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How Does Co-Signing for a Mortgage Work?

How does co-signing for a mortgage work?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

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 lower credit score between the two applicants to determine your mortgage eligibility and loan terms. The lower your credit score, the higher the mortgage rate you pay. If your credit score is too low, you may not be eligible for certain loan programs.

So even though your co-signer’s credit score is high, it may not matter if your credit score is low. The example below demonstrates what credit score lenders use when you apply for a mortgage with a co-signer. Please note that if an individual has two credit scores, the lender uses the lower score and if an individual has three credit scores, the lender uses the middle 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 the 640 credit score -- the lowest of the applicants’ middle scores -- 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 may not help you if your credit score is too low.

Where a co-signer can be more helpful is if they earns 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 guidelines 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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Current Mortgage Rates in Ashburn, Virginia as of September 26, 2020
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Data provided by Brown Bag Marketing, Inc. Payments do not include amounts for taxes and insurance premiums. Read through our lender table disclaimer for more on rates and product details.

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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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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