Credit denial is a shock when you have your heart set on your dream home. You can give up on your dream -- or you can change your application. Many young couples look to co-signers to sweeten the mortgage application. The problem with co-signers is choosing the right person. Your co-signer needs good credit, a decent income and -- for many lenders -- a job. However, some mortgage loan companies may approve a co-signer without a job if he has other stable sources of income such as retirement income, rental income or income from the stock market.
"Unemployed" doesn't necessarily mean no income sources. If your applicant has no source of income, he can't cosign for your mortgage. A co-signer is responsible for paying the bill if you default. No mortgage lender extends a loan to a person without a verifiable source of income. If you choose a retired parent or a self-employed friend, you may have a shot at a mortgage loan. Like you, the co-signer must go through the underwriting process to qualify for the loan based on his personal financial information.
As the primary applicant, your co-signer must meet all the lender's qualifications, from credit score requirements to proof of income. The mortgage lender requires copies of your co-signer's tax returns and credit reports to verify this information. Without a standard job, your co-signer must provide documentation that he can pay the mortgage note in the event you default. In addition to his tax returns, he may need to provide bank statements or a Social Security income verification letter, if applicable.
Your co-signer assumes a large financial risk by signing on your dotted line. In the event you fail to pay the bill, the lender can take him to court for the money owed. You enter into a mortgage contract with the best of intentions. Protect your cosigner if the worst happens and you can't pay the bill. The Federal Trade Commission recommends implementing safeguards to protect your cosigner in the event you default, such as asking the lender to notify the co-signer when you do not pay the bill or limiting the co-signer's liability to the principal of the loan.
Alternatives to Co-Signing
Your mortgage company sets its own policies regarding approving applications. Even with income sources, your co-signer may not be approved under the bank’s underwriting criteria. You have other alternatives to co-signing. Many banks reconsider applications if you increase the down payment on the property. Borrow money from your co-signer to increase your down payment. You may also ask your friend or parent to co-sign a smaller personal loan to increase the down payment. If your credit is the issue, you may be added to a friend or relative’s credit account as an authorized user to increase your credit score over time. When your credit score increases, you can try your mortgage application again.
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