You found the perfect house; unfortunately, the loan officer told you that your debt to income ratio is too high. The debt to income ratio is a simple formula lenders use to determine the maximum monthly mortgage payment. Many first-time homebuyers saddled with student loans, credit card debt and car payments often find it difficult to qualify for a mortgage.
What can you do to qualify for the house?
The solution is a cosigner.
The FHA loan program permits a mortgage co-signer. The cosigner is an additional applicant on the mortgage application. The income, assets, liabilities, and credit history are joined with the borrower/homebuyer in determining mortgage approval. If the combination of income and debt is within the debt to income ratio, the loan will be approved, providing all the other requirements of the FHA home loan are met. A co-signer's good credit and higher income can help support an applicant with a poor credit history.
Cosigners are required to have a valid Social Security number and must reside in the United States or its territories. Cosigners must sign all loan papers and may or may not be on the title for the home; and are liable for repaying the mortgage if the borrower/homebuyer does not pay the mortgage.
Who can be a cosigner?
FHA cosigners who are related by blood, marriage, or law include:
aunts & uncles, children, nieces-nephews, parents, siblings, stepchildren, spouses, and unrelated individuals who can document a longstanding, substantial family like relationship not arising out of the loan transaction are also permitted co-signers.
Cosigners must provide the lender with two years' employment income and residency. Non-permanent aliens are permitted cosigners so long as the main borrower is a US citizen and the primary resident.
Only a one-unit house or FHA approved condominium can be financed with the minimum FHA down payment when using a cosigner.
The FHA prohibits a non-occupying co-borrower to purchase investment properties or rental units.
The only way to remove the co-signer from the loan is to refinance the mortgage, although the FHA offers an easy refinance option with the FHA streamline refinance program.
The dark side of co-signing
If the borrower defaults on the loan, the co-signer is legally obligated to repay the entire mortgage balance in the event of a mortgage default. And that’s not all:
The debt obligation will also show up on the cosigner's credit report. And if the borrower misses a payment, the late payment will show up on the cosigner's credit report.
The co-signed loan can affect the cosigner’s ability to obtain additional credit under their name.
Frequently Asked Questions About FHA Cosigners
Q. Can I buy a house with a 635-credit score?
A. The FHA will permit an applicant with a 500 credit score with a 10% down payment, however, most lenders require a credit score at least 580.
Q. Can you have a cosigner with a first-time home buyer?
Q. Can you have a non-occupying co-borrower on an FHA loan?
Q. Do late payments affect the cosigner?
Q. Does FHA give you money?
Q. Does FHA require a 2-year work history?
A. The lender must document two years of previous employment, military service, or schooling and explain any employment gaps. Previous history in the current position is not required.