Should You Get a Mortgage Cosigner?
When you’re looking to buy your first home, sometimes you need a little help from a friend or family member.
This is particularly true in today’s real estate market, where rising prices and demand are making it difficult for people to find desirable homes in their price ranges.
To make things easier, a growing number of people are using cosigners to help get their mortgage applications approved.
This post covers exactly what you need to know about using a mortgage cosigner.
What is a Mortgage Cosigner?
When you apply for a mortgage, you can either apply individually or jointly with another individual—a cosigner. In short, a cosigner accepts the responsibility of backing the loan in case the primary signer can’t make mortgage payments.
Why Use a Cosigner for a Mortgage Loan?
Borrowers will use cosigners when the mortgage lender considers them at high-risk of defaulting on their loan. Therefore, without a cosigner, it might be impossible for them to get a mortgage.
Here are some examples of when it could make sense to use a cosigner.
Low or limited credit score
One of the first things lenders do when reviewing a loan application is review a borrower’s credit report. Lenders typically want to see a long period of credit to determine the borrower’s trustworthiness.
Borrowers who can’t demonstrate good credit can find it hard to get a loan. For example, first-time homebuyers might lack the credit history required to get mortgage approval. Also, if there’s a bad credit rating, it might be downright impossible to get approved.
When this happens, a cosigner with a better credit score can step in and secure the loan. Simply put, when a cosigner has good credit, they reduce the lender’s risk and effectively nullify the primary borrower’s lackluster credit.
In some cases, a borrower may not have enough income to qualify for the mortgage they are seeking. When this happens, a cosigner with proven income may be required to step in.
For example, if the primary borrower’s net annual income is $30,000, it might be difficult for them to afford monthly payments on a property in the $150,000 to $200,000 range. Even if the primary borrower can afford the payments, the lender won’t approve the application if the numbers don’t line up out of the gate.
In this case, a higher-earning relative like a sibling or a parent may step in to provide support.
Spotty employment history
When a borrower can’t demonstrate steady employment, it can be difficult to secure a loan.
Lenders like to see steady employment because that’s a sign that a borrower will have the consistent cash flow to make monthly mortgage payments.
Typically, lenders need to see two years of tax returns from the same employer to qualify that income as relevant to the mortgage application. If the borrower doesn’t have two years of employment, they may be required to add a cosigner.
High debt-to-income ratio
Lenders also want to see a low debt-to-income ratio (DTI), indicating that there aren’t many other outstanding debts to the borrower’s name. That’s because a borrower with high debt is more likely to stumble into a sticky financial situation wherein they’re unable to afford their mortgage payments.
To qualify for a conventional mortgage loan, lenders typically like to see a DTI of less than 50%. A cosigner may be required if the borrower’s ratio is above that number.
Pros and Cons of Using a Mortgage Cosigner
There are some important things to consider when adding a cosigner to a loan.
Have an easier time getting a loan
Getting a loan can be difficult, and first-time homebuyers often struggle with the process. Having a cosigner can help push a loan through, making it ideal for people who otherwise cannot get financing.
Break the renting cycle
Renting can be costly, and it’s difficult to get out of the cycle. If you live in an expensive city, most of your income might be going toward your monthly rent payments, making it tough to both save money and meet lenders’ specific loan requirements.
In this case, adding a cosigner can help you break the rent cycle and become a homeowner.
You can requalify for a mortgage
One future upside to applying with a cosigner is that as the borrower’s credit improves and the loan amount goes down, you can typically refinance. When this happens, you can remove the cosigner from the loan and get a better mortgage interest rate.
So, just because you start with a cosigner, it doesn’t mean their services will be required forever.
Can create conflict
Asking a family member or friend to serve as a cosigner can inadvertently lead to conflict, which can damage relationships and create stress.
For example, a cosigner may agree to back someone up for a home, only to have the borrower make late payments, putting them on the hook for the money.
What starts as a well-intended promise by the cosigner could easily turn into a tricky dispute and financial burden.
All risk, no reward for the cosigner
For the cosigner, the only real benefit is altruism: they’re helping a loved one buy a house. And while this can be a very nice and supportive thing to do, it’s a lot of risk without much reward.
The cosigner doesn’t build any equity or ownership stake in the house. They also don’t have any claim to the title, as they’re purely a financial instrument.
What’s more, the cosigner has to step in and provide payments if the homeowner should cease to make good on their agreement, potentially putting them in a difficult spot.
In some cases, the cosigner has to step in out of negligence. And if an emergency or unexpected situation arises like illness or job loss, the cosigner still has to back the loan.
Cosigners can be unreliable
There’s no guarantee a cosigner will step in and provide assistance when necessary. It’s not uncommon for cosigners to agree to back a loan as a good-faith gesture without fully understanding the implications that come with it.
If the bank ever approaches a cosigner for repayment and they’re unable (or unwilling) to make those payments, this could eventually lead to foreclosure.
Should You Get a Cosigner?
In some cases, partnering with a cosigner can be a great way to finance a house. At the same time, it could turn into a nightmarish scenario.
Here are some signs that a cosigner is the right call for you.
You fully trust your cosigner
Only work with a cosigner who is reliable and genuinely able to commit to stepping in if you need their support. Avoid asking someone with whom you’re not really on good terms or who has a tendency to be flaky or unreliable.
If you have a trusted prospect like a close family member, then you may want to consider moving forward with this strategy. But there should be no question about their reliability.
You need a better rate
Shopping for a new loan and getting a poor quote or denial can be a frustrating experience. If you’ve looked extensively for a loan and can’t seem to make any progress, consider trying your luck with a cosigner. You may experience drastically better rates.
You can afford a home
Stop and assess the reasons why you’re having a hard time finding a loan. The homebuying process is designed to ensure that only qualified individuals can secure a home in order to reduce risk for all parties involved.
If you’re having trouble getting a loan on your own, it could be a sign that a home is too much risk for you at this time. Think about your financial situation, and determine if your income is stable enough to make 30 years’ worth of on-time loan payments.
Working with a cosigner won’t always fix your problems. In some cases, it can make things even more stressful.
Frequently Asked Questions
Do cosigners get ownership rights?
Cosigners do not have an ownership stake in a property. They are only there to provide financial support for the homebuyer and nothing beyond that. Even if the homeowner stops making monthly payments, the title does not shift to the cosigner. So in short, cosigning is not a pathway to homeownership.
Is a cosigner required for a home loan?
This strategy is not required, but it can make the process of obtaining a home loan easier in some cases. Lenders don’t typically ask for cosigners, although they may recommend one if the borrower does not have a stellar financial track record.
Does cosigning eliminate the requirement of a down payment?
Cosigning a property does not eliminate or reduce a down payment requirement. The mortgage lender is still going to ask the borrower to pay a down payment ranging from 3% to 20% or more of the home’s purchase price, depending on the type of loan.
Is a cosigner the same as a co-borrower for an FHA loan?
No. There’s a big difference between a cosigner and a co-borrower for an FHA loan.
A cosigner doesn’t own any of the loan collateral and may only be held liable for the loan. On the other hand, a co-borrower shares ownership of whatever asset is connected to the mortgage loan.
The Bottom Line
Buying a home can be painstaking, and qualifying for a loan can be difficult if your credit score and finances aren’t in top shape.
If this sounds familiar, consider asking a trusted source to serve as a cosigner on your loan application. You’ll retain full ownership of the property, and you can always try refinancing down the line to remove the cosigner from the property.
Just make sure you and the cosigner are fully onboard with the idea before moving forward. Cosigning can be a stressful experience for both the homeowner and the person signing the paperwork. The last thing you want to do is put a trusted family member in the awkward position of having to step in and make payments on your behalf.
Remember that homeownership is a big responsibility. If you can’t get a loan on your own, it could be an indicator that you need to improve your personal finance situation first. And if someone has asked you to be a cosigner on a loan, think long and hard before you agree.
In the meantime, keep working on building your savings, avoiding debt, and investing any extra income you have. This way, you’ll have a much easier time securing your own loan.