Sometimes you need a little help getting a mortgage. Whether you have bad credit or not enough credit, getting a mortgage with a cosigner can be the answer you need. Understanding how a cosigner works and what it means to you and the person cosigning for you can help you make an informed decision.
Occupant or Non-Occupant Cosigner
The first step is to determine if your cosigner will live with you. That is the difference between the occupant and non-occupant cosigner. An occupant cosigner is someone that resides in the home you take out the mortgage on. This could mean a spouse or someone else that will live with you. A non-occupant cosigner is someone, like your parents that do not live with you but provide you with the help you need to secure the mortgage.
Conventional Loans – If you can qualify for a conventional loan with a cosigner, the person going on the loan with you just needs to sign the loan papers. He does not need to go on the title for the property. The lender uses the person’s credit along with your own credit to determine eligibility for a conventional loan.
FHA Loans – FHA loans also allow a cosigner, but only in certain situations. In addition to the above requirements for conventional loans, FHA loans require the cosigner to be on the loan and the title even if they do not live in the property. In addition, the person signing the loan with you must be a close relative; in some extreme cases, a close friend is allowed. The property you purchase must be a single-family property as well.
Reasons to Obtain a Mortgage with a Cosigner
You might think that one of the best reasons to obtain a mortgage with a co-applicant is because you have bad credit. This is not the case, though. The real reason you should use a cosigner is when you do not have enough income to qualify. The most common occurrences are job loss, divorce, and fixed income situations, such as a retired person. These people do not have enough income to cover their debts for one reason or another, which renders them ineligible for a mortgage. In some cases, they might be able to secure a mortgage, but not one with favorable terms.
A cosigner can help you obtain a mortgage with a lower interest rate, lower origination fees, or a lower down payment. The lender uses the cosigner’s income to calculate your debt ratio, which will obviously be lower, enabling you to secure better terms.
When a Cosigner will not Help
If you have truly bad credit, chances are that this option would not help your case. Most lenders use the lowest middle credit score of the applicants. If the lender pulls 3 credit bureau scores, they choose your middle score and your co-applicant’s middle score; they then use the lower one for qualifying purposes. If you have bad credit, it is obvious that your credit could ruin the application.
Keeping it in the Family
Most lenders suggest keeping the mortgage within the family. This means do not take just anyone up on their offer to help you secure a mortgage. Remember that they have a stake in the property as well, especially with an FHA loan where they go on the title. You want to choose someone you can trust and that will not cause problems down the road.
Everyone should consider the repercussions of obtaining a cosigner on a mortgage. If you default on your payments, the person on the loan with you becomes responsible. Any late payments will show up on his credit report as well, which could ruin his credit and your relationship.
Before you choose a cosigner, think long and hard about how it will play out. You might lucrative terms with another loan program that does not require you to have a cosigner. It is worth it to shop around and see what you can obtain on your own, even if you have to choose a subprime mortgage. This way you own your home on your own and without the issues that having a co-applicant could cause.