Mortgage Financing and Co-Signers

If you have applied for a mortgage, but have had a hard time qualifying for the amount that you had hoped for, a co-signer may be your best option. Mortgage lenders have to follow strict guidelines on the income that can be used for mortgage qualification purposes. If you have unverifiable, unstable, or unusable income, adding a co-signer to your mortgage may be your only option. Employment types that have often had trouble documenting their income to mortgage lenders include: self-employed, commissioned, and tip compensated individuals. If the mortgage lender will not use some or all of your income, a co-signer with good credit, stable employment, and moderate to high income should increase your buying power.

The Federal Housing Administration (FHA) guidelines allow co-signers to be used. They can be family members or sometimes close friends where there is an established relationship with the borrower. Co-signers in general need to have strong credit scores, stable employment, and decent income. FHA guidelines allow the co-signers income and credit to be used with the borrowers to qualify for the mortgage. The co-signers income, assets, and debts are all considered in determining the creditworthiness for the mortgage.

The reason a mortgage lender allows a co-signer to be added to a mortgage, is because they add an additional guarantee that the mortgage will be paid. Anyone considering this option should be aware of the risks and obligations associated with being a co-signer. If the borrower fails to make the mortgage payment, both the borrower's and co-signers credit will be negatively impacted. According to FHA, co-signers do not hold ownership interest in the property, but they are liable for the mortgage payment if the borrower becomes delinquent. Also, a co-signer cannot have a financial interest in the sale of the property, unless they are legally related to the borrower. This guideline is designed to prevent a seller, real estate agent, or builder from co-signing for an individual buying the house they are selling or have an interest in selling.

Co-signers are primarily used if the borrower does not qualify for the mortgage applied for based on their income and debts. A co-signer may not help if the borrower has an unacceptable credit history and/or low credit scores. A co-signer is responsible for paying the mortgage if the borrower fails to make the payment. Although, they must sign the loan application, disclosures, and all closing documents, except the security instrument. What this means to the co-signer is if the loan goes into default, they do not have the right to sell the property. Even though, according to the mortgage document, the co-signer is legally obligated to pay the mortgage if the borrower goes into default.

The only way to remove a co-signer from a mortgage is to pay off the loan. The borrower and co-signer should stay in contact with their mortgage lender after the loan is closed to find out when the borrower is able to qualify for a new mortgage on their own. As soon as the borrower qualifies for a new mortgage on their own and the current interest rate is inline or below their current rate, the loan should be refinanced.