Risky mortgage applicants are often asked to provide additional surety that the bill is going to be paid on time. In many cases, this means adding a co-signer to the mix. When banks are unwilling to take a risk on an applicant, a third-party co-signer is asked to step in. The co-signer signs all the loan documents guaranteeing payment on the loan if the primary borrower defaults. In order to qualify as the co-signer, you need to meet all underwriting criteria including residency status, income, debts, assets and credit history.
Mortgage Underwriting Requirements
When you submit your loan application, it goes to the underwriters for approval. Each loan program uses its own standards for approval including income levels, credit history, debts and assets. When you fail underwriting criteria, you receive a denial. By adding a co-signer, you get a second bite at the apple. The lender considers the co-signer's criteria as though he were a borrower himself. Your co-signer goes through the same underwriting process you did and must pass all points before you receive your approval.
Possible Co-signer Residency Requirement
Some lenders may require co-signers to reside in the state where the loan is issued, because it is difficult for lenders to pursue collection efforts against co-signers who live in different states. Applicants for Federal Housing Administration loans must use a co-signer who maintain a primary residence in the United States. The exceptions to this rule are active members of the military stationed overseas and United States citizens living abroad.
Relationship Doesn't Matter
Often when people think of co-signers, a parent or a spouse comes to mind. In actuality, many lenders do not care about the personal relationship between co-signers. You may use a friend or business partner to co-sign your loan. FHA loans require that the co-signer not have a financial interest in the sale of the property in question; for example, you can't use the real estate agent or broker for the property.
Co-Signer's Mortgage Closing Obligation
Once you receive your approval, the final requirement of being a mortgage co-signer occurs at closing. The co-signer must sign all loan documents agreeing to the terms of the loan before you get the keys. The co-signer does not sign the security instruments because while he is agreeing to pay back the loan if you default, he does not receive any rights to the property.
FTC Co-signer Considerations
Your co-signer is assuming a large amount of risk on your behalf. Because he gets no property rights, he has little recourse if you default on your loan. The Federal Trade Commission (FTC) requires lenders to provide the co-signer with a co-signer's notice. This notice details all the obligations of a co-signer, even including the potential for paying late fees and collection costs.
Before co-signing a loan, the FTC recommends that you negotiate with the lender by asking only for the responsibility of paying the principal balance only -- not the interest -- in case the primary borrower defaults.
- U.S. Department of Housing and Urban Development: Section A. Borrower Eligibility Requirements
- Freddie Mac: Your Step-By-Step Mortgage Guide
- Federal Trade Commission: Co-Signing a Loan
- Money Under 30: Should You Get a Co-Signer on Your Mortgage?
- Experian. "7 Things Lenders Look at Besides Your Credit Score." Accessed June 5, 2020.
- Experian. "Debt-to-Income Ratio." Accessed June 5, 2020.
- Experian. "What Is a Rapid Rescore? Is It Something I Should Consider?" Accessed June 5, 2020.
- Experian. "What Is Peer-to-Peer Lending?" Accessed June 5, 2020.
- First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed June 5, 2020.
- Federal Student Aid. "Federal Student Loans: Basics for Students," Pages 2-3. Accessed June 5, 2020.
- GovLoans.gov. "Stafford Loans for Students." Accessed June 5, 2020.
- Wells Fargo. "Cosign a Private Student Loan." Accessed June 5, 2020.
Leigh Thompson began writing in 2007 and specializes in creating content for websites. She has been published online in various capacities. Thompson has an associate degree in information technology from the University of Kansas and is working on a bachelor's degree in business and personal finance.