Can You Have a Cosigner on a Mortgage?

It is possible to have a cosigner on a mortgage, a common practice that can help individuals achieve homeownership. A cosigner agrees to take on responsibility for repaying the mortgage loan alongside the primary borrower. This arrangement provides a financial safety net for the lender, as the cosigner’s credit history and income are considered during the application process. A cosigner legally obligates themselves to cover payments if the primary borrower defaults on the loan. This differs from a co-borrower, who typically shares both the responsibility for the loan and ownership of the property.

Situations Requiring a Cosigner

Borrowers often seek a cosigner for a mortgage when their financial profile alone does not meet a lender’s criteria. Insufficient income is a common reason, as the primary borrower’s earnings may not satisfy the lender’s requirements. A cosigner with stable income strengthens the application by adding their financial resources.

A high debt-to-income (DTI) ratio is another frequent scenario. Lenders assess DTI to determine how much of an applicant’s gross monthly income is allocated to debt payments. Adding a cosigner can help lower this ratio by incorporating their income.

Individuals with a limited or poor credit history may also benefit from a cosigner. Recent graduates or those with past financial setbacks might lack the established credit score necessary for approval. A cosigner with a strong credit history can provide the creditworthiness needed to secure the loan or obtain more favorable interest rates.

What Lenders Look For in a Cosigner

When evaluating a potential cosigner, lenders assess their financial health. A strong credit score is a primary consideration. For conventional loans, lenders prefer a cosigner to have a minimum credit score around 620, though scores of 670 or higher are viewed more favorably. FHA loans may allow a lower minimum score, sometimes down to 580.

Lenders also assess the cosigner’s stable income and employment history. They require documentation such as pay stubs, tax returns, or bank statements to verify income. The cosigner’s income is combined with the primary borrower’s income to determine the overall capacity to repay the loan.

A low debt-to-income (DTI) ratio is another important factor for cosigners. Lenders prefer a DTI ratio below 43%, though some loan programs, particularly FHA loans, may accept ratios up to 50% or slightly higher. Sufficient assets can also be a positive indicator, demonstrating financial stability.

Understanding Cosigner Obligations

Becoming a cosigner on a mortgage carries legal and financial responsibilities. A cosigner is legally obligated to repay the entire mortgage if the primary borrower fails to do so. If payments are missed, the lender can pursue the cosigner for the full outstanding amount, including late fees and collection costs. Lenders may even pursue the cosigner before the primary borrower for missed payments.

Cosigning can impact the cosigner’s credit score. While timely payments by the primary borrower positively reflect on the cosigner’s credit report, missed or late payments negatively affect it. This negative impact can persist on credit reports for up to seven years. The cosigned loan appears as debt on the cosigner’s credit report, which can increase their debt-to-income ratio and affect their own borrowing capacity for future loans.

Cosigners do not have ownership rights to the property, meaning they do not gain equity or tax benefits. Despite this, their personal assets could be at risk in case of default, as creditors may pursue legal actions like wage garnishments or asset seizures to recover the debt. Cosigners should understand this commitment and ensure they can cover payments if necessary.

Applying with a Cosigner

Applying for a mortgage with a cosigner involves specific steps to submit all necessary financial information. Both the primary borrower and the cosigner must gather documentation. This includes proof of income, such as recent pay stubs, W-2 forms, and sometimes tax returns for the past two years. Lenders verify employment history for both parties to assess income stability.

Bank statements are also required from both individuals to demonstrate sufficient assets and financial reserves. Both the primary borrower and the cosigner authorize the lender to pull their credit reports to evaluate creditworthiness. The application includes sections for both parties’ personal and financial details.

Once all documentation is compiled, the joint application is submitted to the chosen lender. The lender reviews the combined financial profiles, taking into account the income, debt, and credit history of both the primary borrower and the cosigner. This review determines the likelihood of loan approval and the mortgage terms.

Releasing a Cosigner from the Mortgage

Removing a cosigner from a mortgage is not an automatic process and requires formal action from the lender. They must be formally released from their obligation. The most common method for releasing a cosigner is through refinancing the mortgage. This involves the primary borrower applying for a new mortgage in their name only, which then pays off the existing cosigned loan.

For this to occur, the primary borrower must demonstrate sufficient financial improvement to qualify for the new loan independently. This means having a stronger credit score, a stable income, and a manageable debt-to-income ratio that meets the lender’s underwriting standards. Refinancing can involve closing costs, which range from 2% to 5% of the new mortgage amount.

Another less common option is a loan modification or assumption, where the lender may agree to change the terms of the existing mortgage to remove the cosigner. This is at the lender’s discretion and may require the primary borrower to show financial stability or a material change in circumstances. Some mortgage contracts may also include a specific cosigner release clause, though this is not standard. The primary borrower must meet all qualifications on their own to release the cosigner.