How does co-signing for a mortgage work?
First, it is important to define what a co-signer for a mortgage is. A co-signer is someone who is listed on the mortgage note but does not hold an ownership interest in the property. In short, the co-signer is responsible for the mortgage, along with the borrower, but does not own the home. A mortgage co-signer typically does not live in the property you are getting the mortgage on. For example, if you ask a friend or relative to help you qualify for a mortgage and they are willing to be on the mortgage but not own a stake in the property, you are asking them to be a co-signer.
A co-signer is different than a co-borrower, who is listed on the mortgage note but also holds an ownership interest in the home. The most common example of co-borrowers in when spouses apply for a mortgage on a home they intend to own and live in together. In the cases when a co-borrower does not live in the property, they are called a non-occupant co-borrower and different qualification guidelines may apply to this scenario.
A co-signer can help you qualify for a mortgage but there are several important points to keep in mind. First, when two people apply for a mortgage -- be it a borrower plus a co-signer or as co-borrowers -- the lender uses the average median credit score for the two applicants to determine your mortgage eligibility and loan terms. The lower the credit score used by the lender, the higher your mortgage rate. If your credit score is too low, you may not be eligible for certain loan programs.
The example below demonstrates what credit score lenders use when you apply for a mortgage with a co-signer. Please note that if an applicant has three credit scores, the lender uses the middle score to determine the average score. If an applicant has two credit scores, the lender uses the lower score.
Borrower
Credit Bureau A: 630
Credit Bureau B: 640
Credit Bureau C: 660
Co-Signer
Credit Bureau A: 740
Credit Bureau B: 760
Credit Bureau C: 800
In the scenario above, the lender uses 640 for the borrower's credit score and 760 for the co-signer's credit score -- the middle of the applicants’ three scores -- to calculate the average credit score, which is 700 in this case. The lender uses this average score to determine the borrower and the co-signer's ability to qualify for the loan and to set their mortgage terms. This example demonstrates how having a co-signer with a higher credit score can help you if your credit score is low.
Where a co-signer can also be helpful is if they earn a significant monthly income and have relatively low debt expense. With standard mortgage underwriting, when you apply for a mortgage with a co-signer, their monthly gross income is added to your monthly gross income to determine the mortgage you can afford. On the other hand, their monthly debt expense -- including their monthly mortgage or rent payment -- is added to your debt figure.
The higher your combined monthly gross income relative to your combined monthly debt payments, the higher the mortgage amount you qualify for. The example below demonstrates the benefits of applying for a mortgage with a co-signer. This example assumes a 30 year fixed rate mortgage with a 4.000% mortgage rate.
Borrower
Monthly Gross Income: $2,500
Monthly Debt Payments: $500
Mortgage Borrower Can Afford on Own: $125,000
Co-Signer
Monthly Gross Income: $3,500
Monthly Debt Payments: $300
Applicant + Co-Signer
Combined Monthly Gross Income: $6,000
Combined Monthly Debt Payments: $800
Mortgage Applicant Can Afford with Co-Signer: $366,000
This example demonstrates how a co-signer can potentially enable you to qualify for a higher mortgage amount but also highlights the importance of the co-signer’s financial profile. All of the co-signer’s monthly debt payments are added to your debt payments to determine the loan you can afford. If your co-signer has too much debt relative to their income -- such as a high mortgage or monthly rent payment -- she or he may actually reduce the mortgage you qualify for.
Use our TWO PERSON MORTGAGE QUALIFICATION CALCULATOR to determine the mortgage amount two people can afford
It is important to highlight that if you apply for a mortgage with a co-signer and the lender uses manual underwriting -- which is required if you are requesting an exception to a guideline or if your application involves special circumstances -- the lenders applies a 43% debt-to-income ratio to the borrower's income alone to determine what size mortgage you qualify for.
In short, a debt-to-income ratio determines how much of your monthly gross income you can spend on monthly debt expenses including your mortgage payment, property tax, homeowners insurance as well as other debts such as credit cards and car, personal and student loans. The lower the debt-to-income ratio used by the lender, the smaller the mortgage you qualify for. This guideline applies to manually underwritten loan applications even if the combined income and debt expense for you and the co-signer would enable you to qualify for a higher mortgage amount.
We should also emphasize that if you are a co-signer on a mortgage you are required to provide the same information and documentation as the borrower. This means the lender pulls the co-signer’s credit report and the co-signer is required to submit a loan application with detailed personal and financial information. Plus, the co-signer is required provide documents including tax returns and bank statements. In short, the co-signer must be comfortable undergoing the same scrutiny and diligence that is applied to the borrower.
The mortgage also appears on the credit report for both the borrower and the co-signer. So if the borrower has a late payment or other issues with the mortgage, it may impact the co-signer's credit score as well. Additionally, if you are a co-signer the monthly mortgage payment is included in your debt-to-income ratio when you apply for a mortgage or other type of loan in the future, which can make it more challenging to qualify or reduce the loan amount you can afford.
If you co-sign a mortgage, the only time the mortgage payment -- and property tax and homeowners insurance -- can be excluded from your debt-to-income ratio when you apply for another loan is if the other borrower listed on the mortgage has made the monthly payments for at least twelve months. To have the mortgage payment omitted from your debt-to-income ratio, you are required to provide cancelled checks, bank statements or similar documents that show that the other borrower made the payments on time and in full for at least one year.
If the other borrower has not made the monthly payments for the past year, the only way to exclude the payments from your debt-to-income ratio is to refinance the mortgage and remove you as a co-borrower. That way you are no longer obligated for the mortgage so it is not included in your loan applications going forward.
The final point to highlight about applying for a mortgage with a co-signer is that the qualification guidelines may be different. You may be required to make a higher down payment or the lender may apply a lower debt-to-income ratio, which reduces the mortgage you qualify for.
Mortgage underwriting and qualification requirements vary by lender and loan program. It is important to understand the guidelines that apply to your situation and how the loan amount you qualify for and your required down payment change if you apply for the mortgage as a sole borrower as compared to applying with a co-signer.
In closing, applying for a mortgage with a co-signer offers benefits but there are several possible disadvantages as well. The table below shows mortgage terms for leading lenders in your area. We always recommend that you contact multiple lenders to understand your financing options and how a co-signer could potentially help you qualify for a mortgage.
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Sources
"B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction." Selling Guide: Fannie Mae Single Family. Fannie Mae, June 5 2018. Web.
"Non-Occupant Borrower Fact Sheet." Originating & Underwriting. Fannie Mae, July 2019. Web.
"B3-6-05, Debts Paid by Others." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
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