If you have bad credit but still want to get a mortgage, adding a non-occupant co-client to your loan can help convince lenders to give you a loan. But the decision to cosign on a loan or add a cosigner to your loan isn’t one you should make without knowing all the facts.
Today, we’re looking at what it means to be a non-occupant co-client on a mortgage loan. We’ll show you what cosigning means and when it’s beneficial. We’ll also introduce you to the drawbacks of being a non-occupant co-client as well as some of your other options as a borrower.
Overview: Cosigning A Mortgage Loan
When someone cosigns on a mortgage loan, it means they agree to take responsibility for the loan if you default. Cosigning on a loan isn’t just a character reference. It’s a legally binding contract that makes another person partially responsible for your debt. This means that when you become a non-occupant co-client on a mortgage loan, the lender can come after you for 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 cosign on a loan for a house you don’t live in? People cosign on loans to help family members or friends with bad credit take out a loan. If your mortgage application is weak, getting a non-occupant co-client to cosign on the loan makes you a much more appealing candidate.
Here’s an example of what this process might look like. 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 score.
You know that your mother has a credit score of 800, so you ask her to become a non-occupant co-client on your loan application. She agrees and signs her name alongside yours on your applications.
Suddenly, you’re a much more appealing candidate for a mortgage. The lender considers both your income and your mother’s income when they look at your application. This is because the lender doesn’t have to accept the loss if you default on your loan. They can pursue your mother for any payments you miss. Because the lender considered your mother’s finances, income, debt and credit when they look at your application, they decide to approve you for your loan.
From here, your mortgage loan generally functions the same way it would if you were the only person on the loan. You make a monthly premium payment every month and you enjoy your home. However, the lender may hold the non-occupant co-client responsible if you miss a payment. This means your lender has the right to take your mother to court over your missed payments.
Cosigning isn’t just for mortgage loans. You may have a cosigner on personal loans, student loans and auto loans as well.
Whether or not you can have a non-occupant co-client depends on the type of loan you take out. Non-occupant 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.
If you want a non-occupant co-client on a conventional loan, they need to sign on the home’s loan and agree to repay the loan if the primary occupant falls through. However, the non-occupant co-client doesn’t need to be on the home’s title. The lender looks at both your credit and the non-occupant co-client’s credit to determine if you can get a loan.
Lenders also consider you and your non-occupant co-client’s debt-to-income (DTI) ratio when they look at your application. Every lender has its own standards when it comes to what they consider an acceptable DTI. Knowing both your own and your non-occupant co-client’s DTI can make getting a loan easier.
FHA loans are special types of government-backed loans that can 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 non-occupant 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 non-occupant 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
- Spouses or domestic partners
If the non-occupant 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 non-occupant co-client must also live in the United States for most of the year. They must have a DTI of 70% or less 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 non-occupant co-client must be on the title of the home.
What A Cosigner Is Responsible For
Before you agree to cosign on a mortgage loan, it’s important you understand just how heavy of a burden this can be on you. As a non-occupant co-client, you agree that you’re willing to take financial responsibility for the loan you cosigned on. If the primary occupant 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 cosign for. Make sure 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 make sure you have enough income to cover the payments if your primary occupant defaults.
There are a few additional things you can do to protect yourself against your primary occupant’s financial missteps. Here are the steps you should take if you agree to become a non-occupant 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 non-occupant co-client for people who you know are responsible. Never agree to cosign on a loan for someone you just met.
Benefits Of Having A Cosigner
Having a non-occupant 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 non-occupant co-client:
- Looser credit score requirements: Your credit score plays a large role in your ability to get a mortgage loan. If you have bad credit, you may have trouble getting a loan. However, a non-occupant co-client with a great score 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 you had a recent gap in your resume. A non-occupant co-client with a solid employment history can help you fill this requirement.
- The potential for a larger loan: A non-occupant 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.
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Drawbacks Of Cosigning
As the non-occupant co-client, cosigning on a loan comes with a number of 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 cosign on a mortgage loan, it’s very difficult to get out of it. Even if you have a falling out with the primary occupant, you’re still responsible for missed payments.
- A legal tie to the loan: Becoming a non-occupant co-client means you’re just as legally responsible for the loan as the person living in the house. If you fall behind on payment coverage, the lender may sue you for legal fees and the remaining balance on the loan.
- Your credit may suffer: Cosigning on a loan puts your credit on the line. If the primary occupant misses a payment, your credit will suffer as well.
Alternatives To Having A Cosigner
If you’re struggling financially and you can’t find someone willing to cosign 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, there are other types of government-backed loans that 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 loan options before you take a loan with a non-occupant 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.
Applying for mortgages with a non-occupant co-client can help you buy a home with a lower credit score, less income or a shaky work history. When you apply with a non-occupant co-client, the person cosigning agrees they will take on your debt if you default. While this makes you a much more appealing candidate for lenders, it’s risky for the cosigner. Depending on the type of loan you get, there may be limitations on who can be your non-occupant co-client.
If you want to buy a home without a non-occupant co-client, you may want to research home buying assistance or government-backed loans. Both of these options can help you qualify for a loan with lower standards.
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