Securing a mortgage is a crucial step in achieving their dream of homeownership.
However, not everyone meets the requirements for a mortgage on their own. This is where having a cosigner comes in.
An FHA cosigner is a person who signs onto an FHA loan with the primary borrower to help them qualify for the loan. They are also equally responsible for the loan repayment.
In this article, we will discuss everything about using a cosigner on your FHA loan, who can be your cosigner and everything you must know when choosing a cosigner.
What is an FHA Loan?
Before we dive into the specifics of cosigners and FHA loans, let’s first define what an FHA loan is.
An FHA loan is a mortgage that is insured by the Federal Housing Administration. This means that if the borrower defaults on the loan, the FHA will pay the lender back a portion of the money they lost.
Because of this insurance, lenders are more willing to offer more flexible requirements for FHA loans to borrowers who may not meet traditional lending standards.
Can You Qualify for an FHA Loan With a Cosigner?
Yes, you can qualify for a cosigner on an FHA loan.
But you should be aware that not anyone can come on as your cosigner. The FHA has very specific rules and requirements when it comes to cosigners, that you and your cosigner will need to meet.
The requirements may also differ depending on the type of FHA loan you and your cosigner are applying for; refinancing, purchasing, or FHA 203k loans.
It is also very important for your cosigner to understand that if you default on your mortgage, they may be held liable to pay it off. So it should not be a decision either of you make lightly.
FHA Loan Cosigner Requirements
As we have mentioned, FHA does not allow just anybody to be your cosigner. Plus, there are several requirements that both you and your cosigner must meet.
Here are some FHA loan cosigner requirements:
- Relationship: Your cosigner must be a family member or close friend with a documented interest in you. This can include a parent, grandparent, sibling, aunt or uncle, or close family friend.
- Credit Score: Your cosigner must have a minimum credit score of 580. However, some lenders may require a higher credit score for cosigners.
- Debt-to-Income Ratio: The cosigner’s debt-to-income ratio (DTI) must be below the FHA’s maximum DTI requirement of 43%. The DTI is the percentage of a borrower’s gross monthly income that goes towards paying their debts.
- Employment History: The cosigner must have a steady employment history, typically for at least two years.
- Income: The cosigner must have sufficient income to cover their own debts and expenses, as well as the borrower’s loan payments if the borrower is unable to make them.
Before agreeing to cosign an FHA loan, your cosigner should carefully consider their own financial situation and ability to make your loan payments if you default on your loan.
We recommend that both you and your cosigner speak with a mortgage professional or discuss with us to fully understand the requirements and risks involved in the loan process.
Why Would You Need a Cosigner?
Maybe you aren’t too sure if you really need a cosigner on your FHA loan. Here are some of the reasons why it might be a necessity in your homeowner journey.
- Poor or Limited Credit History: If you have a poor credit historyor limited credit history, lenders may view you as a high-risk borrower and be hesitant to approve your application. A cosigner with a good credit history can help with this.
- Insufficient Income: If your income is too low to qualify for a loan or credit on your own, a cosigner with a higher income can help satisfy the lender’s income requirements.
- Limited Employment History: Lenders may be hesitant to lend to borrowers who have limited employment history or who have recently started a new job. A cosigner with a stable employment history can help alleviate this concern.
- Young Age: If you are a young borrower without a long credit history, a cosigner with an established credit history can help you qualify for a loan or credit.
FHA Cosigner Responsibilities
If you are considering cosigning an FHA loan for a friend or family member, it is important to understand the responsibilities that come with being a cosigner.
Here are the FHA cosigner responsibilities:
- Loan Repayment: As a cosigner, you are equally responsible for the loan repayment with the borrower. If the borrower is unable to make payments, you will be required to make them in order to avoid default on the loan.
- Financial Liability: Cosigning a loan also means you are legally and financially responsible for the debt. If the borrower defaults on the loan, the lender can pursue you for payment of the debt.
- Credit Score: The loan will appear on your credit report and will affect your credit score. Any missed payments or defaults by the borrower will also negatively impact your credit score.
- Communication: As a cosigner, it is important to maintain open communication with the borrower about the status of the loan payments. If there are any issues with making payments, you will need to be aware of them in order to make arrangements to ensure that the loan remains in good standing.
- Loan Documentation: As a cosigner, you will be required to provide documentation to the lender, including proof of income, employment history, and credit history.
- Property Standards: The property being purchased must meet certain standards set by the FHA. As a cosigner, you may be asked to provide documentation to ensure that the property meets these standards.
It is important to fully understand the responsibilities of cosigning an FHA loan before agreeing to do so.
Can a Parent Cosign on an FHA loan?
Yes, a parent can cosign on an FHA loan.
In fact, parents are a common choice for cosigners on FHA loans, particularly for first-time homebuyers who may have limited credit histories or income.
However, it is important to note that cosigning on an FHA loan is a serious financial commitment. If the child defaults on the loan, you, as a parent are legally responsible for repaying the debt.
You should also carefully consider your own financial situation and ability to make loan payments as a parent, before agreeing to be a cosigner.
Parents who are considering cosigning on an FHA loan must also be aware of any potential tax implications. Cosigning on a loan could potentially impact the parent’s credit score and could also affect their ability to obtain credit in the future.
Can a Cosigner Choose Not to Be a Coborrower?
No, an FHA cosigner must be a co-borrower on the loan and cannot be a non-borrower.
The FHA requires that all cosigners must have a vested interest in the property and be listed on the mortgage as co-borrowers.
As a co-borrower, the cosigner shares equal responsibility with the primary borrower for repaying the loan. This means that if the borrower is unable to make payments, the cosigner is legally responsible for making the payments or facing the consequences of defaulting on the loan.
It is important to note that the FHA does not allow for non-borrower co-signers or guarantors on FHA loans.
Can a Non-Borrower Be on the Title of an FHA Loan?
You may want to have a non-borrower, like a spouse, on the title of your loan but may wonder if that is possible and what that would mean for them.
Firstly, yes, it is possible for a non-borrower to be listed on the title of an FHA loan. However, there are certain requirements and restrictions that must be followed by the non-borrower.
- The non-borrower must have a documented interest in the property, such as a spouse or co-owner. In the case of a spouse, they may be listed on the title even if they are not listed as a borrower on the loan. This is common in cases where one spouse has a better credit score or income than the other.
- The non-borrower must meet certain income and credit requirements set by the FHA. This is to ensure that the lender is able to assess the creditworthiness of all parties listed on the loan and ensure that the loan is affordable for everyone involved.
- The non-borrower must sign an agreement stating that they are not responsible for repaying the loan. This is to protect the non-borrower from any legal or financial responsibility if the borrower defaults on the loan.
It is important to note that if a non-borrower is listed on the title of an FHA loan, they do not have an ownership interest in the property unless they are listed as a co-owner.
The non- borrower’s name on the title is simply a way to acknowledge their interest in the property and their relationship with the borrower.
If you are considering adding a non-borrower to the title of your FHA loan, we recommended you give us a call to fully explain the requirements and restrictions involved.
This can help ensure that the loan is structured properly and that all parties involved are protected.
FHA Loan Co-signer vs. Co-borrower
While you may see co-signer and co-borrower used interchangeably, there are some distinct differences between the two that you should be aware of.
This table lays out the differences between a co-signer and a co-borrower.
| FHA Cosigner | FHA Co-Borrower | |
|---|---|---|
| Responsibilities | Assumes responsibility for the loan if the primary borrower defaults | Shares equal responsibility for repaying the loan with the primary borrower |
| Ownership Interest | No ownership interest in the property | Has ownership interest in the property |
| Credit and Income Requirements | Must meet FHA credit and income requirements | Must meet FHA credit and income requirements |
| Documentation | Must provide documentation to the lender demonstrating ability to repay the loan if necessary | Must provide documentation to the lender demonstrating ability to repay the loan |
| Title | Not listed on the title of the property | Listed on the title of the property |
| Legal Liability | Only liable if the primary borrower defaults on the loan | Equally liable for the loan with the primary borrower |
| Allowed by FHA | Yes | Yes |
Removing a Cosigner from an FHA Loan?
If you find yourself in a position where you would like to remove a cosigner from your FHA loan, you should know that it is easier said than done. It can be a complex and involved process.
All the same, here are the general steps that are typically involved:
- Review the loan agreement: The first step would be to review the loan agreement to determine if there are any specific provisions that address the issue of cosigner removal. Some loans may have specific requirements or restrictions that must be followed.
- Contact the lender: Once you have reviewed the loan agreement, the next step is to contact your lender to discuss the process for removing a cosigner. Your lender can provide guidance on the specific steps that need to be taken and what documentation will be required.
- Refinance the loan: In most cases, the only way to remove a cosigner from an FHA loan is to refinance the loan in the primary borrower’s name only. This means that you will need to qualify for the loan on your own, without the cosigner’s support. The new loan will pay off the existing loan, including the cosigner’s obligation.
- Provide documentation: To qualify for the new loan, you will need to provide documentation to demonstrate your ability to repay the loan on your own. This may include income verification, credit score, and other financial information.
- Complete the loan application process: Once you have provided all of the necessary documentation, you will need to complete the loan application process. This may involve providing additional documentation, undergoing a credit check, and paying fees associated with the loan such as the closing and down payment costs.
- Close the new loan: Once the loan application has been approved, you will need to close the new loan. This involves signing the loan documents and paying any closing costs associated with the loan.
The best thing you can do is to work very closely with your lender through this process to make sure it gets done right.
If you’re looking to get a home in any of these areas, we can be that lender.
Frequently Asked Questions
Does FHA allow non-occupant co-signers?
Yes, the FHA allows for non-occupant co-signers on FHA loans, but they must be co-borrowers and have a vested interest in the property.
What is the minimum credit score for an FHA mortgage with a cosigner?
The minimum credit score for an FHA mortgage with a cosigner can vary, but generally, the borrower and cosigner must have a median credit score of at least 580.
Can cosigning affect a mortgage approval?
Yes, cosigning can affect a mortgage approval as the cosigner’s credit score, income, and debt-to-income ratio are taken into consideration by lenders during the mortgage application process. If the cosigner has poor credit or a high debt-to-income ratio, it may negatively impact your ability to secure mortgage approval.
Whose credit score is used with a cosigner?
When a cosigner is involved in an FHA loan, the credit scores of both the primary borrower and the cosigner are considered by lenders to determine the loan eligibility, terms and how much you qualify for.
Can a friend be a cosigner?
Yes, a friend can be a co-signer on an FHA loan as long as they meet the lender’s requirements for income, credit score, and debt-to-income ratio.
Should I Have a Cosigner on My FHA Loan?
If you qualify for an FHA loan on your own, you may not need to have a cosigner.
But if you do not, a cosigner might be a great idea. Be sure to pick someone that qualifies to be a cosigner and make sure you both understand the commitment and risks involved for you both.
Give us a call if you have any questions in this light. We can guide you through the process and start you on your homeownership journey today.
