Buying a home is a big milestone, but with hefty housing prices and high mortgage rates, homeownership can feel out of reach for many Americans. And even if you can afford the down payment and monthly mortgage for your dream home, you may not have strong enough credit to qualify for the loan. So what can you do?
Adding a qualified cosigner to your mortgage is a great way to improve your approval odds when buying a house, but there are several risks the cosigner takes on when they help you out. Below, we’ll walk you through how cosigning a mortgage works, what the requirements are, and the pros and cons.
Key Points
• Cosigning can enhance loan approval, secure lower interest rates, and increase loan size.
• Cosigning a mortgage carries significant financial risk, affecting the cosigner’s credit and debt-to-income ratio.
• Cosigners should explore release options and regularly check credit score status.
• FHA loans require a 25% down payment when a cosigner is used, unless the cosigner is a family member, in which case it is 3.5%.
• Consider financial risks, credit impact, and long-term commitment before cosigning.
What Is a Mortgage Cosigner?
A mortgage loan cosigner is someone (usually a relative or close friend) who signs the mortgage alongside the primary borrower but has no ownership interest in the home (and does not live in the same home). Instead, the cosigner simply agrees to take full financial responsibility for the mortgage should the primary borrower miss payments or stop paying entirely.
This is a big deal: The lender has every right to come after the cosigner if the borrower defaults on the mortgage. The cosigner may have to pay missed payments and late fees, and in most cases, the lender is able to use debt collection methods (such as a lawsuit or garnishing wages) on the cosigner without first trying to collect from the borrower.
Having a mortgage cosigner can make a big difference in your approval odds if you don’t have a strong enough credit score to qualify for a mortgage otherwise. However, there are clearly tremendous risks to the cosigner that you should take seriously as the borrower.
How Cosigning a Home Loan Works
Whether your credit score is so low that you can only qualify for a mortgage with an extremely high interest rate — or so low that it precludes you from qualifying for a mortgage altogether — you can get a cosigner on your mortgage loan to help smooth your path.
A well-qualified cosigner should have a strong credit score and a low debt-to-income ratio (DTI); that is, they should make significantly more money than they pay in debts each month. Adding this person, such as a parent, spouse, grandparent, or sibling, can suddenly make your application way more attractive to a mortgage lender. After all, the lender knows that if you fall behind on payments, your cosigner is well within their means to take over.
Assuming you are approved for a mortgage with a cosigner and close on the home, the mortgage will proceed as usual. You’ll move into the house, and the cosigner will continue living separately. They have no further responsibility — unless you stop making payments.
Because your failure to pay can negatively impact your loved one’s credit score and finances — and thus your relationship with that relative or friend — it’s imperative that you do everything within your power to stay on top of mortgage payments. Communicate with your cosigner regularly about the mortgage, and let them know the instant you suspect you’ll struggle to make a payment.
Conventional Mortgage Cosigner Requirements
If you’re using a cosigner to get a conventional mortgage, you’ll still need to meet basic conventional loan requirements. For instance, you’ll still need a minimum credit score for a mortgage with a cosigner of 620 — but if your credit score isn’t strong enough, you can rely on your cosigner’s high credit score to increase your approval odds.
There are a few other conventional mortgage cosigner requirements to keep in mind:
• Down payment: If you’re using a cosigner, you still must use your own funds to make at least 5% of the down payment (in most circumstances).
• DTI: Using only your income (but the debt of both you and your cosigner), your DTI must be no greater than 43%.
• Loan-to-value ratio: When using a cosigner, the loan-to-value ratio (LTV), combined loan-to-value ratio (CLTV), and home equity combined loan-to-value ratio (HCLTV) usually cannot exceed 90%.
FHA Loan Cosigner Requirements
Similarly, FHA loans, backed by the Federal Housing Administration, have special cosigner requirements for a mortgage to bear in mind. FHA loans are ideal because you only have to put 3.5% down, which makes them great for first-time homebuyers who have limited savings to rely on.
However, if you’re adding an FHA loan cosigner, the down payment requirement jumps to 25% — unless the cosigner is a family member. In that case, the down payment remains at 3.5%.
Can parents cosign an FHA loan? Yes. But fortunately, the FHA is pretty liberal with the term “family member,” and also allows it to include:
• A child or grandparent (including step and foster)
• A spouse or domestic partner
• An adopted child or foster child
• A sibling (including step)
• An aunt or uncle
• An in-law (son, daughter, mother, father, brother, or sister)
The cosigner (which the FHA calls a “nonoccupying co-borrower”) must be a U.S. citizen or have a principal residence in the country.
Recommended: Guarantor vs. Cosigner: What Are the Differences?
Benefits of Mortgage Cosigners
The benefits of a mortgage with a cosigner belong primarily to the borrower. Here are a few pros of mortgage cosigners to consider:
• Improved approval odds: Adding a qualified cosigner to your mortgage increases your approval odds, assuming the cosigner has a healthy credit score and stable income. This can be especially helpful for borrowers with low credit scores or unconventional income (such as self-employment income).
• Lower interest rate: Even if you can qualify for a mortgage without a cosigner, you might face high interest rates. Adding a well-qualified cosigner could help you secure a lower mortgage interest rate, which means less money spent over the life of the loan and a lower, more manageable monthly payment.
• Larger loan: You may be able to qualify for a more expensive house with the help of a cosigner. This could be crucial if you live in an area with a high cost of living (and thus more expensive real estate).
Drawbacks of Mortgage Cosigners
As you’d imagine, the cons primarily apply to the cosigner, not to the borrower. Here a few cons of mortgage cosigners to consider:
• Huge financial risk: Cosigning a mortgage poses a huge financial risk. If the borrower stops making payments, you’re on the hook. The lender could potentially sue you or garnish your wages to cover the payments. Plus, late payments by the borrower don’t only impact their credit score; the cosigner’s credit score will take a hit, too.
• Difficulty getting other loans: The mortgage you cosign will impact your debt-to-income ratio. Until that mortgage is paid off (which could take three decades), your DTI might be too high for you to qualify for your own loans, such as a mortgage on a new house, a personal loan, or a car loan.
• Relationship issues: If the borrower isn’t taking enough responsibility for their home loan, you’ll have to have some difficult conversations. Disputes over money could even end your relationship (and yes, you’ll still be on the hook for the mortgage, even if you and the borrower no longer speak).
Recommended: Refinance Your Mortgage and Save
Other Factors to Consider When Cosigning a Mortgage
Planning to cosign a mortgage? Here are a few things to consider:
• Cosigner release: Read the contract carefully to understand what your options are for eventual cosigner release. Some lenders may include a clause outlining cosigner liability release; if the primary borrower meets the lender’s strict requirements (credit score, income, history of on-time payments), you may be able to request to be released from the loan.
• Credit monitoring: Regularly check your credit report for missed payments. While you can communicate with the borrower about how the payments are going, it’s always good to verify with an unbiased resource.
• Long-term commitment: Remember, mortgages typically last between 15 and 30 years. Cosigning one is a long-term commitment. Make sure cosigning won’t impede any of your financial goals during that time period, and think carefully about whether the borrower is responsible enough to manage a loan of this magnitude for that long.
The Takeaway
Adding a cosigner to a mortgage loan can improve the approval odds if your credit score isn’t strong enough to get approved on your own. A cosigner can also help you secure a larger loan and/or a lower interest rate. However, cosigners assume a major financial risk when getting involved — and disagreements over money can easily end even the strongest of relationships. Proceed with caution.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Who can be a cosigner on a mortgage?
Technically, anyone can cosign on a mortgage, but because it’s a big financial risk, people usually rely on family members or very close friends. For FHA loans, cosigning with a family member is ideal; using a cosigner who is not a relative means you have to put 25% down, instead of 3.5%.
Do I need my parents to cosign a home loan for me as a first-time homebuyer?
You do not need your parents to cosign a home loan as a first-time homebuyer. If you have a strong credit score and enough income to handle the loan on your own, you can proceed without a cosigner. But if you need help with your first home purchase, asking a parent to cosign is an option.
Can retired parents cosign a mortgage?
Yes, retired parents can cosign a mortgage. Lenders analyze cosigners’ credit scores, debts, and incomes when making an approval decision. A retired parent’s income will simply look different from a working parent’s income; for instance, a retired parent’s income might include Social Security payments, investment income, a retirement account distribution, or a pension.
Does having a mortgage cosigner affect my home loan approval chances?
Adding a mortgage cosigner can and should affect your home loan approval chances. The whole reason to add a cosigner is to use their stronger credit score and higher income to make you a more attractive applicant and thus improve your approval odds — perhaps at a lower interest rate or for a larger loan amount.
Is it possible to remove a cosigner from a mortgage in the future?
While challenging, it’s technically possible to remove a cosigner from a mortgage in a few ways. Assuming your own credit and income are strong, you can just ask the lender to remove the cosigner. But they won’t always say yes. Your next move, then, is to refinance the mortgage without the cosigner or wait until you sell the property, at which point you can buy your next home without a cosigner.
How do cosigners on home loans affect taxes?
Borrowers get to deduct mortgage interest and property taxes when filing their tax returns, but you as the cosigner don’t reap these benefits. Plus, if you help the borrower by giving them money for the down payment, it may be subject to the gift tax on your tax return.
Can you have a cosigner on a VA mortgage?
Yes, you can have a cosigner on a U.S. Department of Veterans Affairs loan, but unlike other types of mortgage cosigners, the cosigner must live with the borrower in the home. In addition, the cosigner needs to be another qualifying veteran, service member, or a spouse of a qualifying buyer.
What’s the difference between a cosigner and a co-borrower?
Both cosigners and co-borrowers sign a mortgage with the primary borrower to help strengthen the application; they’re also both on the hook financially should the primary borrower not keep up with payments. However, cosigners only guarantee the loan, but they do not live in the home, nor do they have any ownership in the home; co-borrowers on a mortgage share ownership of the home, and their name appears on the title.
Photo credit: iStock/tonefotografia
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