If you can’t qualify for a loan insured by the Federal Housing Administration on your own, you can ask a family member to help you by co-signing as a non-occupying co-signer. The property must be a single dwelling or one-unit home. Since using the property as a primary residence is not a requirement, a co-signer on an FHA mortgage loan can own her own home.
Co-Signer's Ownership Interest
A co-signer is as financially liable for repayment of a home loan as the primary borrower. But despite his financial obligation, a co-signer does not have an ownership interest in the property. When it comes to federal income tax deductions, a co-signer is not entitled to deduct any of the mortgage interest paid unless the primary borrower fails to make the monthly payments and the co-signer makes them instead, points out Bankrate tax adviser George Saenz. If your co-signer wants to be removed from the loan in the future, the only way is for you to qualify to refinance the loan on your own.
If you have poor credit, a co-signer who has good credit and a higher income can help you qualify for an FHA loan. A lender will consider your co-signer’s income, credit standing, assets and liabilities along with your own in determining whether to give you a loan. While a lender requires a co-signer on a mortgage loan to sign the loan application and promissory note, the co-signer’s signature is not required on the mortgage contract or deed of trust. Even though your co-signer won't have any ownership rights, if you don’t make the loan payments, the lender will expect your co-signer to repay all the loan, not just part of it. Defaulting on the loan will affect both your credit and that of your co-signer.
Meeting Co-Signer Requirements
Besides meeting the usual eligibility requirements -- such as having an adequate income, solid credit and low debt-to-income ratios -- to qualify for a loan, a person must meet other requirements to be a co-signer on an FHA loan. The individual must be a blood relative or else you must prove that a significant, long-time relationship exists between you. A non-occupying co-signer must have a principal residence in the U.S. unless he is in the military service and stationed overseas, according to HUD guidelines.
A person who cosigns an FHA home loan for you might have financed her own home through an FHA-approved lender. But as long as she meets the other requirements and her debt-to-income ratios doesn’t exceed the limits FHA allows, she can cosign with you on a loan. FHA lenders use debt-to-income ratios to determine if a borrower and co-signer can afford to make the loan payments. Under FHA guidelines, a borrower’s monthly housing expenses should not exceed 31 percent of her gross monthly income. To qualify for a loan, total monthly debt expenses should not exceed 43 percent.
- FHA.com: The Difference Between a Co-Borrower and a Co-Signer
- Bankrate.com: Mortgage Co-Signer Gets No Deductions
- Bills.com: Mortgage Cosigner
- HUD: Section A -- Borrower Eligibility Requirements
- FHA.com: FHA Requirements -- Debt Ratios
- Consumer Financial Protection Bureau. "What Is a Debt-to-Income ratio? Why Is the 43% Debt-to-Income Ratio Important?" Accessed Aug. 26, 2020.
- Federal Trade Commission. "Co-Signing a Loan." Accessed Aug. 24, 2020.
- Wells Fargo. "Secured Loans and Lines of Credit." Accessed Aug. 24, 2020.
- SoFi. "Using Collateral on a Personal Loan." Accessed Aug. 24, 2020.
- First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed Aug. 25, 2020.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.