Is Having a Cosigner for a Mortgage a Safe Move?

There are many things to consider before buying a home and whether or not you need a cosigner on your mortgage is one of them. A cosigner is someone who goes on a mortgage application alongside primary borrowers who are not fully qualified for the loan on their own. If your mortgage application is weaker than you would like, and you have trouble getting approved, adding a cosigner to your mortgage could be a solution. The cosigner can help shore up the primary borrower’s profile, which includes their debt, credit and income, making the loan application more attractive to the mortgage lender.

In general, while a cosigner will be on various loan documents, including the note, the mortgage and the deed of trust, they will not be on title to the property, and will not sign the deed. Importantly, the cosigner’s role is strictly on the loan application, and they have no ownership of the property.

In this article, we cover who is permitted to be a cosigner, how they can be helpful to you, what they can’t do for you, and the risks of being added to someone else’s mortgage application.

Cosigner eligibility

To be eligible as a cosigner, you must have a family relationship with the primary borrower, such as being a parent, grandparent, sibling, aunt or uncle. You can also be eligible if you have a “family type relationship” with the primary borrower. This can include someone with whom you have a close and long-term relationship with. The purpose of this type of restriction is to eliminate the possibility of a cosigner being someone who might have a vested interest in selling the property, like a realtor, a mortgage broker, or a developer. Each could benefit if your loan application is approved, and as a result, they are ineligible. 

The cosigner must be a US citizen or a permanent resident. In some cases, lenders may also require that the cosigner live in the same state as the primary borrower and as the property that is being purchased.

Ways a cosigner can help you

The main advantage of adding a cosigner to your mortgage is that they can help alleviate any weakness in a primary borrower's profile. Mortgage lenders underwrite loans using various criteria, including an applicant’s loan-to-value (LTV) ratio, their debt-to-income (DTI) ratio and their credit score. 

If you are a borrower that is weak in all three categories, and have no previous history of paying a monthly housing expense, you might not be approved for the loan. While you could decide to wait on buying a house, and instead choose to rent, while building up your financial profile, you could alternatively add a cosigner to your loan. If the cosigner has good or excellent credit, with  a low DTI, they could add enough strength to the primary borrower’s loan application, and get it approved. 

The addition of the cosigner provides the mortgage lender with an extra level of security, lowering the risk of approving the loan. If the primary borrower is unable to make the payments, then the cosigner will presumably step in and make the necessary payments. And if the primary borrower defaults on their mortgage, the lender will be able to pursue remedies from the cosigner.

What a cosigner can’t do for you

Although a cosigner can help you strengthen your mortgage application, there are limits to what they can do.

• Down payment: Adding a cosigner to your loan will not erase the down payment. The Federal National Mortgage Association, also known as “Fannie Mae” has set guidelines in place, requiring the LTV ratio on the property being purchased to not exceed 95%. This means that a 5% down payment will always be necessary, and this payment must come from the primary borrower’s funds. Though the cosigner may increase the amount of the down payment, the minimum requirement must be paid by the primary borrower.
• DTI ratio: Mortgage lenders impose a maximum DTI of 43% on the primary borrower. This means that if the primary borrower has a DTI higher than that, even if you add a cosigner that drops the average DTI below the 43% threshold, you will not qualify for the loan.
• Credit: The addition of a cosigner may not help you if your credit is too low. The minimum credit score for a conventional mortgage is 620. For an FHA insured mortgage, the credit score minimum is 580, though you may still be eligible with a lower credit score if you put down a down payment of 10% or more. However, if you fail to meet these minimum credit score requirements, a cosigner will not be able to help you gain approval for the loan.

Potential risks to the cosigner

While many might view cosigning a mortgage as rather straightforward, it may come with some risks to you. Importantly, cosigning a mortgage is not a singular event. You will remain legally part of the mortgage until it is paid off. This could hinder your ability to obtain credit in the future, and this additional obligation will appear on your credit report. And this may be counted as a liability against the cosigner by future lenders. Furthermore, if the primary borrower makes late payments, this will affect your own credit score. And finally, if the primary borrower were to default on the mortgage, the lender will pursue you to pay off the remaining balance.

Conclusion

Adding a cosigner to your mortgage can help you get approved for a mortgage if your application is less than stellar. However, it is not the answer to everything and can come with its own set of risks to you and to the cosigner themselves. As always, before commiting to a mortgage, make sure that you will stay on top of it and make the necessary payments. The last thing you want is to lock yourself into a situation where you will lose control of your finances.