When Do You Need a Co-Signer for a Home Loan?
When you buy a home, you may need another person to be a cosigner for the mortgage loan. A cosigner assists the borrower by taking on responsibility for repaying the mortgage note. If the principal borrower falls behind on payments or defaults on the loan, the cosigner can (and will) be held legally responsible for the debt. For this reason, approach cosigner arrangements with great caution.
Credit History and Qualification
Loan companies qualify applicants by running credit checks and verifying income. They examine credit reports, bank statements, paycheck stubs, and income tax returns. If the borrower does not qualify for the full purchase price of a home, the lender may require a cosigner to take on some of the responsibility for repayment of the loan in case of default. In this way, a cosigner helps increase the amount of money a borrower can obtain.
A cosigner may also be required if the borrower is too young to have an established credit history. Although the borrower's verified income, credit report, and credit card history might be satisfactory, his minimal credit history makes it impossible for the lender to establish a dependable credit rating.
Unverified or Uncertain Income
A cosigner also may have to help if the borrower has uncertain, intermittent, or unverifiable income. Self-employed freelancers, for example, may be paid enough money each year but they earn it at irregular intervals. As independent contractors, their earnings are not guaranteed by their clients and can dry up or disappear, making it difficult for them to pay high monthly mortgage amounts.
Cosigners may be required for borrowers who are not U.S. residents. Foreign investors in real estate, for example, may be required to provide a U.S.-based cosigner to help guarantee mortgage repayment--defaulted mortgage loans cannot be claimed against individuals in foreign courts. Each lender sets guidelines on this.
Lenders may require cosigners in other circumstances, too, most of them related to the borrower’s financial condition. If the borrower has a previous bankruptcy, a loan default, a foreclosure, multiple late payments, high outstanding debt, too many credit accounts, or is applying for a loan that would result in a high ratio of monthly payment to monthly income, the lender can demand a cosigner. The cosigner is also subject to credit review before the loan is approved.