Are you considering having a cosigner on your mortgage application to increase your chances of approval? It’s important to understand the responsibilities of a cosigner and whether it would be more suitable to ask for a mortgage co-borrower instead of a family member or friend before making this request.
Keep in mind that buyers and co-borrowers have equal standing in the mortgage process, while buyers and cosigners do not.
This article will provide an overview of what a mortgage cosigner is, when to use a cosigner instead of a co-borrower, and the requirements for cosigners on different types of mortgage loans. Make sure to carefully consider these factors before making a decision about having a cosigner on your mortgage application.
What Is A Mortgage Cosigner?
A mortgage cosigner is a person who takes on legal responsibility for someone else’s mortgage in the event that they default on their payments. This option should only be considered as a last resort and cosigners do not receive any of the benefits of homeownership. Alternatively, a mortgage co-borrower is a person who shares ownership and responsibility for a mortgage with the primary borrower, and both parties are equally responsible for the mortgage payments and eligible for the benefits of homeownership.
Cosigner Vs. Co-Borrower: What’s The Difference?
Before deciding to ask someone to be a cosigner, it’s important to understand the difference between a cosigner and a co-borrower. While both options may be able to help you qualify for a mortgage, they have some key differences. Co-borrowers are equal partners in the loan and are equally responsible for paying it off. Cosigners, on the other hand, are essentially just providing their credit and income information to help you qualify for the loan, but they are not legally responsible for paying it back.
If you do decide to seek a cosigner, be sure to consider their financial stability and creditworthiness, as their credit and income will be taken into account when determining your loan eligibility. Additionally, be aware that different types of mortgage loans may have different cosigner requirements, so it’s important to do your research and understand what is expected.
How to Get a Cosigner on Your Mortgage Loan?
If you are looking to apply for a mortgage with the help of a cosigner, there are a few requirements that most lenders will expect to be met. First, the cosigner should not have any financial interest in the property being purchased. Additionally, there should be a personal connection between the cosigner and the borrower, and this relationship should have existed prior to the mortgage application process. In some cases, lenders may ask for an affidavit to confirm the connection and ensure it will remain throughout the term of the mortgage.
To apply for a mortgage with a cosigner, you can start the process online and include your cosigner as an additional borrower on the application. Once your mortgage has been pre-approved, be sure to notify the lender that the second borrower will be serving as a cosigner rather than a co-borrower.
Cosigner Requirements Based on Mortgage Type
The need for a cosigner may vary depending on the type of mortgage being applied for. Here is an overview of the requirements for cosigners for conventional loans, FHA loans, USDA loans, and VA loans.
Conventional Loan Cosigner Requirements
Conventional mortgages are loans that are sponsored by Fannie Mae and Freddie Mac. Conventional mortgages may include low-down payment programs like as HomeReady and Home Possible, in addition to the Conventional 97 mortgage.
In addition to the general principles for cosigners, conventional mortgage cosigners must also fulfill the requirements outlined in the following list of program standards:
- 620 or higher on the FICO scale.
- Digital asset verification, such as bank statements Digital income verification, such as W-2 forms and tax returns from the federal government
There is a possibility that cosigners on conventional mortgages will not have a share in the buy mortgage transaction.
FHA Loan Cosigner Requirements
The Federal Housing Administration (FHA) insures certain types of mortgage loans. With an FHA loan, a buyer just has to put down 3.5%.
Cosigners for FHA loans must satisfy the following requirements, in addition to those outlined by the government agency and other mortgage lenders:
- Minimum of 580 on the FICO scale
- Verification of assets and income using digital bank statements and W-2 forms
Cosigners on an FHA mortgage do not need to be U.S. citizens. However, their principal home must be in the United States or one of its territories.
VA Loan Cosigner Requirements
A VA loan is a mortgage insured by the VA branch of the U.S. Department of Veterans Affairs. There is no need to make a down payment or pay mortgage insurance with a VA loan.
In addition to the typical requirements for a mortgage cosigner, the following additional conditions must be met by anybody seeking to cosign for a VA loan:
- Minimum credit score of 620
- Proof of income (W-2 forms or tax returns)
- Proof of assets (bank statements)
A cosigner on a VA loan must be a current service member, a veteran, or the surviving spouse of a service member killed in action.
USDA Mortgage Cosigner Requirements
The United States Department of Agriculture (USDA) backs some mortgages. Mortgages guaranteed by the USDA are 100 percent loans with low interest rates and modest mortgage insurance costs. In the case of USDA loans, cosigners are not permitted.
The Risks Your Mortgage Cosigner Assumes
As a cosigner, it is your responsibility to ensure that you have the financial means to cover the loan of the borrower if they are unable to do so. This includes being responsible for repaying the loan in full and potentially facing late payment fees or collection expenses.
It is important to be aware that the creditor has the right to pursue payment from you and may take legal action, such as wage garnishment, to do so. This can also negatively impact your credit score. It is essential to thoroughly consider the potential risks and consequences before agreeing to cosign a loan. Please note that this information does not constitute a legal contract establishing your obligation to pay the debt.
Alternatives To Having A Cosigner
There are several alternatives to cosigners for homebuyers who may not qualify for a mortgage due to low income, low credit score, or lack of a large down payment. These alternatives include:
- Adding a co-borrower with income to your mortgage application, which can help reduce your debt-to-income ratio and increase your chances of getting approved.
- Paying off existing debts to reduce your overall debt burden and improve your debt-to-income ratio.
- Receiving a cash gift of a down payment from family or friends, which can lower your total loan size and reduce your mortgage payment, making it easier to qualify.
- Improving your credit score by getting current on accounts and reducing your credit utilization ratio.
- Exploring low- or no-down payment mortgage options, such as USDA loans or first-time homebuyer grants and incentives.
- Using cash gifts of a down payment to qualify for a mortgage without the need for a cosigner.
In conclusion, cosigners can be a helpful option for homebuyers who do not meet the necessary qualifications for a mortgage on their own. However, it is important for cosigners to be aware of the potential risks and consequences of their involvement, including being responsible for repaying the loan if the borrower is unable to do so and facing potential legal action.
If you are a homebuyer who is considering using a cosigner, it is important to carefully consider your options and explore alternatives, such as adding a co-borrower, paying off debts, improving your credit score, or exploring low- or no-down payment mortgage options. It is also important to remember that a cosigner is not the only option, and you may be able to qualify for a mortgage without one by exploring these alternatives.