How does co-signing a mortgage for a relative or a friend affect your ability to qualify for your own mortgage?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

Depending on your personal financial circumstances, co-signing a mortgage for someone else can make it more challenging to qualify for your own mortgage or reduce the loan amount you can afford.

If you co-sign on a mortgage for another person before you buy your own home then the total monthly housing expense including the mortgage payment, property tax and homeowners insurance for that property is included in your debt-to-income ratio when you apply for your own mortgage or other loan. This requirement applies even if you do not live in the property.

The only time the mortgage payment can be excluded from your debt-to-income ratio when you apply for another mortgage is if the other borrower listed on the mortgage (the one you co-signed) has made the monthly payments on time and in full for at least one year.  To have the mortgage payment omitted, you are required to provide twelve months of documents such as cancelled checks or bank statements that show that the other borrower made the payments.

Unless you satisfy this requirement and you are able to exclude the payment, if you co-sign a loan for someone else, you need to earn sufficient income to afford the mortgages on two properties when your apply for your own loan. For example, if the total monthly housing expense for the mortgage you co-sign is $2,500, then this figure is added to your monthly debt expense for your own loan application.

If you have $500 in other debt expenses for credit cards and car, personal and student loans, then the total monthly debt figure the lender includes in your debt-to-income ratio is $3,000 ($2,500 (expenses for co-signed house) + $500 (personal debt expenses) = $3,000).

If you make a lot of money then including the additional housing expense may be less of an issue as you still may be able to afford the mortgage amount you want. But if you are on the border in terms of qualifying for your own loan, then the extra debt expense could disqualify you or prevent you from getting the mortgage you need.

Use ourHOW MUCH HOME CAN I AFFORD CALCULATORto determine what price home you can afford based on your monthly gross income and debt payments

If you are not a co-signer on the other mortgage then the lender only includes your $500 in personal debt payments to determine the mortgage you qualify for. In short, the lower your monthly debt expense, the higher the mortgage amount you qualify for and vice versa

This is why co-signing a loan for someone else usually reduces what size loan you can afford on your own, depending on how much money you make, and why we usually recommend that you buy your own home first before you co-sign a mortgage for a relative or friend.

One question people frequently ask is why do lenders include the full monthly payment for the mortgage (plus property tax and insurance) I co-sign in my debt-to-income ratio instead of only half of the payment? After all, there may be other borrowers who help pay the mortgage. This is because if the other co-borrower experienced financial hardship you are solely responsible for paying the mortgage and the lender’s qualification analysis reflects this worst case scenario.

Another common question is what happens if the other co-signer pays half the mortgage payment or pays me rent? Lenders typically only allow you to include rental income if you can provide tax returns that show you have received the income for at least two years, although some programs only require a one year rental history, depending on certain circumstances.  If you cannot document a track record of rental payments directly to you, then lenders are unlikely to give you credit for this income.

Additionally, if you split the monthly mortgage payment with another borrower, but the payments are made directly to the lender, you receive minimal benefit when you apply for your own mortgage.  As a reminder, you can only exclude the payment on a mortgage you co-sign from your application if you can document that the other borrower on the mortgage has made the payments in full for at least twelve months with no delinquencies.  

We always recommend that you contact multiple lenders to confirm their qualification guidelines, especially as they pertain to co-signers.  Comparing multiple lenders is also the best way to save money on your mortgage.

You can also use our Mortgage Pre-Approval form to get pre-approved for your loan. Getting pre-approved enables you to understand what size mortgage you qualify for and review key issues in advance such as the impact of being a co-signer on another loan. Our Pre-Approval form is easy-to-use, no obligation and requires minimal information.

In closing, co-signing a mortgage can be very beneficial in helping someone else buy a home but be sure to understand the consequences and potential negatives, especially if you want to apply for for your own mortgage in the future.

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.

"B3-6-05, Debts Paid by Others."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.