Some couples find it tough to save up the cash for a down payment for a first time home. Even if you have some money saved up, you might find it hard to get a home loan if you have a less-than-stellar credit report or a limited income. With Federal Housing Administration (FHA) loans, you can get past some of these issues by introducing a co-signer into the equation. The loan cosigner's financial health may be able to boost your income and credit eligibility, which the lender can use to grant approval for your mortgage.
TL;DR (Too Long; Didn't Read)
You can use a co-signer for your FHA mortgage loan if the co-signer's income, credit and debt load are within FHA guidelines. The co-signer doesn't have to share ownership of the property, which means the co-signers name won't appear on your deed.
Overview of FHA Mortgage Loans
The FHA works with lenders to offer low-cost financing options to first time home buyers and other borrowers. The FHA insures a portion of your mortgage so that your lender receives some compensation if you default on the loan. When you buy a home with an FHA-insured loan, you only have to make a down payment of 3.5 percent compared with 20 percent on a conventional home loan. Aside from purchase mortgages, you can also refinance a home with an FHA loan.
FHA Cosigner Guidelines
A co-signer is someone who agrees to share the responsibility for repaying a debt such as mortgage, credit card or car loan. You can co-sign on an FHA loan even if you don't own the property being financed. To qualify as an FHA loan co-signer, you must have your principal residence in the United States, although the FHA does make some exceptions for citizens and members of the military who work overseas.
The co-signer and the primary borrower both sign the actual loan agreement or note. The primary borrower also signs a document called the security instrument, which legally attaches the loan to the home being financed.
Using Co-Signer to Improve DTI
You can't normally get an FHA loan if the monthly mortgage payment exceeds 31 percent of your monthly income. If your total debt payments exceed 43 percent of your income, you'll also be unable to qualify for a loan. If you can find a co-signer with a low debt-to-income ratio (DTI), you may be able to revive your flagging home ownership dreams because the lender looks at your combined income levels.
Likewise, most lenders require FHA borrowers to have minimum credit scores of between 580 and 620. Even with a co-signer, you can't get a loan if your score falls below these minimums, but a creditworthy co-signer may mean getting a lower interest rate.
Considerations and Risks for Co-Signers
If you default on your mortgage, your lender can sell your home to pay off the debt. A record of the foreclosure will remain on both your and your co-signer's credit report for up to seven years. You'll both struggle to borrow money in the meantime – whether for car loans, credit cards or mortgages – while the foreclosure remains on your reports.
Due to the risks involved, many people are reluctant to co-sign on FHA loans because they have to share the responsibility for repaying the loan without having the benefit of actually owning the home you're financing.