Can You Have a Cosigner on an FHA Loan?

You can have a cosigner on an FHA loan. An FHA loan is a mortgage insured by the Federal Housing Administration, designed to make homeownership more accessible. A cosigner strengthens an applicant’s financial profile, which can be crucial for securing home financing through FHA programs.

Understanding FHA Cosigner Eligibility

The Federal Housing Administration (FHA) permits various individuals to act as cosigners on an FHA loan. Non-occupant co-borrowers are allowed, meaning an individual can cosign without living in the property. For such arrangements, FHA guidelines generally require the non-occupant co-borrower to be a family member, such as a parent, grandparent, child, sibling, aunt, uncle, or in-law. All non-occupant co-borrowers must be U.S. citizens or have a principal residence in the U.S.

If multiple borrowers plan to live in the home, they are considered occupant co-borrowers. Their qualifications are assessed jointly to determine loan eligibility.

Financial Criteria for FHA Cosigners

FHA cosigners must meet the same financial standards as primary borrowers to qualify for the loan. A minimum credit score is required, typically 580 for the lowest 3.5% down payment option. If the credit score falls between 500 and 579, a higher down payment of at least 10% is generally required. Lenders, however, often impose their own minimum credit score requirements, which can be higher than the FHA’s baseline.

The cosigner’s income is included in the total household income calculation, which is used to assess the loan applicant’s ability to repay the mortgage. This income must be stable and verifiable, typically requiring at least a two-year employment history. Furthermore, the cosigner’s existing debts, along with the proposed new mortgage payment, will impact the overall debt-to-income (DTI) ratio for the loan application. While FHA guidelines generally look for a DTI ratio of 31% for housing expenses and 43% for total debt, higher ratios may be approved if significant compensating factors are present.

To verify these financial standards, cosigners will need to provide various financial documents to the lender. These commonly include recent pay stubs, W-2 forms from the past two years, federal tax returns, bank statements, and employment verification.

The Impact of a Cosigner on FHA Loan Approval

The presence of a cosigner can significantly enhance a primary borrower’s ability to obtain FHA loan approval. One primary benefit is the improvement of the debt-to-income (DTI) ratio. By combining the cosigner’s income with the primary borrower’s, the overall DTI can be lowered, making the application more favorable and helping to meet FHA qualification standards. This can be particularly helpful for borrowers whose income alone may not be sufficient to support the desired loan amount.

While the primary borrower must still meet FHA’s minimum credit score requirements, a cosigner with a strong credit profile can help mitigate a primary borrower’s less-than-perfect credit history. Lenders often consider the lowest credit score between the primary borrower and the cosigner, making the cosigner’s strong score a contributing factor to the overall application strength. A cosigner’s robust financial standing, including substantial cash reserves or a history of managing similar payment obligations, can also serve as a compensating factor. These factors may allow for slightly higher DTI ratios than typically permitted, providing more flexibility in the approval process.

Cosigners are often beneficial in common scenarios such as for first-time homebuyers who may have limited income history or established credit. Recent graduates or individuals with higher existing debts who need additional income to meet qualification standards also frequently benefit from having a cosigner on their FHA loan application.

Responsibilities of an FHA Loan Cosigner

Once an FHA loan is approved, a cosigner assumes significant legal and financial obligations. A cosigner is equally responsible for the entire loan amount. If the primary borrower defaults on payments, the lender has the right to pursue payment directly from the cosigner. This shared responsibility means the cosigner is legally bound by the loan terms.

The FHA loan will appear on the cosigner’s credit report, impacting their debt-to-income ratio and ability to secure future credit. This increased debt burden can limit their capacity to take on new loans. Default can severely damage the cosigner’s credit, lead to collection efforts, and potential legal action.

Being a cosigner does not automatically grant property ownership rights. Unless listed on the property title, cosigners have no legal claim to the home, despite being fully responsible for the mortgage debt. Their obligation is solely loan repayment.