Banks are sometimes reluctant to approve mortgage applications for young adults who have never previously owned a home. You can strengthen the credit history portion of your application if you ask a friend or relative with more a established credit history to co-sign on the loan. However, when you involve a co-signer you get the good as well as the bad, and the co-signer's debt levels could harm your chances of obtaining a mortgage.
When you submit a loan application a mortgage underwriter calculates your existing monthly debt payments as a percentage of your total income. Debt-to-income ratio limits vary between institutions, but federal government-sponsored mortgage entity Fannie Mae only buys mortgages if DTI ratios are capped at 45 percent. If your co-signer already has a mortgage on another property then both that loan and your proposed mortgage are added into the DTI equation. Regardless of your co-signer's high credit score, if the overall DTI ratio exceeds the acceptable limit you cannot qualify for the loan.
While DTI ratios encompass your total debt payments, lenders also calculate your housing payment as a percentage of your gross income. The Federal Housing Administration only insures loans with housing ratios of 31 percent or less. If your co-signer has limited income, a high mortgage payment may cause the housing ratio based on your combined incomes to exceed your lender's limits. As with high DTI ratios, excessive housing ratios normally lead to loan applications being rejected.
While you cannot do much about the debts that you and the co-signer are obliged to pay, you can sometimes appeal to your lender to include additional sources of income in the DTI equation. Lenders typically accept wages, retirement income and Social Security payments as income for loan applications. However, rules vary on the use of rental income payments, royalties, commissions and bonuses. If your co-signer receives non-wage income, you may have to shop around for a lender willing to accept hard-to-verify income sources for DTI purposes.
Co-signers do not necessarily have an ownership stake in the home being financed but co-signers and primary borrowers are equally responsible for repaying the debt. Rules pertaining to DTI are designed to protect lenders from loaning funds to people who cannot afford to repay the debt. If you and your co-signer lack the income to cover the debt payment, look for a house that fits into your budget rather than trying to find a way to take on a mammoth debt you cannot afford.
- Thinkstock/Comstock/Getty Images