What Is a Mortgage Co-Signer?

Owning a home is a dream that many people have from a young age. Yet, homeownership sometimes seems out of reach. You need a substantial down payment and your credit score and debt-to-income ratios must qualify. In the face of these requirements, many are forced to put their dreams on hold. 

The good news is that even if you don’t qualify for a mortgage, a co-signer may help you meet the home loan requirements. 

In this article, discover all you need to know about mortgage co-signers and the alternatives.

Understanding Mortgage Co-Signers

Most people need a mortgage to buy a property, but what happens if you don’t qualify? Some lenders will grant you a mortgage if you can find a mortgage co-signer who acts as a safety net. A co-signer with a good credit history increases your chance of receiving loan approval. 

Being a co-signer is a heavy responsibility. A co-signer must pay your mortgage if you default. That person also risks a downgraded credit score. If you find a co-signer, there are no guarantees that you will receive the loan. The bank will assess your financial position and the property value before agreeing to lend you the money. 

There may be alternatives to finding a co-signer. These include improving your credit score and paying off some of your debts before applying for a mortgage. You could also make a larger down payment to reduce the risk to the lender.   

Co-Signer vs. Co-Borrower: What’s the Difference?

Co-signers and co-borrowers both have a part to play in securing a mortgage, but there are differences, including:

• Ownership: A co-signer is a guarantor. They have no ownership claim on the property. The co-borrower shares ownership of the financed property with the primary borrower.
• Responsibility: The co-signer is responsible for payments only if the borrower fails to make payments. The co-borrower and primary borrower share responsibility for payments. 
• Decision-making: The co-signer has limited decision-making rights on how the loan funds are used. The co-borrower shares the decision-making on fund allocation with the primary borrower.   

How Does Mortgage Co-Signer Process Work?

You apply for a mortgage, but the bank turns you down, so you need a co-signer for loan approval. You approach a friend or family member, who agrees to co-sign. 

During the application process, the bank will evaluate the co-signer’s income and credit history along with yours. Your co-signer must also provide documentation supporting their income and credit history. 

In most cases, the co-signer will carry responsibility jointly and severally with you. This means the lender can pursue you and the co-signer separately for the debt repayment. They may also choose to pursue both you and the co-signer. 

To illustrate with an example:

You want to buy your first home. You have a good job and can afford to make the required payments, but you have a limited credit history. The mortgage provider needs a more extensive credit history, so you approach your parents.

Your parents both work and they have excellent credit scores. They agree and submit their financial information along with yours. Your chances of getting loan approval increase significantly because of the co-signer. The loan is approved. If you always pay on time, everybody achieves their goals. 

If, for any reason, you are unable to fulfill your obligations, your parents will have to make payments to prevent the bank from foreclosing on your home. This may put your parents in a difficult financial position and damage their credit score if they can’t make payments. 

Who Can Be a Mortgage Co-Signer?

The law does not restrict who may become a co-signer, but you’ll usually need someone with a credit score of 620 or more. The person who cosigns must have a stable income to cover their financial obligations and the mortgage payments if you default. The lender will consider the co-signer’s current debt obligations when they decide whether to approve the mortgage. To have someone willing to be a co-signer, you will likely need a long and established relationship with that person. 

Co-signer for Conventional Loans

A co-signer on a conventional loan should have the following qualifications: 

• Minimum credit score: A co-signer should have a credit score of at least 620. 
• Affordability: The bank will want to know that the co-signer can cover their debt commitments and the loan payments should you default.
• A steady income: The co-signer should have permanent employment and be able to prove their income history. 
• U.S. resident: The co-signer must lawfully reside in the U.S.

Co-Signer for FHA Loans

Qualifying for a Federal Housing Administration (FHA) loan is easier than a conventional loan. The credit rating requirements and down payments are lower. However, you may still need a co-signer to meet the loan requirements: 

• Minimum credit score: A credit score of at least 620. 
• Verifiable income: The co-signer must earn enough to cover all their commitments and your loan repayments should you default. 
• Employment stability: The co-signer must present proof of regular employment. 

What Are the Responsibilities of a Co-Signer?

A mortgage co-signer takes on significant responsibilities. They must:

• Guarantee loan repayment
• Make the repayment to prevent foreclosure if the primary borrower defaults
• Pay any late payment fees that accrue 

The co-signer must know that:

• Delinquent payments could affect their credit score and interest rates on future loans.
• A foreclosed mortgage could affect their ability to get a loan.

Pros and Cons of Having a Co-Signer on Your Mortgage

There are several benefits to having a co-signer but also be aware of the drawbacks. 

Pros

• Improve your loan approval prospects: If your credit score or income falls short of the lender’s requirements, a co-signer could significantly improve your chances of getting mortgage approval. 
• Lower interest rates: Your mortgage interest rate is based on the risk of default, among other things. A co-signer with a strong credit history and substantial income could reduce the bank’s risk, so you can negotiate a lower interest rate and save a significant amount of money over the term.  
• First-time homeowner support: First-time homeowners may battle to save enough for the down payment or have a limited credit history. If you’re a first-time buyer, a co-signer could help you get your foot in the homeownership door.  

Cons

• Risk to the co-signer: Your co-signer takes a significant risk in agreeing to co-sign for the mortgage. If you default, the co-signer is legally obliged to pay the debt. 
• Strained relationships: If you cannot pay and your co-signer becomes legally responsible for your payments, your relationship may become strained. 

How Long Does a Co-Signer Stay on a Mortgage?

The co-signer usually remains on the mortgage for the entire term. This may be up to 30 years. However, there are ways to release the co-signer from the mortgage obligation:

• Loan refinancing: The most common way to remove a co-signer from a mortgage happens when the borrower refinances the mortgage. If the borrower’s credit score and income improve, the time may come when they can finance the loan without needing a co-signer. In this case, the borrower can apply for a new loan with new terms and conditions, releasing the co-signer from the mortgage. 
• Selling the property: When you sell the property, you’ll pay the mortgage in full. The co-signer is released from the obligation. 
• Negotiate with the lender: Lenders are sometimes willing to consider releasing the co-signer once you have a history of regular on-time payments. 

Find the Best Mortgage Offers with Co-Signers from Benzinga’s Top Lenders

The chart below is designed to help you find the best mortgage for property financing. 

Alternatives to Co-Signing a Mortgage

It’s good to know you have alternatives if you struggle to get mortgage approval. Consider these:  

• Government-backed loans: These loans are backed by government agencies and departments. The applications are available online, so they are easy to access. These loans focus on various economic areas, like small businesses, students and homeowners. Government loans offer borrowers an alternative funding source often with very favorable terms. The government guarantees the loans, reducing the lender’s risk. 
• Homebuyer assistance programs: Homebuyer assistance programs come with lower interest rates. It is easier to qualify for loans under these programs because the credit score and down payment requirements may be more flexible. 

Explore Your Options

Don’t give up on your dream of a home. You may have a close friend or family member willing to cosign. Openly explore your rights and responsibilities and consult a mortgage professional before you take the plunge. Understand that if you default, there are serious repercussions for the co-signer.  

Frequently Asked Questions