When someone cosigns a mortgage with you, she makes herself responsible for paying the bank if you don't. If your home-buying budget is too tight to get the house you want, having a cosigner can make a difference. If your credit isn't good enough to qualify for a mortgage, however, a cosigner won't help.
The Cosigner Effect
When you apply for a mortgage, you need a credit history and credit score good enough to satisfy the lender's underwriters. Cosigning doesn't affect your score at all: if your credit is less than ideal, a cosigner's great credit won't change that. The benefit of having a cosigner is that you can add his monthly income to yours, which allows for larger monthly mortgage payments and therefore a bigger mortgage. Some lenders only count 50 percent of the cosigner's income or don't allow cosigners at all.
If your credit score is only fair, a cosigner can't bump it up -- but there's no absolute rule on what credit score counts as good, bad or fair. Scores on the FICO system run from 300 to 850, for instance, so a 790 is excellent. The Vantage scoring system runs from 501 to 990, which makes a 790 only fair. Lenders in 2013 accepted applicants with lower scores than in 2012, according to the Los Angeles Times. If a changing market makes your fair score acceptable, adding a cosigner's income might close the deal.
The better the rest of your application looks, the easier it is to get a loan with only fair credit. If your income is steady, if you don't carry too much debt and if you have cash reserves for emergencies, lenders may cut you some slack on your credit score. Qualifying with a cosigner's income can help, but the lender also considers the cosigner's debts. If she has a good income but lots of debts of her own to pay, she may not be much help.
If you'd like to pump your credit score up from fair to good, there are steps you can take to make it happen. Don't apply for any new credit cards or other loans in the six months before you apply for the mortgage. Pay down your card balances, but don't close any accounts. That gives you a good debt-to-available-credit ratio. Order free copies of your credit report through the Annual Credit Report website. If you find any false information, get it fixed.
- Mortgage Professor: Can Co-Signing Help? What Are the Hazards?
- CNN: Great Credit Score? Think Again
- Los Angeles Times: Signs of an Easing of Credit Requirements Are Surfacing
- Kiplinger: Improve Your Credit Score Before Applying for a Loan Read more at http://www.kiplinger.com/article/credit/T017-C001-S001-improve-your-credit-score-before-applying-for-a-lo.html#JWrizHuxfRZz1IIG.99
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.