Q: My husband and I would like to buy now, but I work for the state, which just cut my salary. My husband usually makes a good wage, but was recently laid off. We have good savings, and my husband is collecting enough private unemployment insurance so that we can afford a conservative mortgage payment, but we don’t qualify for a large-enough mortgage on my salary alone. Is it still possible to buy with a co-signer? How does it work?
A: Once upon a time, using a co-signer to buy a home was quite en vogue. It was a very common way for parents to help out their newlywed children. With the advent of subprime lending, the co-signer model fell largely out of use, because it just wasn’t that hard for buyers with little money and marginal credit to qualify for a mortgage on their own. As mortgage qualifying guidelines have tightened up again, I’ve had more and more buyers ask about whether getting help from a co-signer, now known as a non-occupant co-borrower, is a possibility.
Mindset Management
First things first. Is there a reason you need to buy a home before your husband gets a job? If he gets a new position before too much time has passed since his last job, the gap should not prevent his income from being used to support a larger mortgage (so long as the new job is in the same line of work). A sudden layoff can be traumatic — especially for someone who is used to being gainfully employed. My hopes are that your husband is able to secure a new job quickly. In your decision-making, though, you should consider that it is a tough job market right now. Does it make sense to add to the stress of a job hunt with the stress of a house hunt? It may or may not, depending on your values, priorities and ability to manage complex situations as a family.
If you deliberate and decide to proceed with buying a home before your husband gets a job, explore the option of buying with a co-signer fully before you approach your intended purchase. Buying your home with the help of a co-signer takes a familial or emotional relationship and applies financial pressures to it. Often, the relationship suffers under the pressure.
Your co-signer will become fully liable for your mortgage payments and other costs of ownership in the event you stop making payments. Also, the fact that your mortgage payment history will appear on your co-signer’s credit report may impact your co-signer’s own ability to qualify for additional credit (e.g., auto loans, mortgages, etc.) — especially if you pay late. For the life of the loan and potentially for the duration of your ownership of the home, you will need to obtain your co-signer’s input and assent to your mortgage decision-making, including refinancing and taking out equity loans.
You may or may not be comfortable with asking someone to help you as a co-signer knowing all of these things. More important than your comfort level, though, it is imperative that your co-signer be both aware of and comfortable with all of these consequences of co-signing for you. For them, it’s a pretty benefit-less arrangement, except that they gain your eternal love and affection (for what that’s worth!) and the satisfaction of having helped you buy a home.
Need-to-Knows
The feasibility of buying with the help of a co-signer depends largely on whether you plan to use an FHA mortgage or a conventional loan.
Conventional loans today generally place much stricter requirements on a non-occupant co-borrower arrangement. Essentially, your lender will consider not only the co-signer’s credit and income to help you qualify, but they will also consider the co-signer’s debts and liabilities. So if your co-signer has a high level of mortgage or credit-card debt, they may not be able to help you qualify, even though your own income and assets are what you plan to use to make the payment. Additionally, conventional loan programs require that the occupant-borrowers (i.e., you and your husband) still have the credit and about 90 percent of the income and assets they would have needed to qualify for the mortgage on their own! Clearly, this situation would not work for you, as your whole problem in the first place is that you cannot qualify for the mortgage on your own.
Basically, the only major advantage to using a co-signer on most conventional loans today is in the rare situation in which your co-signer wants to gift you more than 5 percent and less than 20 percent of the purchase price toward your down payment. Under today’s conventional lending guidelines, this cannot be done unless the gifter also elects to be a co-signer. (In these cases, the funds are no longer a gift. The co-borrower is just putting their own funds down on their own loan.)
FHA-insured mortgages process loans with co-signers somewhat differently, using what insiders call "truly blended ratios." This simply means that they throw all borrower’s income, assets and liabilities into a pot, and the blended debt-to-income ratio must fall within the lender’s guidelines. That is, if your own income doesn’t get you close to qualifying for a mortgage, a co-signer with excess income compared to their debt can significantly help you get an FHA loan.
Once you have assessed the feasibility of using a co-signer in your situation, be very careful in deciding whether and how to use a co-signer to buy your home. I have seen brothers stop speaking to brothers and parents become estranged from their children when these situations fall apart.
Action Plan
1. Think long and hard before buying before your husband finds a new job.
2. Consider the economic and relationship ramifications of buying with the help of a co-signer — both for you and for the co-signer.
3. Talk with your mortgage representative about whether you will be using an FHA loan or a conventional loan.
4. If you decide to move forward, carefully select your co-signer, refrain from pressuring them to help you and create only conservative mortgage obligations that you are confident you can fulfill.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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