For many, buying a home is considered the American dream. But sometimes there are roadblocks to homeownership. Well our site is designed to break through those roadblocks and provide solutions to home buyers. A common occurrence primarily in young, first time buyers is not enough income to qualify. Lenders use a term called “debt to income ratio” to qualify borrowers. If the number is too high, then it is difficult to lend. Although there is a solution called a mortgage cosigner. First of all, not all mortgage loans allow this but there are two great options we will share with you today. We also provide examples of cosigner scenarios and a warning that applies to all credit types.
Why Use a Cosigner?
There are several reasons for using a mortgage cosigner. The most common request for a cosigner comes from borrowers with low credit scores. Although cosigners are allowed, one cannot overcome too much derogatory credit. Basically that means all borrowers on the loan must credit qualify. So a mortgage cosigner can be used when a primary borrower is short on income and/or assets. The biggest benefit is that a mortgage cosigner does not have to live in the home too. Lenders call this a nonoccupying co borrower. Here are a few examples where a mortgage cosigner helps.
Buying a home for a college student
A strategy for some families involves parents buying a home for a child to attend college. One way to finance a home for an adult child to live in is using an investment property loan. But another option with a lower down payment requirement and typically better rate is to cosign. Foremost, the student must have a good credit score. Though this may be tough for an 18 year old to have. The credit doesn’t have to be extensive to be the primary borrower. Cosigner mortgages do not even require the primary borrower to have any income! Perfect for undergraduate or graduate students. So instead of paying high rent around college campuses, ask about how these types of loans could help you.
First time buyers that need a little help from mom and dad
The old days of mom or dad going to the bank and saying “Give my daughter a loan, I’m good for it.” is gone. But a family member with good credit and income can still help. Maybe because a young buyer(s) is just starting out, the income is not so high and there are student loans. This could cause the buyer to have a high debt ratio. So this is another situation where a mortgage cosigner could help. Maybe even the down payment comes from the cosigner. That is perfectly fine!
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We have several solutions even for deferred or IBR loans
Buying a home for parents retirement
Being a cosigner for a mortgage isn’t just for young buyers. Another great example is cosigning for senior parents so they have a good home to live in. Often social security may not cover the ability to buy a particular home. Well, the senior’s children could cosign for their parents. In this case the parent(s) can live in the house and the cosigning children do not have to occupy the home. But you can come visit! What a great way to take care of your parents.
Mortgage Cosigner Loan Types
As mentioned, most loans only allow a co borrower if that person will live in the house. Practically all loans allow this scenario. But when the primary occupant does not qualify and a cosigner is needed, there are two solutions.
FHA Home Loan Cosigner
FHA is a very popular home loan for buyers looking for a low down payment. This mortgage actually allows for as little as 3.5% down. Additionally the down payment may come as a gift or from the cosigner on the loan. Not only does FHA have great down payment options, it is also lenient on credit. Buyers do need to show the ability to pay the mortgage payment, but a few late payments may be ok. Medical collections may even be left open.
Conventional Loan Cosigner
Conventional loans offer another alternative for using a co borrower that will not live in the home. Financing offers as little as 5% down which may come from any borrower. Also, if the buyers put down 20% or more, this reduces the payment even further. The reason is that there would not be any mortgage insurance on the loan. Check out our popular article “When does PMI stop on my mortgage?”.
So if you are a buyer and are interested in purchasing a home yet don’t qualify on your own, ask us about using a co-borrower. We will compare the two mortgage cosigner loan types and thoroughly explain the differences to you. Then you are able to make an informed decision.
Cosigners are on the Hook too!
One last thing. While going over credit report debts, it is very common to hear someone state “No, that is my child’s car loan. I didn’t make those late payments and I’m not responsible for it.” So whether cosigning for a car, student loan, or mortgage, remember that a cosigner is just as responsible as the borrower! Therefore mortgage late payments, foreclosure, or similar, would affect both the borrower and co borrower. So if you are considering signing for someone else, make sure to have a thorough discussion. Plus ask us questions!