signing on the many pages of a mortgage. Here are some of the key ones:
Payment is now your responsibility
As a co-signer on a mortgage, you’re now 100 percent responsible for someone else’s obligation.
While you probably won’t be making a monthly payment on the house, as a co-signer you’re now just as responsible for repaying the obligation as the home buyer is. Your offer of help — such as using your income and good credit score to help them qualify for the loan — extends to paying the mortgage if they don’t make payments.
“In lenders’ eyes when you go for a new mortgage, you’re responsible for that whole payment in their eyes” as a co-signer, says Ray Rodriguez, regional mortgage sales manager in metro New York City for TD Bank.
“It’s unfortunate, but lenders take the worst-case scenario in mind,” Rodriguez says.
Question why your signature is needed
Since lenders use the lower of the two borrowers’ credit scores, it’s rare to add a co-signer for added credit, says Anthony Marino, president of My Liberty Loans in Palm Beach County, Fla. “Most of the time borrowers need a co-signer because their income may not support the loan amount they are seeking,” Marino says.
That should be enough to lead the co-signer to question why their help is needed, he says.
“If that is the rationale for the co-signer and the co-signer is not willing to make a monthly financial commitment to the borrower to meet their monthly obligations, then you may want to steer clear of obligating yourself to the loan as it may become a potential financial hardship for you in the future,” Marino says.
Your future credit is affected
A co-signer is in essence lending their future credit worthiness for someone else’s obligation of a home loan now.
If the person you’re co-signing for, such as a brother, loses their job and can’t make house payments, then their credit report will be hurt. And so will yours.
The delinquency will appear on your credit report too, as does the obligation to pay the mortgage bill on time each month. This could hurt your ability to get credit in the future, such as if you apply for a home, auto, personal, business or student loan or want to get a good rate on a credit card.
Even if the mortgage payments are made on time and in full each month, being a co-signer on the mortgage can count against you when qualifying for future loans. That large loan is still a risk that you’re obligated to pay, and could be a liability on your credit report.
There is an out, however. If you can provide a 12-month history of someone else making payments on the home loan that you co-signed for, the obligation can be committed and improve your borrowing ability.
Do you have good credit now?
If dad is co-signing a loan so his son can buy a house, then dad wants to make sure his credit score is good enough to qualify for the loan, Rodriguez says.
Dad’s credit liabilities could make it worse, Rodriguez says, and simply pulling his credit report could hurt his credit score. If the father doesn’t have good credit, then he may not be a good choice as a co-signer.
Your debts will be looked at
A co-signer’s debts will be considered, with the expected outcome that debt and income from two borrowers will lower the debt-to-income ratio, or DTI, for the home loan.
For conforming loans, Fannie Mae and Freddie Mac will allow a “blended ratio” DTI that combines the incomes of the occupant and non-occupant co-borrowers. This can help when the co-signer who isn’t going to live in the house has most of the income, such as parents helping a child buy a home.
Fannie Mae and Freddie Mac actually allow higher debt with co-signers, allowing up to 49.99 percent DTI, says David Hosterman, branch manager at Castle & Cooke Mortgage in Greenwood Village, Colo. FHA loans allow 56.99 percent DTI, Hosterman says.
As a co-signer, you should be prepared to provide paperwork for all of the same credit requirements that the borrower is subject to, Marino says.
“Lenders will require all of the same documentation from you as if you were applying for the loan yourself, such as income tax returns and bank statements,” he says.
You now own a house
Whether you’re ready for it or not, you’re now a part-owner of a home when you become a co-signer on a mortgage.
There are two main types of co-signers. The most common are non-occupant co-borrowers who don’t live in a home. The others are occupant co-borrowers who will live in the home.
Lenders require anyone on the loan to also be on the title to the home, such as a co-signer. If they take title as joint tenants, the occupant and non-occupant co-borrowers will each have equal ownership shares in the property. If they take title as tenants in common, they can define their individual shares of ownership.
Whatever ownership shares the co-borrowers agree to, the note on the loan makes them both equally liable for the loan.
There are alternatives
Once in a home loan as a co-signer, there are two says to get out of it: Paying off the mortgage or refinancing it.
Since you or the other borrower is unlikely to have enough money to pay off the loan — unless they’re selling the house and moving — then refinancing is a “fantastic idea” after a few years of living in a home that they could only afford with a co-borrower, Hosterman says. If their income and credit score have improved, refinancing could remove the co-signer from the loan.
“Traditionally it’s designed to get them a little more borrowing power,” Hosterman says of a refi.
For an alternative much earlier in the home buying process, a potential co-signer could offer to pay off someone’s debt to help improve their credit. Also, an entire down payment can be a gift from a relative.