Can You Have a Co-signer on a Mortgage Loan?

Qualifying for a mortgage can be a tall order. Lenders generally want to see a healthy credit score and sufficient income to make sure you can cover your mortgage payments. If those things are lacking from your mortgage application, bringing on a co-signer may help you on the road to homeownership.

A co-signer is a person who essentially vouches for you and agrees to assume responsibility for the loan if you stop making your payments. Let’s take a closer look at what it means to apply for a mortgage with a co-signer.

What is a Co-signer?

A co-signer is someone who’s listed on your mortgage application and is essentially opting to take on responsibility for the loan if you default on your payments. While a co-signer is not the primary borrower, they are essentially vouching for your loan by opting in to serve as a backup payee. Regardless of who is making payments, the loan will show up on both of your credit reports.

A positive payment history on the mortgage loan can improve your and your co-signer’s credit, but the opposite is also true. And if you default on your loan, your co-signer will be responsible for the debt.

Co-signer vs. Co-borrower

A co-signer on a mortgage does not have an ownership interest in the home. A co-borrower, on the other hand, is a co-applicant on the loan and has joint ownership of the property. They’re alike in that co-signers and co-borrowers are both responsible for repaying the mortgage.

Why Consider a Co-signer on Your Mortgage?

You may consider or need to apply for a mortgage with a co-signer if:

You Have Bad Credit

Applying with a creditworthy co-signer could improve your chances of qualifying for a mortgage. A co-signer can help remove some of the risk for the lender if there is concern about your ability to make on-time payments.

You’re Hoping to Unlock a Lower Interest Rate

Having a co-signer on your loan application may help you qualify for a better mortgage rate. That could translate to huge savings over the life of the loan.

You Want a Larger Loan Amount

In some cases, bringing on a co-signer may increase the amount the lender is willing to loan you. That can come in handy if you don’t qualify for enough money on your own.

The Responsibilities of a Co-signer

When someone chooses to co-sign on a mortgage loan, they’re agreeing to guarantee the debt. Doing so means that:

• They’re making a long-term financial commitment (most mortgages have repayment terms that last 15, 20 or 30 years).
• They’ll have joint liability for the mortgage — and will have to assume monthly payments if the main borrower defaults.
• The loan will appear on their credit report.
• The primary borrower’s payment history will impact their own credit score, for better or worse. That means late payments could cause a financial headache for them.

Qualifications for a Mortgage Co-signer

Every mortgage lender is different. According to Experian®, which is one of the main credit reporting agencies, co-signers will likely need to have:

A Good Credit History

Co-signers usually need good to excellent credit. A minimum credit score of 670 is often required.

Stable Income and Employment

Mortgage lenders want reassurance that the monthly loan payments will be paid. To that end, you can expect them to verify the co-signer’s employment history and income.

A Low Debt-to-Income Ratio (DTI)

The co-signer’s DTI shows lenders how much of their monthly income is going toward debt payments. A DTI that’s less than 50% is ideal, but the threshold can vary from lender to lender.

Potential Risks for Co-signers

When someone co-signs for a mortgage, they’re taking responsibility for the home loan. Here are some potential risks of doing so, according to the Federal Trade Commission (FTC):

It Puts Their Credit at Risk

The main risk for the co-signer is that their own credit is on the line. If the main borrower fails to make good on their monthly payments, it could drag down both of their credit scores. A home foreclosure could also be a major source of stress.

It Could Majorly Disrupt Their Finances

If the co-signer has to assume the mortgage payments, that could amount to a huge financial responsibility. That burden may affect their ability to pay their own bills and reach their financial goals.

It Could Make it Harder to Qualify for Future Financing

Co-signing for a mortgage will increase their DTI, which could impact their eligibility for loans or credit cards in the future. It may also make it harder for them to refinance their own mortgage.

If They Offer Collateral, They’re Putting Those Assets at Risk

If the co-signer uses their car or other asset to secure the loan, they could lose that collateral if the primary borrower defaults on their mortgage.

It May Damage the Relationship

A co-signer is usually a family member, loved one, or close friend of the primary borrower. If things go sideways, it could create a rift in the relationship.

Alternatives to Having a Co-signer

If you prefer not to bring a co-signer into the mortgage application process, consider these alternatives:

Save for a Larger Down Payment

Applying for a mortgage with a larger down payment could increase your chances of getting approved. The bigger your down payment, the less you have to borrow.

The minimum down payment will depend on the type of loan you choose. Some conventional loans require anywhere from 3% to 5% down. Federal Housing Administration (FHA) loans require just 3.5%.

You can also explore down payment assistance programs, which can be particularly helpful if you’re a first-time homebuyer. However, it’s important to consider that a down payment of 20% is a requirement for certain types of loans if you don’t want to take on additional mortgage insurance.

Improve Your Credit

If a low credit score is your main barrier, improving your credit could be a game-changer. According to the credit reporting agency Experian®, you can boost your score by:

• Checking your credit report and disputing any errors, which may include instances of identity fraud
• Consistently making on-time payments
• Reducing your debt, which will bring down your DTI
• Keeping old credit accounts open (closing them could increase your credit utilization ratio, which is the amount of your available credit you’re currently using)
• Limiting new credit applications

There are also programs like Experian Boost® that allow consumers to boost their credit score by making on-time bill payments on regular recurring expenses like utilities.

Opt for a Different Loan Program

Some mortgage loans have looser eligibility requirements. That includes the following government-backed loan programs:

• FHA loans: These mortgages have flexible down payment requirements, low closing costs, and lower minimum credit scores.
• U.S. Department of Veterans Affairs (VA) loans: Qualifying borrowers can get approval with no down payment and a lower credit score. These loans are for military veterans, National Guard members, certain reservists, and surviving spouses of deceased veterans.
• U.S. Department of Agriculture (USDA) loans: These mortgages, which are designed for borrowers in rural areas, have lower down-payment requirements.

How to Decide if a Co-signer is Right for You

The decision to apply for a mortgage with a co-signer is a big one. Your financial situation and home-buying goals will determine if it’s the right path for you. Consider the following steps before making a decision:

Assess Your Financial Situation

Are you able to comfortably afford a down payment, closing costs, and monthly mortgage payments? As the homeowner, you’ll also need to maintain the home and cover the costs of any repairs that pop up in the future.

Decide if You’re Comfortable Putting Someone Else’s Financial Health at Risk

If there are missed payments or you default on your loan, it could negatively impact your co-signer. It could also damage your relationship with the co-signer if anything happens with the loan to break your trust with the person.

Have an Open and Honest Conversation With Your Potential Co-signer

Think hard about who you want to ask to be a co-signer — then keep the lines of communication open. Listen to any concerns they may have, and answer their questions honestly.

The Bottom Line

There are both risks and rewards to signing on to a loan with a co-signer. Make sure to evaluate all your options and ensure you and your co-signer are on the same page before moving forward with this type of transaction.