Sometimes a little assistance is needed to get started in life when you don’t qualify on your own for a car or a home loan. The solution many use to get a co-signer.
A cosigner, essentially a co-borrower, is someone who signs a legally binding agreement to repay the loan based on a number of set terms by the lender. It is a lot of responsibility if the primary borrower’s financial situation begins to worsen. As a co-borrower your name and credit are being put up as security for the loan.
Here are some examples of what could happen.
If the primary borrower is overdue on a payment by 15-30 days, the lender or other creditor will pursue you for the past due payment. Any late payments of 30 days or more will also get reported to the credit bureaus which means it will be on your credit report.
Applying for a Mortgage with a Co-borrower
Mortgages that allow non-occupant co-borrowers are typically seen on conventional loans and specific types of FHA loans.
Conditions for Conventional Loans
The cosigner, or with a non-occupant co-borrower, must put their signature on the loan, however, being on property title is not a condition. Usually, the primary borrower uses a co-borrower’s credit score and/or income to combine income to qualify or the borrower with the highest credit score will be used for loan qualification.
A unique aspect of concerning conventional loans is how lenders look at debt-to-income (DTI) ratios when using a non-occupying co-borrower. Some lenders, allow DTI ratios up to 70% for the occupying borrower when they have a 20% or less down payment. And when the down payment is higher than 20%, the DTI ratio usually has no maximum yet some lenders have more restrictive guidelines.
With FHA loans, as much as two non-occupying co-borrowers can be added to the loan. However, the primary residence of the non-occupants must live in the U.S.A. and they have to be on title to the property. If you’re occupier of the property is permitted to have a up to 70% DTI on 20% or less equity or down payment. DTI is has no limits when equity or down payments are higher.
Additional restrictions are the property needs to be a single-family residence. The non-occupant co-borrower cannot be just anyone. They have to be a relative or a close friend. If using a close friend, additional documentation is necessary .
You’re not totally out of the woods as there are occasions whereby you will need to have a minimum of 25% down payment or at least 25% equity listed below:
The non-occupying co-borrower is not a relative or a close friend
The co-borrower is also the seller
Purchasing a a two-unit property
Before cosigning on a property with anyone, be sure you both understand what you’re getting into.