By: Ask Bill
Submitted: 2010-12-13 04:40:09 | Word Count: 610
A few years back, my uncle approached my mother for her help in applying for a mortgage loan. According to his banker, his income was not sufficient to qualify him for the mortgage loan. If my mother could become his mortgage cosigner, the combined income and credit history would likely increase his chances. Unfortunately, due to certain financial restraints, my mother had to decline his request; she assumed that she would have to share the mortgage payments with him and that was not possible at the time. Eventually my uncle found someone else and was granted a loan.
Like my mother, many people are confused with the terms cosigner and co-borrower. Was she correct in assuming that she would have to share the payments if she became a mortgage cosigner? In a way, she was. A co-borrower is someone whose name is included in the loan application and his/her status is similar to that of a borrower. The income and credit rating of both the primary borrower and the co-borrower are usually taken into account in determining the loan application. Both parties are equally obligated to repay the loan. Generally, a co-borrower also has ownership interest in the mortgage property.
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On the other hand, a cosigner usually does not have any ownership interest, and is only obligated to repay the loan if the borrower defaults on his/her payments. In a way, a cosigner acts as a form of guarantee to the loan. This is why one should always be comfortable with the borrower’s ability to repay the loan before agreeing to become a cosigner. My mother had thought that she would have to share the monthly loan payments with my uncle, when in fact, she would not have needed to pay a single penny if my uncle was fully capable in the repayment (which he was).
So how does one go about getting a mortgage with a cosigner? Generally, a cosigner would be needed if the borrower has bad credit or no credit at all, a high debt-to-income (DTI) ratio, insufficient income, or need to borrow an amount more than he can afford. If you have sufficient income and good DTI ratio but lousy credit, a cosigner with excellent credit may help you qualify for the mortgage and possibly help you get a lower interest rate. If you have high outstanding debts or low income, then a cosigner with good and consistent income as well as good credit may help although that may not be enough. You may want to discuss this with your banker or get pre-qualified before making any decisions. Bear in mind that for Federal Housing Administration (FHA) loans, your cosigner should be a blood relative or a non-relative whom you can prove to have a long-standing relationship with.
Home mortgages are something that are becoming increasingly common these days. Chances are your cosigner is already on a mortgage loan himself. So the question is can someone who is already on a loan cosign for your loan? For FHA loan, the answer is yes. FHA also allows you to have a cosigner who is not living in the house, which is not always the case with other conventional loans. For non-FHA loans, it will usually depend on the cosigner’s credit history and his DTI ratios. As long as the credit history is favorable and the DTI ratio is around 33% or below, there should no problem for that person to cosign on your mortgage while having his own mortgage loan. However, be reminded that it is still dependent on the creditor as different creditors may have different criteria.
