Does Having a Co-Signer Help?

When you bought your first car, mom or dad was probably there to help you qualify for the car loan by being your co-signer. That made them jointly obligated for repayment of the loan, since you likely had no credit history on file at that time. Their established credit stood in to “prop up” your lack of loan experience. Does it work the same way when you are buying a home? It depends on which loan you choose, and how many of the applicants will be living in the new home after close of escrow.

If you select an FHA loan, the answer

is yes.

When you apply for an FHA loan, no distinction will be made as to who will occupy the house and who will not. All parties to the loan will be evaluated with regards to credit, with the loan decision being made on the worst credit profile of the group. All income will be pooled to offset the group’s monthly debts. This is one of the few loan products that allow “non-occupying co-borrowers” – those parties to the loan who will not live in the new house – to participate as equals in the qualifying process. Generally your co-signers must be family members.

In most other situations, the borrower needs to qualify on their own merit before any co-signers will be evaluated. Generally, you need to have good enough credit for the loan program on your own: Co-signers cannot be used to offset your poor credit report. This is why we sometimes say it’s better to have no credit than bad credit. With regard to income, loans that allow for “non-occupying co-borrowers” usually allow for higher debt ratios for your part of the qualification. When you add the co-borrowers, the total debts must be in line with original loan guidelines.

Due to automated underwriting, the need for co-signers has greatly diminished. Borrowers with decent credit are sometimes approved with debt ratios of up to 45%. That can be good news for all parties concerned, since the co-signer’s financial picture can be altered when they participate in your loan. Not only would they jointly hold title to your house, but your loan is on their credit report. Should you be late or miss payments, their credit will be adversely affected. Even if you do make payments on time, your loan payment will be counted with the co-signer’s other debts when they apply for financing. Even if they quit claim their interest to the title of your house, the loan remains in place against them until you can qualify to refinance on your own.

In today’s market, there are enough loan programs available that the inconvenience of co-signing can usually be avoided. To keep those options open to you, always be aware of keeping your own credit profile as clean as you can.