Document Signing

Bringing on a Mortgage Co-Signer

After searching for what seems like forever, you’ve finally found the ideal home. But when it comes time to get a loan, you’re told you don’t qualify for a mortgage. That’s when you might consider getting a co-signer. Here are some advantages and disadvantages if you decide to go that route. You’ll also want to be sure and consult with your personal PERL loan officer.

Why a mortgage co-signer might be needed

A co-signer can be a good idea if you’re set on a property that’s just out of your price range, or if you have poor or no credit. Although you know you will be able to make the monthly mortgage payments, your lender needs to know that as well. There needs to be a guarantee that the money lent to a potentially risky borrower will be paid back, and that’s where a co-signer is beneficial.

What is co-signing?

The person who applies for a mortgage is the occupying borrower, while a co-signer (typically a friend or family member) usually doesn’t live at the property and is considered a non-occupant co-borrower. This person co-signs the mortgage or deed of trust note, adding the security of their income and credit history against the loan. Both individuals then become co-credit applicants and take on the financial risk of the mortgage together. That means the co-signer also owns the home, whether they live in it or not.

Calculating debt-to-income ratio with a co-signer

Your debt-to-income ratio influences both the approval of a mortgage and how large a mortgage you can get. This is essentially how much income you have compared with your debts, including college and car loans. Calculating the DTI ratio with a co-signer usually is done by combining you and your co-signer’s incomes, which should boost your overall DTI to a number that will be approved. Keep in mind, however, that your co-signer’s debts also will be examined and factored in to create a blended debt-to-income ratio. Toward that end, you want to make sure you select a mortgage co-signer with high income and little debt to help offset your numbers.

How liable is a co-signer?

A co-signer assumes the financial risk of buying a home with you, so if something unforeseen happens and you are unable to make mortgage payments, the co-signer will be contacted to pay. If anything happens to affect the occupying borrower’s financial situation—such as the loss of a job or severe medical problems—the co-signer is responsible for payments. In addition, if you fall behind on the loan, the full amount of the mortgage payments will be reported on both of your credit reports.

Who shouldn’t you ask to co-sign a loan?

Co-signers should be people who are rooting for you to pay off the loan rather than someone with an interest in owning the house, which is a possibility if they take over paying off the property. Avoid co-signers who could make money by facilitating this real estate transaction, including the home seller or the builder/developer.

Why a co-signer doesn’t solve everything

Although a co-signer’s income can offset weaknesses in the occupant borrower’s loan application, no co-signer can erase a significant problem with your credit history. Before placing a co-signer at risk, make sure you are willing and able to make the mortgage payments and to maintain homeownership. Never take your co-signer for granted, and depend on them only in the worst-case scenario.

And as always, don’t hesitate to call your PERL loan officer if you have any questions at all!