Have you been asked to cosign by someone looking to get a home loan approval? You may be wondering why they would ask or how this affects you. This article will help you to understand both of these points.
Why Were You Asked To Cosign?
These are the top reasons that home loan applicants seek a co-borrower:
- Income: People may ask for a cosigner to include more income on their mortgage application. Higher income on the application can make it easier to get approved or borrow more from the lender.
- Credit score: Having someone with a higher credit score may help to secure a lower rate.
- Employment: Little or poor employment history can prevent mortgage approval. Having a cosigner with better employment history can aid in getting a mortgage.
Cosigning affects your credit and finances, so you must trust the person you're cosigning for. Should they be unable to pay the mortgage, the responsibility falls on you. Also, any late payments or foreclosures will negatively affect your credit score.
Additionally, this new debt could make it more difficult for you to get approved for future credit. Ironically, it could mean that the only way you could get a loan is by getting a cosigner, too.
While there may be an option for the cosigner to be released from the loan, you should still be prepared to take over the mortgage (and accept the risks) if this option is not available.
Cosigner Requirements: Occupant versus Non-Occupant
Non-occupant means that the cosigner will not live in the home, while occupant means that they will. Here's how that affects the loan:
For Conventional Loans
A non-occupant co-borrower on a conventional loan means that they are on the loan but not on the property's title. The co-borrower's credit is pulled, and the score is used to help determine loan qualification. However, the non-occupant co-borrower does not own the property.
For FHA Loans
There are some restrictions with an FHA loan when it comes to a non-occupant co-borrower. First, you can have up to two non-occupying co-applicants. Second, the person occupying the property must have no more than a 70% debt-to-income ratio when the downpayment is less than 20%.
Thirdly, non-occupant cosigners must be on both the title and the loan, and the property must be a single-family residence. Additionally, the non-occupant co-borrower must be a relative.
The Bottom Line
Of course, this article doesn't cover all the requirements for cosigning on a mortgage. But it does help you to better understand your responsibilities as a cosigner and how to qualify with one. Need help getting approved for a home loan on your own? Need more answers about cosigning on a mortgage? We're here to help! Contact us today for all your mortgage needs.