If you can’t quite get a mortgage approval on your own, you may consider adding a co-signer. A non-occupancy co-signer with great credit may be able to offset your bad credit, giving you a chance to get a mortgage.
A co-signer takes responsibility for your loan in case you default. This puts them on the hook for another liability. It’s important to choose your cosigner carefully and make sure you are truly ready for a mortgage before putting somebody else’s credit on the line.
Choosing the Right Cosigner
The right cosigner depends on the loan program you use as well as your lender’s requirements. Conventional and FHA lenders require the cosigner to be a family or close friend with a long-term relationship. A few examples include:
- Parents, grandparents or in-laws
- Aunts or uncles (blood or marriage)
If your cosigner is a friend, you must document the relationship in a letter, stating the length of the relationship as well as stating the reason the friend wants to help you.
No matter the relationship, the cosigner must be a US citizen and have a home in the United States. In addition, the cosigner’s debt-to-income ratio makes a difference. Even though the cosigner already has his or her own debts, the lender will calculate the new DTI. Most lenders allow cosigners to have a DTI of up to 70% if you put less than 20% down on the home. This gives the lender some reassurance that the cosigner could make good on the debt if you default. If you put more than 20% down, the lender won’t care about the cosigner’s debt ratio.
Why Use a Cosigner
If you can’t qualify for a mortgage on your own, a cosigner makes it easier for you to qualify. Typically, if you have a co-borrower (occupying the property), the lender takes the lowest credit score between the borrowers for qualifying.
With a cosigner, lenders may use the cosigner’s credit score as a compensating factor. Rather than using your low score, they’ll use the cosigner’s score to underwrite your loan. The cosigner’s good credit gives the lender reassurance that they’ll receive payment one way or the other.
Cosigners can also help you fill the employment gap if you are self-employed or have a sketchy employment history. If you have a cosigner with a solid employment history, the lender will use that as a compensating factor, giving you better terms and possibly even a higher loan amount than you could get on your own.
A cosigner may also help you get a larger loan amount, but take this step with caution. Remember that this person isn’t going on your loan to make your payments for you. the payments are still your responsibility. Do you want payments that you can afford or those that make you struggle every month trying to make ends meet?
What if you Don’t Want a Cosigner?
If you don’t want a cosigner but can’t get approved for a standard loan, consider other options, especially government-backed loans that have flexible guidelines and make it easier to get approved. FHA loans, for example, only require a 580 credit score and a 3.5% down payment. It’s the perfect first-time homebuyer loan or a great mortgage for those with less than perfect credit.
Other government options include:
- VA loan – Veterans and active military members have access to 100% financing with flexible credit score and debt ratio requirements.
- USDA loan – Consumers living in a rural area that make less than 115% of the average income for the area may qualify for 100% financing with flexible guidelines, including credit scores as low as 640.
If the government loan options don’t work for you, there are plenty of alternative/subprime loans that you can try. Private lenders offer these loans with guidelines that they create themselves. They don’t have to abide by any loan program rules as subprime/alternative lenders keep the loans on their own books, which allows them to make their own rules.
If you need a cosigner, make sure you choose them wisely. The cosigner should know the ramifications of getting on the loan and you should know the cosigner’s rights as well. While they won’t live in the home, the cosigner takes on a large responsibility so that you can buy a home.