Buying a house with a co-borrower or co-signer

Three roles, three sets of rights

Fannie Mae's section B2-2-04 separates the people who can help:

Everyone who signs the note shares liability for it. The guide also requires that a guarantor, co-signer or non-occupant borrower has no interest in the sale itself, so the seller, the builder or the real estate agent cannot fill the role. These helpers are allowed on purchases and on limited cash-out and cash-out refinances.

The title question matters beyond the loan. A co-signer who is not on the title owes the debt but owns none of the house. A non-occupant borrower who is on the title owns a share, which affects what happens if you sell, refinance or separate.

Fannie Mae's rules when the helper will not live there

When the loan is manually underwritten and a non-occupying person's income is used to qualify, B2-2-04 adds three limits:

• Down payment. The occupying borrower must make the first 5 percent of the down payment from their own funds, unless the loan-to-value is 80 percent or less, or the purchase is a one-unit principal residence where the borrower meets the rules for using gifts, grants or employer assistance for that contribution.
• Debt-to-income. Using only the occupying borrower's income, the debt-to-income ratio cannot exceed 43 percent. The guide notes this applies even when the combined ratio of both people is far lower.
• Loan-to-value. The maximum LTV is 90 percent, with a higher combined LTV allowed only when a Community Seconds loan is involved.

For loans run through Desktop Underwriter, the guide says DU analyzes the risk factors for all the borrowers together. The occupying borrower's own ratio still matters to the overall decision, but the manual-underwriting caps above are the clearest example of how much a non-occupant can help.

What the helper is agreeing to

The Federal Trade Commission's Credit Practices Rule requires lenders it covers to give co-signers a plain-language notice before they sign. Mortgages from many lenders fall outside that rule, but the notice is still the clearest summary of the risk. It says, in part, that if the borrower does not pay, the co-signer will have to; that the co-signer may owe up to the full amount plus late fees or collection costs; that the creditor can collect from the co-signer without first trying the borrower; and that a default may become part of the co-signer's credit record.

There are practical effects even when every payment is on time. The mortgage usually appears on the helper's credit report, and the payment can count against them when they apply for their own loan. A parent planning to downsize or refinance may find that your mortgage reduces what they can borrow.

Settling the details before you apply

Write down the answers to these questions and both sign it. A lawyer can turn it into a proper agreement.

• Who pays the mortgage, taxes and insurance each month, and from which account?
• If the helper is on the title, what share do they own?
• What happens to that share when the home is sold?
• How will the helper be removed later? Usually that means refinancing in your name alone once you qualify.
• What happens if one person dies, divorces or wants out?

Removing a co-signer is rarely as simple as calling the servicer. The note is a contract with every signer, so release usually takes a refinance or the lender's formal approval.

Alternatives to consider

• A gift instead of a signature. A family member who can afford it may prefer to give part of the down payment. Fannie Mae allows gifts from relatives and certain others, documented with a gift letter. A larger down payment lowers the loan and the payment without tying them to the debt.
• Paying down a debt. Clearing a car loan or card balance can move your ratio more than you expect.
• A different loan program. FHA and other programs set their own ratio limits and their own rules for non-occupant co-borrowers, so ask a lender to compare them.

The bottom line

A co-borrower or co-signer can turn a denial into an approval, but only within the lender's rules, and only by making that person liable for the whole loan. Learn which role your helper would have and how your file will be underwritten, and settle ownership and exit terms in writing before anyone signs.