If someone in better financial shape than you cosigns your mortgage, that often works out great. With your cosigner's credit and income backing you up, you may become a much better prospect for a good deal from your lender. That includes not only a better interest rate but a larger mortgage, as a cosigner can give you a better debt-to-income ratio.
The debt-to-income ratio is used to determine how big a housing payment -- mortgage, homeowner and mortgage insurance, property taxes -- you can afford each month. The rule of thumb is that your payment shouldn't be more than 28 percent of your pretax monthly income. Your payment plus credit card bills, student loans and other monthly debt payments should be no higher than 36 percent. With an FHA-insured loan, those two DTIs can be as high as 29 percent and 41 percent, respectively.
If you have a cosigner on an FHA loan, it's no longer only your income that determines the DTI ratio, but your income plus the cosigner's. If your gross income is, say, $5,000 a month, 29 percent of your income is $1,450. You would qualify for a mortgage with payments of that amount or lower. With a cosigner who brings in $10,000 a month, you might qualify for mortgage with payments of $4,350. Lenders for conventional mortgages, however, may refuse to consider the cosigner's income, or may consider only 50 percent of it.
No lender -- regardless of the type of mortgage -- just tacks on the cosigner's income to yours. If you want your co-signer to deliver a larger mortgage, she has to undergo a DTI review just like you. If her $10,000-a-month income comes with, say, $5,000 in debt payments, equaling a 50 percent DTI, it won't help you qualify for a bigger mortgage payment. For conventional mortgages, the lender considers only 50 percent of the cosigner's income but 100 percent of her debt, further shrinking the potential help.
Stop and Think
Even with the help of a cosigner if you qualified for a $4,350 payment on a $5,000-a-month gross income, it wouldn't make it a good idea to sign that mortgage. Whatever you have left after your housing payment must cover living expenses, investment income and whatever fun you intend to have. If you're going to have trouble making the payments, consider looking at a smaller house. It's true that your cosigner is responsible for paying the bills if you can't -- but if you care about your relationship with your cosigner, you won't dump that on them.
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