Can I Have a Cosigner on a Mortgage?

A mortgage cosigner helps individuals purchase a home when they face challenges securing a loan independently. A cosigner adds financial strength to a mortgage application, potentially improving approval chances or securing more favorable loan terms. This arrangement involves a significant financial commitment for all parties, requiring careful consideration of responsibilities.

Understanding the Cosigner’s Role

A mortgage cosigner is an individual who agrees to take on legal responsibility for the primary borrower’s loan if payments cannot be made. While the cosigner does not typically live in the home, they commit to repaying the loan if necessary.

The need for a cosigner often arises when a primary borrower might not independently meet a lender’s requirements. Common reasons include insufficient income to qualify for the desired loan amount, a high debt-to-income ratio, or a limited credit history. For instance, if a borrower’s income does not meet lender standards, a cosigner’s income can strengthen the application by improving the overall financial picture. Similarly, a limited or poor credit history can make it difficult for lenders to assess repayment ability, and a cosigner with good credit can make a substantial difference.

Key Considerations for All Parties

Lenders require cosigners to meet specific qualifications. They typically need a strong credit profile, often a credit score of 620 or higher for conventional loans, or potentially lower for FHA or VA loans (e.g., 580 for FHA). Cosigners also need to demonstrate a stable income and a manageable debt-to-income ratio, often below 43%. Most lenders require cosigners to be U.S. citizens or permanent residents.

Cosigning a mortgage carries implications for the cosigner’s financial standing and future borrowing capacity. The mortgage loan will appear on their credit report, impacting their debt-to-income ratio and potentially their ability to secure future loans, such as an auto loan or another mortgage. Any missed or late payments by the primary borrower will negatively affect the cosigner’s credit score. Conversely, consistent, on-time payments can positively influence the cosigner’s credit score.

For the primary borrower, a cosigner can improve the chances of loan approval and potentially lead to more favorable loan terms, such as better interest rates or a higher loan amount. This is because the cosigner’s strong financial background helps mitigate the lender’s risk. However, relying on a cosigner introduces an external dependency, and financial difficulties could strain the personal relationship due to shared legal liability.

The Mortgage Application Process with a Cosigner

Applying for a mortgage with a cosigner involves a structured process where both parties’ financial information is assessed. Lenders require documentation from both the primary borrower and the cosigner to evaluate their combined financial picture. This typically includes proof of identity, such as a Social Security number and driver’s license, along with proof of income like pay stubs, W-2 forms, and tax returns for at least two years.

Both individuals will also need to provide proof of assets, such as bank statements and investment account details, and disclose information on all existing debts. Lenders will conduct hard credit checks on both applicants to review their credit histories and scores. During the underwriting process, lenders assess the joint application, often considering the lower of the two credit scores when determining eligibility and loan terms. The combined income and debt-to-income ratio of both parties are also factored in to determine the overall affordability and risk.

Removing a Cosigner from the Mortgage

After a mortgage has been established with a cosigner, there are methods to remove them from the loan, though these typically require the primary borrower to demonstrate sufficient financial stability to assume sole responsibility. The most common approach is refinancing the mortgage. This involves the primary borrower applying for a new mortgage in their name only, using the new loan to pay off the existing one. For this to be feasible, the primary borrower must meet the lender’s current eligibility requirements, including having an improved credit score and sufficient income to qualify independently.

Another less common method involves loan assumption, where the primary borrower takes over the existing mortgage. However, many conventional mortgages contain “due-on-sale” clauses that prevent assumption, making refinancing the more prevalent option. Some lenders may also offer a specific cosigner release option within the original loan terms, allowing for removal after a certain number of on-time payments and a credit check of the primary borrower. Removing a cosigner often incurs costs associated with refinancing, such as closing costs, which can range from 2% to 5% of the new mortgage amount.