As the housing market appears dim due to rising rates and decreased affordability, being able…
Featuring Guest Author: Kristen Livingston, Loan Officer
Cosigning a Mortgage
At some point in your life, you might decide to buy a home with a mortgage. While most mortgage lenders will make the homebuying process as smooth as possible, there may be a financial roadblock on your end that prevents you from getting to the finish line. Even if you’re in a favorable position to put a down payment, pay the closing costs, and consistently make monthly payments, what if you’re not able to qualify?
Luckily, your home buying journey doesn’t have to stop there. For many homeowners, getting turned away from a mortgage pre-approval can be a discouraging roadblock in trying to secure their dream home. This can be due to many factors, including poor credit, other personal loans, or the overall risk that the mortgage lender perceives from your financial situation. Before you think you lost all hope, consider having someone cosign the mortgage.
To cosign a mortgage means to sign the loan jointly with another borrower. The cosigner takes on the legal obligation to be a “backup” source for repayment and step in when one is unable to perform their financial responsibilities. This concept has helped many borrowers achieve homeownership and can even help you too.
Reasons to Cosign a Mortgage
It is very common for lenders to see borrowers cosigning on a loan. Typically, a cosigner is a close friend or family member of the borrower and is helping this person qualify for a loan when they do not qualify on their own. Cosigning a mortgage isn’t always necessary, but may be beneficial for the following reasons:
- Help an applicant obtain financing
- Help an applicant build credit
- Reduce financial risk
A realistic example of one of these reasons is a college student or recent graduate who wants to buy but has minimal credit history and no income. The student’s parents are willing to cosign on the loan because it would be a smart investment and they have the income and credit required to get the loan approved. In this scenario, the parents do not need to live in the home and if their income can support the loan qualification, we are not required to document any income from the student.
What Do I Need to Get Started?
As the occupying borrower, you will get started with the application process just as if you were to obtain a mortgage on your own. The cosigner will be treated the same as any other loan applicant. Depending on your mortgage lender’s requirements, you will need to provide similar documentation as the occupying borrower, which may include:
- Loan application: The cosigner will complete a loan application which gives the lender the cosigner’s employment and residence history.
- Financial information: The cosigner will need to provide similar financial documentation that one would be required to submit for a loan application. Some of these include W-2s, tax returns, paystubs, assets, and a credit report.
- Relationship to Cosigner: Depending on your mortgage lender, you may be expected to explain your relationship to the borrower. Some lenders and programs require the cosigner to be a close family member rather than just a friend. Remember to ask your mortgage lender their policy on cosigners before proceeding with the application.
As these items only cover the basic requirements, your lender may communicate with you and the cosigner to provide extra documentation or verify any submitted information.
How Does Cosigning a Mortgage Work?
Usually, lenders first look at the application and paperwork for the person wanting to purchase or refinance the home. If it looks like they will not qualify on their own, a common solution is to ask if a cosigner is an option. If someone is willing to cosign, the lender will request a loan application and the required documentation to confirm the loan qualification will work with both parties. They will analyze the credit and income for the borrower and cosigner to make sure that the aggregate debt and income of each party fit within the qualifying parameters. The credit score that we will use for our loan decision will be the lower, middle score between each party.
Most loan programs will allow a cosigner, but when you start getting into the larger loan amounts there can be more restrictions regarding cosigners. As a reminder, consult with your mortgage lender about their procedure on cosigning a mortgage before applying.
Things to Know about Cosigning a Mortgage
Though many borrowers succeed in securing a cosigner, there are a few things to keep in mind before moving forward:
Credit. The cosigner will always appear on the mortgage unless the loan is refinanced. This means that the mortgage will appear not only on the borrower’s credit but also on the cosigner’s credit. This is something for the cosigner to consider if they are looking to purchase a home of their own soon.
Payments. For most loan programs, if you can show that the borrower has been making the mortgage payment on time for the most recent 12 months, then we can exclude that payment from the cosigner’s loan qualification in the event that they try to apply for their own mortgage.
Trust. The cosigner must also consider and trust the other person on the loan because if a payment is late, that will also be reflected on their credit report which will impact their score.
Your mortgage lender will be able to go in-depth with you on other possible risks of cosigning a mortgage.
How a Cosigner Helped Her Daughter
As one of our top producers with over eight years in the industry, Kristen Livingston has worked with several mortgage situations where a cosigner was involved. Recently, she worked with two borrowers who brought on a mom to cosign their mortgage.
I had a recent closing where a mom was helping a daughter and her boyfriend purchase their first home. One had recently graduated, and the other one was still in school. The mom recognized that homes were quickly appreciating in the area and instead of assisting with rent –not to mention in an area where rent was rising—it was a good decision for them to buy and invest rather than rent. With the addition of the mom’s income and funds for the down payment, the loan was a slam dunk.
There are several ways to structure a loan, so it is important that you work with a lender that understands the loan guidelines. There may be additional solutions other than cosigning such as gift funds. There is also a special consideration when children are providing housing for their parents. You will want to make sure you are working with a loan officer that can analyze your scenario from all angles to make sure you are getting the best loan.
Ready to Apply?
Cosigning allows more homeowners to achieve financial freedom in their future. Essentially, it opens doors to important milestones that individuals wouldn’t be able to achieve on their own. Although finding a cosigner is a great solution, you may want to explore other ways that can increase your ability to qualify on your own.
For example, individuals working on their credit may want to look at ways to repair their credit score before bringing someone on as a cosigner. If you have other debts that are hindering your ability to qualify, think of strategies to pay those off so that you’re clear of any burdening debt.
If these options are not attainable, then having someone cosign will be very beneficial to your financial goals. Contact us if you are thinking of cosigning or are considering having someone cosign on your loan and we will be more than happy to assist you.
About the Guest Author
Kristen Livingston decided to join the mortgage business in 2013 after working on the Institutional Sales Team for an investment management firm in San Francisco. As a Mortgage Consultant with RWM Home Loans, she is passionate about helping clients with their mortgage needs and works hard to make the loan process as smooth as possible. She completed the Future Leaders Program with California MBA and is an active member of the Young Mortgage Professional Association. Kristen graduated from Loyola Marymount University in Los Angeles with a BA in Finance and Marketing. Learn more.
Financing details are for educational purposes only. All views and opinions do not constitute financial or legal advice and reflect requirements at the time of publication. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445