Mortgage Matters: Can co-signers be brought in the loan process? (column)
What if I have “co-signer” on the loan with me? I get this question quite frequently and with good reason.
Applying for and obtaining mortgage financing can be difficult in the current lending and regulatory environment. Combined with the fact that property values and prices here in the Vail Valley are perhaps greater than those of many metropolitan areas, it is a natural question for buyers to ask whether or not they can bring a “co-signer” in on the loan application to help with qualification.
Doing so can be difficult, but the answer is yes it can absolutely be done. I have successfully structured transactions where the primary borrower(s) was assisted in qualifying and closing the loan by a parent, brother or another such acceptable interested party. To be expected, there is specific criteria that must be followed when bringing in a co-signer to the loan.
“Non-occupant co-borrower” is the technical term for this type of co-signer. First and foremost the non-occupant co-borrower needs to be aware that helping the interested party qualify for the loan is not as simple or as easy as just signing a few documents at closing. The assisting person is completely responsible for the mortgage and the debt just as the primary borrower is. Furthermore, the assisting party must go through the same mortgage qualification process as the primary borrower.
The person assisting has to provide all of the numerous and necessary documents for qualification. By this I am referring to full income, employment, and asset documentation and a full credit check. If the real intention of the assisting party is just to help with the necessary down payments for the transaction, then this can be accomplished by simply gifting the primary borrower the funds needed. When simply gifting money to the primary borrower, an interested party does not have to go through the full loan qualification process.
But in many cases, the primary borrower needs help from the non-occupant co-borrower in the form of additional income in order to qualify for the loan. If this is the case, then we are back at the scenario of having to go through the full application and documentation process. If the non-occupant co-borrower is agreeable to all of that, then the good news is that the transaction can be structured in such a manner.
While the primary borrower must still have some sort of verifiable income and employment, the co-signer can carry most of the weight when it comes to qualification from an income or a debt to income ratio stand point. Every scenario is a little bit different depending on the loan program, loan size and amount of down payment. Nonetheless, I have successfully closed loans where the income calculated by the underwater for the primary borrower was not even enough to cover the debt of the proposed mortgage. The income from the interested party was brought in to qualify for and close the loan.
Please do not misinterpret the point of this column. By no means am I implying that someone trying to buy a home that they can’t afford should ask someone to cosign with them and ultimately put all parties involved in a dangerous scenario. I am saying that in the current environment, income and employment are highly scrutinized by banks and lenders and there may be many scenarios where bringing in a non-occupant co-borrower’s income may be completely advisable and without risk.
For example, a roommate’s income may not be used for qualification purposes in most cases. Or salary, bonus, commission or tips type income without a solid two-year history may not be used for qualification either. Borrowers with ample assets and a lack of acceptable income for lending purposes may have a hard time qualifying. The same holds true for borrowers who are self-employed borrower and write off a lot of income in business expenses.
In such cases, the non-occupant co-borrower’s income may help all parties make a wise and prudent real estate investment. As with any mortgage financing, a mortgage professional should be consulted prior to going down this course.
William A. DesPortes works for Central Rockies Mortgage Corp. He can be reached at 970-845-7000, ext. 103, and firstname.lastname@example.org.