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.
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.
According to David Myers of the Chicago Tribune, a lender may require co-signers to reside in the state where the loan is issued. 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.
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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.
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.
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 recommends instituting safeguards to protect your cosigner such as negotiating with the lender to limit his liability to the loan principal only. He may also want to set up a notification system with the lender so if you fall behind he can step in to save his credit score.
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