The convenience and financial flexibility a home equity loan affords you doesn't mean anything if you can't qualify. To get a home equity loan, you have to meet the lender's income or credit requirements. If you can't, that doesn't necessarily mean you're out of options. If you can find a willing co-signer, you may qualify yet.
Why You Need a Co-signer
Two major factors in qualifying for a home equity loan are credit and income. You must show a debt-to-income ratio of no greater than 40 percent. If your ratio is higher, a co-signer with enough income and low debt can push the ratio under the qualifying guidelines. On the other hand, if your income is good, but your credit is poor, a co-signer with strong credit can make the bank more likely to approve you.
What You Need
When you fill out the application, include the co-signer's information. Indicate that the property is in your name, but the loan will be to both of you. Submit your application along with financial information for both yourself and the co-signer. The co-signer will sign all applicable disclosures and authorize the lender to run his credit report. The lender will calculate the debt-to-income ratio using both credit reports and both sets of financial documents. If you qualify with the co-signer, the process will move forward.
Once you are ready to close, the co-signer attends settlement with you. You both sign the promissory note, which is the contract between you and the lender. With both of you signing the note, you are both obligated for the repayment of the loan. The mortgage document, which serves to pledge the collateral, will be signed solely by you, since you are the owner of record. Any other documents related to the loan repayment have to be signed by both of you.
Once the loan is closed, both you and the co-signer are on the hook for the payments. It doesn't matter to the lender whether one or both of you make the payments as long as they're paid. If you fail to make the payments, however, it can take legal action against both of you. As long as the loan is active, you are both responsible. If, eventually, you wish to remove the co-signer, you will have to prove that you can afford the payments on your own. If the lender determines the co-signer is no longer needed, you'll have to sign a modification or an entirely new set of documents depending on the lender's policy and procedure.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.