When a Cosigner Makes Sense
Do you need a cosigner? Maybe you’ve been asked to help out a relative and cosign on a mortgage? It’s long been a practice for parents to help out their kids buy their first home when needed. Cosigning isn’t as pervasive as it once was, primarily due to changes in lending guidelines, but it’s still available. What are the primary roles of a cosigner? Let’s take a look at how and how not cosigning works.
What is a Cosigner
A cosigner is someone that agrees to be a responsible party on any credit obligation someone else has taken on. Many times a cosigner agrees to pay a credit card payment if it becomes delinquent. Or, if the same account goes into collection, the cosigner will be contacted to pay the outstanding balance. A cosigner can expect however that any negative information reported on the primary borrower’s account will appear on the cosigner’s credit report. This means a primary borrow can start making payments 30 days past the due date and often without the cosigner knowing about it, the negative credit information from the primary borrower will appear on and damage the cosigner’s credit report.
When someone applies for a mortgage and credit is pulled, sometimes the credit history isn’t up to par. For whatever reason, such as late payments, collection accounts or previous bankruptcy, the loan application will be turned down regardless of how much someone makes or the size of a down payment as it relates to conventional and government-backed home loans. Someone has damaged credit? No problem, get a cosigner who has great credit and have them cosign on the note. But with a mortgage, someone’s good credit can’t overcome someone else’s bad credit. It’s just the same when two people apply for a mortgage together. Say that a couple applies for a mortgage and one spouse has great credit and the other has poor credit. The lender will use the lower credit score for qualifying, ignoring the borrower with the better credit.
A cosigner can work out when borrowers need a boost in monthly income in which to qualify. The lender will then add all income and debts of the primary borrowers as well as the cosigners when reviewing credit, income and debt ratios. If a couple has debt ratios of say 55 and the maximum recommended ratio is 43, then a cosigner can help out with additional income. If the additional income drops the debt ratios down to 43, then the loan may proceed. However, conventional loans, while accepting cosigners, still ask the primary borrowers to qualify based upon their own income and debt, essentially making the cosigners’ contribution of no use.
FHA loans are a bit more accommodating and only require a 3.5% down payment. Cosigners should be related to the primary borrowers and when a cosigner is needed, the additional income can help. Family members are those related by blood. When a cosigner is needed, Conventional, FHA and Jumbo loan programs can help.