Co-Signing A Mortgage Loan: What Both Parties Need To Know

If you have less than ideal credit or simply want to get the best rate possible, adding a nonoccupant co-signer to your loan can help you qualify for 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 – or co-signer – on a mortgage loan. In this article, 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.

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. Co-signers can be family members, friends, spouses or parents.

Co-signing on a loan isn’t just a character reference – it’s a legally binding contract. This means that when you’re a co-signer, the lender can come after you for payments if the primary signer defaults on the mortgage. 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 co-sign on a loan? People co-sign on loans to help family members or friends who want to take out a loan or refinance with bad credit. If your mortgage application is weak, getting a friend or family member to co-sign on the loan makes you a much more appealing candidate.

Both co-signers and co-borrowers share in the responsibility of taking out a loan. You can also be a nonoccupant co-borrower, meaning you’ve agreed to take on responsibility for the payments on a mortgage even if you don’t live in the home. There is sometimes confusion on this point, but there really is no difference between being a co-signer and a co-borrower. The terms are synonymous from a lending perspective.

From a legal perspective, however, there’s a big difference: A co-borrower will appear on the property’s title, but a co-signer will not, in most cases. Being on the title comes with its own set of rights and responsibilities. For example, if the property falls into disrepair and a visitor to the home is injured as a result, you could be liable for damages if your name is on the title.

If you’ve been asked to co-sign a mortgage loan, ask your attorney how best to structure the transaction.

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

In this scenario when you apply for preapproval, you find that lenders can’t offer you the best interest rates or you may find that you have a hard time getting approved due to your credit score. However, you know that your mother has an 800 credit score, so you ask her to co-sign your loan application. She agrees and signs her name 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. Lenders also consider your mother’s finances, 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 you can have a co-signer depends on the type of loan you take out. Co-signers 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’re looking to apply for a conventional loan with a co-signer, they’ll need to sign the home loan and agree to repay the mortgage if the primary occupant defaults. However, the co-signer doesn’t need to be on the home’s title. The lender looks at both your credit and the co-signer’s credit to determine if you can get a loan.

When they look at your application, lenders will also consider you and your co-signer’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 co-signer’s debt-to-income ratio can make getting a loan easier.

FHA Loan Co-Signer Requirements

FHA loans are government-backed loans through the Federal Housing Administration (FHA) 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 co-signer (you can have a maximum of two), your co-client will need to meet a few basic criteria.

First, your co-signer must be a relative or close friend. Mortgage lenders consider the following relatives as eligible to be co-signers 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 co-signer is a close friend, you’ll 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. On an FHA loan, the co-signer must be on the title of the home.

Before you agree to co-sign on a mortgage loan, it’s important to understand the legal and financial liability you’re assuming. As a co-signer, you’re agreeing to take responsibility for the loan if the primary borrower fails to make payments.

If the primary borrower misses multiple payments, you can easily become responsible for 100% of the loan value. Before co-signing, 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 take a few additional steps to protect yourself against your primary occupant’s financial missteps. Let’s look at 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 whom you know are responsible. It’s best to never agree to co-sign on a loan for someone you just met or someone who might have a rocky financial situation.

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: 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 reliable and steady income before they'll provide you a loan. If you happen to be self-employed or have a recent gap in your resume, a nonoccupant co-client with solid employment history can help you fulfill this requirement.
• The potential for a larger and cheaper loan: The lender considers both your and the nonoccupant co-client’s incomes when determining how much money you can receive in a loan. This can mean you could qualify for a larger loan with a lower interest rate.

As the nonoccupant co-client, co-signing on a loan comes with several risks. Let’s review them.

• 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 mortgage payments.
• Your credit may suffer: the primary occupant misses a payment, your credit as the co-signer will suffer as well. It’s important that you’re aware of all the long-term negative consequences that could result from the occupying borrower’s default.

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, Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (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 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 available at the state and local level. The Department of Housing and Urban Development (HUD) maintains a directory of these local home buying assistance programs.

Cosigning a mortgage is a huge commitment. Let’s address some of the most common concerns and questions around co-signing.

Can I co-sign a mortgage if I already have one?

Yes – assuming that your DTI remains manageable, and your income is sufficient to handle both payments. 

Will co-signing hurt my credit?

If the primary borrower misses a payment, it will show up on the co-signer’s credit report as if they missed a payment. If the primary borrower defaults and you’re unable to make the mortgage payments, you’ll suffer the same consequences as the primary borrower. The foreclosure of the home will appear on your credit report, and you could be held liable for lender losses on the loan.

Can a co-signer be removed from a mortgage?

Technically, no. Only a refinance by the primary borrower – a brand new mortgage without a co-signer, or with a different co-signer – can remove a co-signer from their obligation under the co-signed mortgage.

What credit score is needed for a co-signer?

As a co-signer, you stand in the primary applicant’s place during the approval process. You’ll need a minimum 580 median score for an FHA or VA loan. For a conventional loan, Rocket Mortgage^® requires a qualifying score of 620. For a jumbo loan, the minimum credit score required is 680, depending on the loan amount and the purpose of the loan.

Can a co-signer become the primary borrower?

No. It’s important to remember that the co-signer has no rights under the mortgage, only obligations. Even if the primary is no longer making payments, the co-signer’s only “right” is to make the payments themselves or allow the foreclosure to proceed.

If you’re ready to move beyond your past financial mistakes, a financially responsible co-signer can help you rebuild your credit while also securing the financing you need to purchase a home. Just make sure you both understand your rights and responsibilities in this arrangement.

Ready to become a homeowner? Apply for a mortgage today and see the difference a co-signer can make.