Multigenerational family having dinner discussing cosigning mortgage.

Cosigning A Mortgage Loan: What Both Parties Need To Know

Victoria Araj7-minute read

October 16, 2021


If you have bad credit but still want to get a mortgage, adding a nonoccupant co-client to your loan can help convince lenders to give you financing. But the decision to co-sign on a loan or add one to your mortgage isn’t one you should make without knowing all the facts.

Today, we’re looking at what it means to be a nonoccupant co-client on a mortgage loan. We’ll show you what co-signing means and when it’s beneficial. We’ll also introduce you to the drawbacks of being a nonoccupant co-client and some of your other options as a borrower.

What Is A Co-Signer?

A co-signer is someone who agrees to take on the financial responsibility of the primary borrower’s loan if they can no longer make payments, and is usually a family member, friend, spouse or parent.

Co-signing on a loan isn’t just a character reference. It’s a legally binding contract. This means that when you become a nonoccupant co-client on a loan, the lender can come after you for mortgage payments if the primary signer defaults. The lender has the right to hold you responsible for the missed loan payment even if you don’t live in the home.

Why would you want to co-sign on a loan for a house you don’t live in? People co-sign on loans to help family members or friends with bad credit take out a loan. If your mortgage application is weak, getting a nonoccupant co-client to co-sign on the loan makes you a much more appealing candidate.

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Co-Signer Vs. Co-Borrower: Know The Difference

Both co-signers and co-borrowers share in the responsibility of taking out a loan. The key difference between a co-signer and a co-borrower is how much the loan benefits that party. A co-signer does not benefit, they simply use their resources to help secure the loan for another person.

A co-borrower, on the other hand, has an active stake and interest in the investment. Sometimes lenders will also allow a nonoccupant co-borrower, which is a mix between a co-signer and co-borrower. While a nonoccupant co-borrower might not live at the purchased piece of real estate, they still benefit from the loan and will be partially responsible for making payments.

Co-signing A Mortgage Loan: A Look At The Process

Imagine you want to buy a home with a mortgage loan, but you have bad credit.

When you apply for preapproval, you find that lenders don’t give you the best interest rates. You may even have a hard time getting approval at all due to your credit score. You know that your mother has an 800 on her credit report, so you ask her to become a nonoccupant co-client on your loan application. She agrees and signs her name alongside yours 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.

They can also now pursue your mother for any payments you miss because the lender considers your mother’s finances, income, 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 nonoccupant co-client responsible if you miss a payment. This means your lender has the right to take your mother to court and force her to repay the loan.

Co-signing isn’t just for mortgage loans. You may have a co-signer on personal loans, student loans and auto loans as well.

Whether or not you can have a nonoccupant co-client depends on the type of loan you take out. Nonoccupant co-clients are most common on two specific types of mortgages: conventional loans and FHA loans. Let’s take a look at the limitations for both types of loans.

Conventional Loan Co-Signer Requirements

If you want a nonoccupant co-client on a conventional loan, they need to sign on the home’s loan and agree to repay the mortgage if the primary occupant falls through. However, the nonoccupant co-client doesn’t need to be on the home’s title. The lender looks at both your credit and the nonoccupant co-client’s credit to determine if you can get a loan.

When they look at your application, lenders also consider you and your nonoccupant co-client’s debt-to-income (DTI) ratio. Every lender has its own standards when it comes to what they consider an acceptable DTI. Knowing both your own and your nonoccupant co-client’s debt-to-income ratio can make getting a loan easier.

FHA Loan Co-Signer Requirements

FHA loans are special types of government-backed loans that allow you to buy a home with a lower credit score and as little as 3.5% down. If you want to get an FHA loan with a nonoccupant co-client (you can have a maximum of two), your co-client will need to meet a few basic criteria.

First, your co-client must be a relative or close friend. Mortgage lenders consider the following relatives as eligible to be nonoccupant co-clients on FHA loans:

  • Parents and grandparents (including step, adoptive and foster)
  • Children (including step, adoptive and foster)
  • Siblings (including step, adoptive and foster)
  • Aunts and uncles
  • In-laws
  • Spouses or domestic partners

If the nonoccupant co-client is a close friend, you need to write an additional letter to your mortgage lender explaining your relationship and why your friend wants to help you.

Your nonoccupant co-client must also live in the United States for most of the year. They must have a DTI of 70% or lower if you have less than a 20% down payment.

If you have more than 20% to put down, your co-client’s DTI can be anything. On an FHA loan, the nonoccupant co-client must be on the title of the home.

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What A Co-Signer Is Responsible For

Before you agree to co-sign on a mortgage loan, it’s important to understand just how heavy of a burden this can be on you. As a nonoccupant co-client, you agree that you’re willing to take responsibility for the loan you co-signed on.

If the primary borrower misses multiple payments, you can easily become responsible for 100% of the loan value. It’s important to be careful when it comes to who you agree to co-sign for. You should make sure that the primary occupant you’re vouching for has the means to pay the mortgage, insurance and maintenance fees for their new home. You should also ensure you have enough income to cover the payments if the homeowner defaults.

You can do a few additional things to protect yourself against your primary occupant’s financial missteps. Here are the steps you should take if you agree to become a nonoccupant co-client on a mortgage loan:

  • Ask the primary occupant to give you online access to their mortgage statements.
  • Ask the lender to send you a notification immediately when the primary occupant misses a payment.
  • Set aside a monthly premium or two in your savings account in the event the primary occupant misses a payment.
  • Keep the lines of communication open with the primary occupant. Encourage them to be open and honest if they think they might miss a payment.

Most importantly, you should only become a nonoccupant co-client for people who you know are responsible. Never agree to co-sign on a loan for someone you just met.

Benefits Of Having A Co-Signer For Your House

Having a nonoccupant co-client on your loan can make it much easier to get a mortgage. Here are a few of the benefits that come along with applying for a mortgage with a nonoccupant co-client:

  • Looser credit score requirements: Your credit history plays a large role in your ability to get a mortgage. If you have bad credit, you may have trouble qualifying for a loan. However, a nonoccupant co-client with good credit on your loan may convince lenders to be more lenient with you.

  • Assistance with employment requirements: Mortgage lenders need to see that you have a steady and reliable income before they’ll give you a loan. This can be a pain if you’re self-employed or have a recent gap in your resume. A nonoccupant co-client with a solid employment history can help you fill this requirement.

  • The potential for a larger loan: A nonoccupant co-client on your loan means the lender considers both of your incomes when they look at how much you can get in a loan. This can mean you may qualify for a larger loan. Of course, you should be absolutely positive you can make the payments before you accept the loan.

Drawbacks Of Co-signing A Loan

As the nonoccupant co-client, co-signing on a loan comes with several risks, including:

  • Potential responsibility for payments: If the primary occupant on the loan can’t come up with a monthly payment, you must pay it as the co-client. This premium will come out of your own pocket, and you can’t refuse a payment.

  • Difficulty getting out of the loan: Once you co-sign on a mortgage loan, it’s very difficult to get out of it. Even if you fall out with the primary occupant, you’re still responsible for missed payments.

  • A legal tie to the loan: Becoming a nonoccupant co-client means you’re just as legally responsible for the loan as the person living in the house. If you fall behind on coverage, the lender may sue you for legal fees and the remaining late payments.

  • Your credit may suffer: Co-signing on a loan puts your credit on the line. If the primary occupant misses a payment, your credit will suffer as well.

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Alternatives To Having A Co-Signer

If you’re struggling financially and you can’t find someone willing to co-sign on your loan, there are still a few ways you can buy a home.

Explore Your Government-Backed Loan Options

In addition to FHA loans, other types of government-backed loans can help you buy a home with lower requirements. Government-backed loans are special types of mortgages that have insurance from the federal government.

Government-backed loans are less risky for lenders, so they can extend them to people who normally wouldn’t qualify for a loan. FHA loans, VA loans and USDA loans each have their own qualification standards. Be sure you know all your options before you take a loan with a nonoccupant co-client.

Use A First-Time Home Buyer Assistance Program

If you’re a first-time home buyer, you may qualify for an assistance program that can make buying a home easier. Home buying assistance can come from a state or local government, a federal program, or a charitable or employer sponsor. Depending on your circumstances, you may qualify for down payment assistance, a discount on a foreclosed home and/or tax breaks.

Many home buyer assistance programs are only available in certain areas. If you’d like to learn more about programs, loans and grants you may qualify for, start by visiting the Department of Housing and Urban Development’s (HUD) website.

The Bottom Line

Applying for mortgages with a nonoccupant co-client can help you buy a home with a lower credit score, less income, or shaky work history. When you apply with a nonoccupant co-client, the person co-signing agrees to take on your debt if you default.

While this makes you a much more appealing candidate for lenders, it’s risky for the co-signer. Depending on the type of loan you get, there may be limitations on who can be your nonoccupant co-client.

If you want to buy a home without a nonoccupant co-client, you may want to research home buying assistance or government-backed loans. Both options can help you qualify for a loan with lower standards.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.