5 guidelines for using mortgage calculators with co-signers

September 13th, 2010

Co-signers for mortgage applications are becoming more and more necessary as the economy continues to reduce incomes and mortgage underwriting guidelines get tighter. Mortgage calculators can estimate your monthly payment, but they cannot tell you if you need a co-signer, or if your transaction is even eligible for using a co-signer. Here are five guidelines to follow if you need a co-signer for your new home loan or refinance mortgage.

(When discussing co-signers here we are referring to anyone who agrees to sign the mortgage documents and be legally liable for the payments, but will not occupy the property. These co-signers are known as non-occupant co-signers.)

1) Co-signer won’t cure bad credit

Perhaps the most important guideline for co-signers is that if you have poor credit, a co-signer will not help in qualifying. The credit scores and credit history of all borrowers are considered equally. Underwriting guidelines for conventional and FHA mortgages use the lowest applicable credit score for all applicants.

This means if you have several derogatory credit items, a charge off or judgment and a credit score below 500, getting a co-signer will not increase your credit profile and make you eligible for a mortgage. If you need a co-signer to help raise your income to debt ratio, make sure your co-signer has a credit history that is adequate for underwriting guidelines.

2) Relationship required

Generally speaking the co-signer on your mortgage needs to be related to you. Extenuating circumstances may provide for a long-time friend, co-worker or employer to co-sign on your mortgage, but in general there should be a family relationship. Uncles, cousins, step-brothers or step-sisters are all possible co-signers.

You need not provide a family tree to show your relationship, however most underwriters will request a letter of explanation from the co-signer as to why he or she is willing to co-sign and to include in the letter the relationship with you. Keep in mind the letter of explanation acts as an affidavit on a loan that is subject to Federal laws and enforcement.

3) Some lenders allow blended ratios

Using pre-qualification calculators will show you the approximate sales price and loan amount you may qualify for with a new home loan. If it is lower than you feel you can afford or the price of the home you are looking to purchase you may need to consider a co-signer to increase your income in your mortgage application package. If you are using a co-signer to qualify for a mortgage it is important to know if the loan program, or lender, you are using allows non-occupant co-signers and just as importantly if “blended ratios” are allowed.

30 Yr. Fixed - Refinance Rates from Our Lenders in California

Lenders
Rate
APR
Monthly Payment
LoanDepot, LLC
3.875%
4.044%
$705
Quicken Loans
4.500%
4.626%
$761
Rocket Mortgage
4.375%
4.500%
$749
 

Blended ratios are when the income of the borrower(s) and co-signer(s) are pooled together, as are the monthly debt obligations and then the income to debt ratios is calculated. For instance, if you make $2,250 per month and your brother who makes $3,250 per month is co-signing your total income, for the application package is $5,500 per month. Likewise, you may combine your debt payments. Enter the total income and the total debts into your pre-qualification calculator.

It is important to note that Fannie Mae does not blend ratios for non-occupant co-signers. Currently Freddie Mac and FHA allow blended ratio qualifying with non-occupant co-signers.

4) Refinance mortgage and overlays

A refinance calculator will show you potential savings with a refinance mortgage, however you still need to qualify for the mortgage. While conventional and FHA guidelines do allow for non-occupant co-signers for refinances some lenders have what are known as “overlays” which are guidelines that are stricter than those of Fannie, Freddie or FHA.

Some lenders’ overlays do not allow adding a co-signer to a mortgage just for qualifying purposes. With these guidelines if your co-signer is not on title now then adding the co-signer to title and the mortgage just for qualifying purposes may not be allowed. Check with your lender before adding a co-signer to your refinance mortgage.

5) Co-signer is on the hook too

It is important, very important, when you approach someone to co-sign for your mortgage that they understand the obligation they are undertaking. A co-signer has no less responsibility than the primary borrower to ensure the monthly mortgage payment is made in a timely fashion. As well your new home loan or refinance mortgage will appear on your co-signer’s credit report as long as the loan is outstanding. This impacts the co-signer’s income to debt ratio for auto loans, their own home loan and other credit they may wish to acquire in the future.

Mortgage calculators show mathematical results based upon the numbers you input, what they do not do is provide underwriting approval. Use these guidelines if you are in a position to need a co-signer for your refinance mortgage or new home loan.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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