There’s an old saying in the mortgage industry, “A Mortgage is like sausage. The end result can be good but you have no idea what goes into it.” Since the mortgage meltdown of 2007, that is even more true today.
To make sure your mortgage, that you could likely have for 30 years, is in your best interest, you can increase your buying power by having a co-signer. The definition of co-signer will depend ultimately on who will be backing your mortgage – Fannie Mae, Freddie Mac, or FHA. Each has slightly different guidelines on that subject and those guidelines can change.
Fannie Mae’s co-signer is a non-occupant co-borrower; meaning they will not occupy the premises, but are equally responsible for the mortgage. Primary borrower will have to occupy the premises, and, have a minimum of 5% of the purchase price in the deal of his/her own verifiable funds. That 5% cannot be gifted from any other source and cannot come from the co-signer sources.
Non-occupant co-borrowers will sign the Note at closing assuming responsibility for the payment just like the occupant (or principle borrower). However, they may not necessarily hold title to the property. It is permissible to have more than one co-signer. Each will be responsible for the mortgage payments.
Freddie Mac works on the same basic principles as Fannie Mae when it comes to co-signers. And just like Fannie Mae, the primary borrower will always have to have a minimum of 5% of the purchase price in the deal of his/her own verifiable funds that are not gifted from any other source.
FHA allows the co-signer or non-occupant co-borrower with as little as 3.5% of the purchase price as a down payment. In this case, the person must be related to the borrower. FHA further defines “related” as: Parents, Children, Spouse, Siblings, Aunts-Uncles, Nieces-Nephews; OR someone who has a long-standing (and provable) relationship with the borrower. Proving this can sometimes be very invasive.
But who needs a co-signer? People who can benefit the most from a co-signer, for example, are recently graduated college students. Those borrowers are likely to see an increase in their income over the life of the loan, but want to take advantage of the market and rates available now; however, anyone can use a co-signer. The combined income of the Borrower and Co-signer will be used to qualify for the mortgage.
USDA and VA
Since USDA and VA offer 100% financing to qualified buyers, neither allow co-signers or non-occupant co-borrowers. If a borrower can not qualify for those mortgages without assistance, borrower is not allowed outside help. VA takes it a step further in their guidelines: only a spouse can be on a mortgage with the Veteran – no parent, child, sibling or other relative.
Jumbo mortgages are mortgages that are over $453,100. No co-signers are allowed on Jumbo mortgages.
Your mortgage broker can help you determine if using a co-signer will help you get qualified BEFORE you pick out that dream or starter home. Then go enjoy a good piece of sausage. You’ll be able to afford the eggs and grits with it.