Many young couples struggle to qualify for mortgages due to limited credit histories and very little cash to spare. If you fall into this group, you may be able to call on relatives for help if the lenders accept cosigners. A non-residing cosigner doesn't own or live in your house, but agrees to share the responsibility to repay the debt. The non-residing cosigner also has to follow the rules set by the lender.
Government Sponsored Enterprises
Government sponsored enterprises Fannie Mae and Freddie Mac keep the mortgage market moving in the United States by buying home loans from banks and lenders. These companies accept primary residence mortgages with cosigners as long as the loan amount does not exceed 95 percent of the property value. Your debt-to-income ratio as the borrower cannot exceed 50 percent. This means you can't get a loan if you spend over half your income on debt payments. According to Freddie Mac, the cosigner only has to make the loan payments if you default on the mortgage. In contrast, a co-borrower such as your significant other has a responsibility to pay on the debt during the entire loan term.
Federal Housing Administration
The Federal Housing Administration insures purchase mortgages where you make a down payment of 3 1/2 percent. The FHA covers some of the lender's lost revenue if you default on the loan. According to FHA rules, you can have a non-residing cosigner on your loan and the cosigner must sign all of the loan documents except the security instrument that ties the loan to the house. The lender must approve the loan on the basis of the creditworthiness of the borrowers and the cosigner. A non residing cosigner must have a primary residence in the United States, which rules out any uncles in Canada.
Freddie Mac, Fannie Mae and the FHA are only involved in some mortgages. Lenders keep a certain number of "portfolio" loans on their books. Rules for cosigners on portfolio loans vary from lender to lender. Some institutions don't allow cosigners. Simply put, the cosigner has no ownership rights to your home. So if you don't repay the mortgage, the cosigner may think twice about using his or her own money to save your home. Obviously, defaulting on a loan would hurt the cosigner's credit score. Due to the risks involved, many lenders only allow residing co-borrowers or cosigners.
Lenders have to follow the underwriting guidelines on anything approved by the FHA, Freddie Mac and Fannie Mae. However, the guidelines are minimums rather than maximums. You may find lenders have such tight guidelines that you won't be able to get a non-residing cosigner even on a Freddie Mac or FHA loan. In reality, such restrictions help homeowners as well as borrowers. Lenders don't want you getting into a situation where you are relying on relatives to keep you financially afloat.
- The Role of Mortgage Lenders
- Can I Add a Non-Occupant Borrower to a Mortgage for a Cash-Out Refinance?
- Conforming vs. Non-Conforming Mortgages
- What If the Co-Signer on a Mortgage Has a Lot of Debt?
- What Are the Requirements for Loan Co-signers?
- Habitability Laws for Mortgage
- Difference Between an Alternate Modification & a Home Affordable Loan Modification
- What Is a FHA Loan Endorsement?