Qualifying for a mortgage loan can be one of the biggest financial challenges you face. In fact, you may not realize how difficult it is to get a mortgage until you complete an application. There's a laundry list of qualifications you have to meet, and if you fall short in any one area, a mortgage lender might reject your application. A rejection can leave you frustrated and angry, but a cosigner can help you qualify for a mortgage.
If your mortgage lender allows non-occupant co-borrowers on loans, applying for a mortgage with a cosigner can help you meet the lender’s basic qualifications. A cosigner is someone who doesn't have an interest in your property, yet they can help you qualify for a loan because their income and assets are taken into consideration when the application goes through underwriting. A cosigner strengthens your home loan application because this person promises to pay the loan if you can’t.
Here are three ways a cosigner can help you qualify for mortgage:
1. Provides a Stronger Employment History
Getting approved for a mortgage loan requires at least two years of consecutive employment, preferably with the same employer. If you’ve recently graduated from college and just hired for your first job, or if you have a history of job hopping from career to career, a bank might reject your application despite the fact that you earn enough to afford a mortgage payment. This is where it makes sense to have a cosigner.
When applying for a mortgage, the mortgage lender not only looks at your employment record, but also the employment record of your cosigner. If your cosigner has a long, stable history of employment, this can compensate for your short employment history and help you qualify.
A cosigner is also beneficial if you're self-employed. As a self-employed borrower, you need at least two years of profitable income. But even with this information, it can be harder to qualify for a mortgage. If you write off too many expenses on your tax return, it can appear as if you earn less on paper. Since the bank also uses your cosigner’s income for qualification purposes, the higher income helps you purchase sooner.
2. A Co-signer Can Fix a Debt-to-Income Problem
Too much debt can also create problems when applying for a mortgage loan. Depending on the type of mortgage, your total monthly debt payments cannot exceed 36% to 43% of your gross income. This includes the monthly mortgage payment. After falling in love with a house, you might be confident in your ability to afford the property. But if you have student loans, auto loans and credit cards, these payments might push your DTI beyond 43%, and the bank may reject your loan. Your odds of qualifying can improve with a cosigner. The lender will use your combined income, assets and debts when underwriting the loan, which can result in a lower combined DTI. For this to work, you need to choose a cosigner with little debt of his own
But although a cosigner can lower your DTI and help you qualify for a mortgage, this might not be the smartest move from a financial standpoint. You're ultimately responsible for the mortgage, not your cosigner. So it’s important to get a mortgage you can comfortably afford, or else you could end up house broke or run into financial hardship.
3. You Don’t Have a Credit History
When it comes to applying for a mortgage, not having a credit history is sometimes just as bad as having terrible credit. If you've never had a credit card, an auto loan or a student loan, you might enjoy zero debt and peace of mind. But without any type of credit history, a bank doesn’t know if you're responsible enough to manage a mortgage. Even if you earn enough money to afford a mortgage and you have a sizable down payment, your lack of credit history can keep you on the sideline. The bank might approve your mortgage if you have a cosigner with good credit.
There is, however, a difference between using a cosigner with no credit history and a bad credit history. In the case of bad credit, a cosigner may not help you qualify for the loan, or help you get better mortgage terms. When mortgage lenders work with two applicants and two different sets of credit scores, it's customary for lenders to use the lowest of the two scores for qualification purposes. It doesn't matter if your cosigner has a perfect 850 credit score. If your credit score is in the 500 or 600 range, you might not qualify for the mortgage, or you could pay a higher mortgage rate.