Co-Signers for Home Loans: Getting Approved

Co-Signers for Home Loans: Getting Approved

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If you're trying to apply for a mortgage but fall short of the lender’s underwriting criteria, you may want to consider adding a co-signer to your loan. This can help if you’re just beginning to establish your credit history or recently experienced a financial setback. Co-signers can help make up for deficiencies in an applicant’s credit and income qualifications, increasing the chances of getting approval or better loan terms.

Who Can Co-Sign a Mortgage Application?

In theory, anyone can co-sign a home loan by submitting their credit report, income information, current assets, and debts. Realistically, you should look for a close friend or relative who is willing and able to take on the responsibilities of co-signing a major loan. A good co-signer will have:

  • High income
  • Strong credit history
  • Low debt-to-income ratio
  • Trust in your ability to fulfill the loan terms

A co-signer takes on several financial obligations that make trust a critical part of the arrangement. Co-signers are responsible for any debt that the primary borrower proves unable to cover due to default, foreclosure or even death. Moreover, a co-signed mortgage will appear on the co-signer’s credit report, so any late payments from the borrower will reduce the credit scores of both the borrower and the co-signer.

Benefits of Having a Co-Signer

A co-signer can improve a mortgage application in two main areas: credit and income. If you fall short in either category, recruiting a co-signer with excellent credit and high income can improve your chances of approval. In particular, first-time homebuyers with little or no established credit can benefit greatly from a strong co-signer.

A co-signer can also help primary borrowers with poor credit, low income or a high DTI. In such cases, the co-signer’s income will be taken into account when the lender considers whether the loan is affordable to the borrower. Adding the co-signer's income to the application can significantly improve the odds of approval. However, keep in mind that a co-signer’s DTI will be considered too. The co-signer must be financially capable of adding your mortgage to their existing debt.

Limitations of a Co-Signer

Co-signers can't fix every issue. For example, a co-signer's credit score won't help you qualify for loan programs that require each individual on the application to meet a minimum score. If you have a history of foreclosures, lenders may be less willing to overlook your record simply because you have a co-signer. Co-signers are also unable to help cover the down payment and cash reserve requirements of a mortgage, nor can they help pay for new debts like insurance and property taxes. Such costs are the sole responsibility of the primary borrower.

Co-Signers vs. Co-Borrowers

What's important here are the differences between a co-signer and a co-borrower. Co-borrowers have the same payment obligations and ownership rights as primary borrowers. Therefore, co-borrowers must help pay for upfront and ongoing costs like down payments, taxes and insurance. By contrast, co-signers retain no ownership in the property and are only responsible for paying if the primary borrower defaults. Unlike co-borrowers, co-signers aren't obligated to help cover down payments or monthly mortgage expenses.

How to Remove a Co-Signer From a Mortgage

There are several ways to remove a co-signer from your mortgage: refinancing into a new loan, requesting an assumption or even selling the property altogether. Some of these methods are more reliable—and realistic—than others.

Removing a Co-Signer by Refinancing Your Home Loan

A refinance is the most practical way to remove a co-signer. Many lenders will be reluctant to let the primary borrower eliminate the backing of a co-signer, but few will object to being paid off by another bank. However, refinancing does pose some challenges. The closing costs for a refinance may cost you thousands of dollars, and your mortgage rate might also increase. Additionally, you'll need to be able to requalify for the refinance on your own, which is why it's generally a good idea to refinance a few years after your original mortgage, after you've had the chance to build up your credit.

Borrowers seeking a more affordable way to remove a co-signer might consider a streamline refinance. Government agencies like the VA and FHA offer streamline refinance programs that offer lower closing costs. Unlike a standard refinance, streamline refinancing doesn't require a new appraisal and has reduced qualification requirements.

Typical streamline refinances don't remove your co-signer from your mortgage automatically. You will need to request this directly through your lender, which may require you to re-qualify for your mortgage terms. Make sure you discuss the requirements for co-signer removal with your lender to confirm that it's an option.

Removing a Co-Signer by Selling Your Home

Another reliable way to remove a co-signer from your home loan is by selling your property. This closes the loan altogether and removes all liability for both you and the co-signer. Of course, selling means that you’ll need to find a new home to live in. Depending on your local real estate market, it may also take time to close a sale. You'll also need to pay closing costs when selling, making this option less ideal for many borrowers.

Transferring a Mortgage Loan Through an Assumption

A final option that may not be available for all borrowers is to remove a co-signer through an assumption. In a loan assumption, your lender agrees to remove the co-signer and relieve them of any further responsibility for the loan. Assumptions are typically available to borrowers with government-sponsored mortgages from the FHA, VA or USDA, although it may be permitted for some other loans. Check with your mortgage lender or consult your loan documents to see whether it's possible.

To request an assumption, you need to first review your loan documents to make sure it's a permitted option. Lenders are often hesitant to remove co-signers, since their involvement reduces the lender's risk. If your lender is willing to consider an assumption, you must provide new proof of your improved financial situation and may also have to re-qualify for your mortgage terms.

Kenny Zhu

Kenny is a Banking and Mortgage Research Analyst for ValuePenguin and has worked in the financial industry since 2013. Previously, Kenny was a Senior Investment Analyst at PFM Asset Management LLC. He holds a Bachelors of Science from Carnegie Mellon University, where he majored in International Relations & Politics. He is a CFA® charterholder.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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