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Cosigner on FHA Mortgage

Does a co-signer on a mortgage need to be a blood relative?

Hi Bill. With the help from your website and advice, I was able to increase my FICO score to a 580 (40 pts since Nov '09) in order to buy a home. My income is in the lower 30K range. My mother-in-law has excellent credit and is willing to co-sign the mortgage loan with me. My question is: do you think with her high credit score, we'd be able to get a lower interest rate and perhaps get approved for a higher loan amount? I read somewhere that she has to be a blood-relative, is this true? I'm asking because if her being a co-signer doesn't make a difference, we don't want to bother her with all this. Thank you.

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Highlights

  • Learn about the difference between a co-borrower and a co-signer on a loan.
  • Review the difference between an occupying co-borrower and a non-occupying co-borrower.
  • Understand the risks that a co-signer takes when co-signing on a loan.

Thank you for sharing your good news about how the advice you found at Bills.com improved your credit score!

Co-Signer vs. Co-Borrower

First of all, I will address a small confusion in terminology in your question. You referred to your mother-in-law as a potential co-signer, when she would actually be a co-borrower.

A co-borrower is someone who is included on the loan application. The co-borrower's income and credit history are used to qualify for the loan and the co-borrower's name will also be listed on the title of the property.

In general, home loans do not accept co-signers on a loan, as opposed to car loans or student loans. Mortgage loans require co-borrowers instead of co-signers.

A co-borrower is different that a co-signer. While a co-signer assumes full responsibility for the debt, in the event that the borrower defaults on the loan, the co-signer does not necessarily have ownership in the property. Co-borrowers are frequently spouses, relatives, or partners. Their income is combined with the borrower, in order to qualify for a larger mortgage than could be obtained without the co-borrower and the co-borrower ends up as a co-owner of the property.

FHA Loans Require Family Relationship For Co-Borrower

There is no requirement that I am aware of that requires a co-borrower on most mortgages to be related by blood. However, the FHA Government Loan Program does require that co-borrowers be related by blood or marriage.

Occupying Co-Borrower vs. Non-Occupying Co-Borrower

It is important to know if the co-borrower will reside in the house or not. Assuming that your mother-in-law will not occupy the house with you, she will become a non-occupying co-borrower. In this case, the lender will use her credit score to help you qualify; however, you as the primary borrower, must be able to qualify with your debt-to-income ratio. In other words, your income alone must be enough to cover the payment -- your lender will generally require that the mortgage payment, including taxes and insurance be no more than 33% of your gross income. So if you can qualify with your income, then it will be beneficial to have her co-sign on the mortgage with her higher credit score.

Co-Borrower is Fully Responsible for Payment

A co-borrower is an equal party on the loan, fully responsible for the payment of the loan and also vested in the property's title. This is unlike a co-signer on other kinds of loans, who guarantee payment in case the primary borrower defaults. Both co-borrowers and co-signers assume considerable liability.

If a person agrees to be a co-borrower, he or she should consider making an agreement with the primary borrower that when the primary borrower's financial picture and credit score improves, the primary borrower will refinance the loan to remove the co-borrower.

Understand the Risks of Co-Signing

Although your question, as I discussed, is really about co-borrowing, I think it is important for me to make a couple of important general comments about co-signing. Anyone considering co-signing on any kind of loan should fully understand the risks and obligations that go along with co-signing for a loan.

It may also be useful to review How Do I Remove My Self as a Co-signer on a Mortgage?, to learn more.

Whenever shopping for a mortgage, makes sure to visit the Bills.com Mortgage Resource Center.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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2 Comments

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  • MN
    May, 2014
    meredith
    Arlington, VA
    I'm currently a stay-at-home mom, but with years of work experience at the executive level and an excellent credit history. My husband purchased his condo (which is an investment property) before we met, and recently refinanced it..however, he did not add me onto the loan as a co-signer. Instead, he listed his mother as a co-borrower. When I asked him about this, he told me he asked but supposedly you cannot have three co-signers on a condo. Is this true? Honestly, I don't know whether to be offended or believe him.
    0 Votes

    • BA
      May, 2014
      Bill
      There is no standard restriction that prevents three co-borrowers on a condo. I can't comment on what the loan officer told your husband, however, or if that lender has any specific policies that limit the number of borrowers. Was his mother a co-borrower on the previous loan? Perhaps it was easiest to not change the way things were?

      A more important issue, it seems to me, is whether you are on title and whether you and your husband have a clear understanding of the ownership stake each of you in all the assets you own separately or jointly. This would be a good time for you and your spouse to meet with an estate planning lawyer to create wills and to discuss all the issues that the arose from this occurrence.
      0 Votes

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