The reason to have a co-signer on a mortgage is because that person can help you qualify for the loan. For example, if a person earns significant income or has sizable financial reserves then having them co-sign your loan may help you get approved or qualify for a higher mortgage amount. If the person lacks these characteristics, then it may not make sense to have them co-sign your loan.
In some scenarios, like the one you describe in your question, having a co-signer offers little benefit to your application. For example, if the co-signer does not earn a monthly income but has debt expenses such as a mortgage, rent, credit card or other loan payments, no additional income is added to your application but the co-signer’s debt payments are included in your debt-to-income ratio.
The higher your monthly debt expense, the lower the mortgage you can afford. In your case, if your Dad co-signs your mortgage but does not receive any retirement income, the lender includes his monthly debt expense with no additional income, which decreases the loan you qualify for.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford based on your monthly income and debt
Another point to consider is that even if the co-signer has a higher credit score, this may not boost your application as much as you think. This is because when two people apply for a mortgage, the lender averages the median credit scores for the borrowers to evaluate their loan application. If you have three credit scores, the lender uses the middle score to calculate the average score. If you have two scores, the lender uses the lower score.
So if you have three credit scores and your middle credit score is 640 and your co-signer has two scores and their lowest score is 680, the lender uses the average of 640 and 680 -- which is 660 -- to determine your ability to qualify for the mortgage and to set your loan terms. With most programs, the lower the credit score the lender uses, the higher the mortgage rate you pay and vice versa.
Returning to your specific situation, even though your Dad has a high credit score, including him as a co-signer may not have a significant impact because the lender averages your scores. In short, including your Dad as a co-signer may not significantly improve your ability to qualify for a mortgage and may even be detrimental because your Dad does not contribute any income.
For the reasons outlined above, you should consider applying for the mortgage as a sole borrower and focus on financing options such as the FHA and HomeReady mortgage programs that offer more flexible qualification guidelines for credit-challenged borrowers.
For example, you can qualify for an FHA mortgage with a credit score as low as 500 if you make a 10% down payment and a score of 580 if your down payment is between 3.5% and 10% of the property purchase price.
Another positive of the FHA program is that FHA mortgage rates tend to be lower than conventional rates, which reduces your monthly payment and increases the loan you qualify for.
The table below shows FHA loan terms for leading lenders in your area. We recommend that you contact multiple lenders to determine the mortgage you qualify for and to find the best terms including the lowest rate and closing costs.View All Lenders
The downsides of the FHA program are that you are required to pay an upfront and ongoing mortgage insurance premium (MIP) which increases your closing costs and monthly payment. Unlike a conventional mortgage, FHA MIP is non-cancellable in most cases, which means you are required to pay it for the entirety of your loan.
Review our FHA Mortgage Guide
If you prefer a conventional mortgage option, then you should consider the HomeReady program which requires a credit score of 620 and may permit applicants with limited or no credit history in some cases. Additionally, the HomeReady program requires a down payment of only 3% to qualify.
Although the HomeReady program does not require you to pay an upfront mortgage insurance fee, you are required to pay monthly private mortgage insurance (PMI) until your loan-to-value (LTV) ratio reaches a certain level -- typically 78% to 80%. HomeReady also applies borrower income limits, which means you may not be eligible for the program if you earn too much money.
Review our HomeReady Mortgage Guide
In closing, although having your Dad co-sign your mortgage may not be the best idea, there are multiple loan programs that may help you qualify on your own. We recommend that you review your options to find the program that best meets your needs.
"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.
"Selling Guide Announcement, Credit Score Eligibility in DU." SEL LL-2021-08. Fannie Mae, September 1 2021. Web.« Return to Q&A Home About the author