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If you have but still want to get a mortgage, adding a nonoccupant co-client to your loan can help convince lenders to give you a loan. But the decision to co-sign on a loan or add a co-signer to your loan isn’t one you should make without knowing all the facts.
Today, we’re looking at what it means to be a nonoccupant co-client on a mortgage loan. We’ll show you what co-signing means and when it’s beneficial. We’ll also introduce you to the drawbacks of being a nonoccupant co-client as well as some of your other options as a borrower.
Co-Signing A Mortgage Loan: A Look At The Process
Imagine you want to buy a home with a mortgage loan, but you have bad credit.
When you apply for preapproval, you find that lenders don’t give you the best interest rates. You may even have a hard time getting approval at all due to your credit score.
You know that your mother has a credit score of 800, so you ask her to become a nonoccupant co-client on your loan application. She agrees and signs her name alongside yours on your applications.
Suddenly, you’re a much more appealing candidate for a mortgage. The lender considers both your income and your mother’s income when they look at your application.
They can also now pursue your mother for any payments you miss. Because the lender considers your mother’s finances, income, debt and credit when they look at your application, they decide to approve you for your loan.
From here, your mortgage loan generally functions the same way it would if you were the only person on the loan. You make a monthly premium payment every month to cover your principal, interest, taxes and insurance and you enjoy your home.
However, the lender may hold the nonoccupant co-client responsible if you miss a payment. This means your lender has the right to take your mother to court over your missed payments.
Co-signing isn’t just for mortgage loans. You may have a co-signer on personal loans, student loans and auto loans as well.
Whether or not you can have a nonoccupant co-client depends on the type of loan you take out. Nonoccupant co-clients are most common on two specific types of mortgages: conventional loans and FHA loans. Let’s take a look at the limitations for both types of loans.
Co-Signing A Mortgage Loan: A Look At The Process
Imagine you want to buy a home with a mortgage loan, but you have bad credit.
When you apply for preapproval, you find that lenders don’t give you the best interest rates. You may even have a hard time getting approval at all due to your credit score.
You know that your mother has a credit score of 800, so you ask her to become a nonoccupant co-client on your loan application. She agrees and signs her name alongside yours on your applications.
Suddenly, you’re a much more appealing candidate for a mortgage. The lender considers both your income and your mother’s income when they look at your application.
They can also now pursue your mother for any payments you miss. Because the lender considers your mother’s finances, income, debt and credit when they look at your application, they decide to approve you for your loan.
From here, your mortgage loan generally functions the same way it would if you were the only person on the loan. You make a monthly premium payment every month to cover your principal, interest, taxes and insurance and you enjoy your home.
However, the lender may hold the nonoccupant co-client responsible if you miss a payment. This means your lender has the right to take your mother to court over your missed payments.
Co-signing isn’t just for mortgage loans. You may have a co-signer on personal loans, student loans and auto loans as well.
Whether or not you can have a nonoccupant co-client depends on the type of loan you take out. Nonoccupant co-clients are most common on two specific types of mortgages: conventional loans and FHA loans. Let’s take a look at the limitations for both types of loans.
Conventional Loans
If you want a nonoccupant co-client on a conventional loan, they need to sign on the home’s loan and agree to repay the loan if the primary occupant falls through. However, the non-ccupant co-client doesn’t need to be on the home’s title. The lender looks at both your credit and the nonoccupant co-client’s credit to determine if you can get a loan.
Lenders also consider you and your nonoccupant co-client’s debt-to-income (DTI) ratio when they look at your application. Every lender has its own standards when it comes to what they consider an acceptable DTI. Knowing both your own and your nonoccupant co-client’s DTI can make getting a loan easier.
FHA Loans
FHA loans are special types of government-backed loans that can allow you to buy a home with a lower credit score and as little as 3.5% down. If you want to get an FHA loan with a nonoccupant co-client (you can have a maximum of two), your co-client will need to meet a few basic criteria.
First, your co-client must be a relative or close friend. Mortgage lenders consider the following relatives as eligible to be non-occupant co-clients on FHA loans:
- Parents and grandparents (including step, adoptive and foster)
- Children (including step, adoptive and foster)
- Siblings (including step, adoptive and foster)
- Aunts and uncles
- In-laws
- Spouses or domestic partners
If the nonoccupant co-client is a close friend, you need to write an additional letter to your mortgage lender explaining your relationship and why your friend wants to help you.
Your nonoccupant co-client must also live in the United States for most of the year. They must have a DTI of 70% or less if you have less than a 20% down payment.
If you have more than 20% to put down, your co-client’s DTI can be anything. On an FHA loan, the nonoccupant co-client must be on the title of the home.
What A Co-Signer Is Responsible For
Before you agree to co-sign on a mortgage loan, it’s important you understand just how heavy of a burden this can be on you. As a nonoccupant co-client, you agree that you’re willing to take financial responsibility for the loan you co-signed on.
If the primary occupant misses multiple payments, you can easily become responsible for 100% of the loan value. It’s important to be careful when it comes to who you agree to co-sign for.
Make sure the primary occupant you’re vouching for has the means to pay the mortgage, insurance and maintenance fees for their new home. You should also make sure you have enough income to cover the payments if your primary occupant defaults.
There are a few additional things you can do to protect yourself against your primary occupant’s financial missteps. Here are the steps you should take if you agree to become a nonoccupant co-client on a mortgage loan:
- Ask the primary occupant to give you online access to their mortgage statements.
- Ask the lender to send you a notification immediately when the primary occupant misses a payment.
- Set aside a monthly premium or two in your savings account in the event the primary occupant misses a payment.
- Keep the lines of communication open with the primary occupant. Encourage them to be open and honest if they think they might miss a payment.
Most importantly, you should only become a nonoccupant co-client for people who you know are responsible. Never agree to co-sign on a loan for someone you just met.
Benefits Of Having A Co-Signer
Having a non-occupant co-client on your loan can make it much easier to get a mortgage. Here are a few of the benefits that come along with applying for a mortgage with a non-occupant co-client:
- Looser credit score requirements: Your credit score plays a large role in your ability to get a mortgage loan. If you have bad credit, you may have trouble getting a loan. However, a nonoccupant co-client with a great score on your loan may convince lenders to be more lenient with you.
- Assistance with employment requirements: Mortgage lenders need to see that you have a steady and reliable income before they’ll give you a loan. This can be a pain if you’re self-employed or if you had a recent gap in your resume. A nonoccupant co-client with a solid employment history can help you fill this requirement.
- The potential for a larger loan: A nonoccupant co-client on your loan means the lender considers both of your incomes when they look at how much you can get in a loan. This can mean you may qualify for a larger loan. Of course, you should be absolutely positive you can make the payments before you accept the loan.
Drawbacks Of Co-Signing
As the nonoccupant co-client, co-signing on a loan comes with a number of risks including:
- Potential responsibility for payments: If the primary occupant on the loan can’t come up with a monthly payment, you must pay it as the co-client. This premium will come out of your own pocket and you can’t refuse a payment.
- Difficulty getting out of the loan: Once you co-sign on a mortgage loan, it’s very difficult to get out of it. Even if you have a falling out with the primary occupant, you’re still responsible for missed payments.
- A legal tie to the loan: Becoming a nonoccupant co-client means you’re just as legally responsible for the loan as the person living in the house. If you fall behind on payment coverage, the lender may sue you for legal fees and the remaining balance on the loan.
- Your credit may suffer: Co-signing on a loan puts your credit on the line. If the primary occupant misses a payment, your credit will suffer as well.
Alternatives To Having A Co-Signer
If you’re struggling financially and you can’t find someone willing to co-sign on your loan, there are still a few ways you can buy a home.
Explore Your Government-Backed Loan Options
In addition to FHA loans, there are other types of government-backed loans that can help you buy a home with lower requirements. Government-backed loans are special types of mortgages that have insurance from the federal government.
Government-backed loans are less risky for lenders, so they can extend them to people who normally wouldn’t qualify for a loan. FHA loans, VA loans and USDA loans each have their own qualification standards. Be sure you know all your loan options before you take a loan with a non-occupant co-client.
Use A First-Time Home Buyer Assistance Program
If you’re a first-time home buyer, you may qualify for an assistance program that can make buying a home easier. Home buying assistance can come from a state or local government, a federal program or a charitable or employer sponsor.
Depending on your circumstances, you may qualify for down payment assistance, a discount on a foreclosed home and/or tax breaks.
Many home buyer assistance programs are only available in certain areas. If you’d like to learn more about programs, loans and grants you may qualify for, start by visiting the Department of Housing and Urban Development’s (HUD) website.
Summary
Applying for mortgages with a nonoccupant co-client can help you buy a home with a lower credit score, less income, or a shaky work history. When you apply with a nonoccupant co-client, the person co-signing agrees they will take on your debt if you default.
While this makes you a much more appealing candidate for lenders, it’s risky for the co-signer. Depending on the type of loan you get, there may be limitations on who can be your non-occupant co-client.
If you want to buy a home without a nonoccupant co-client, you may want to research home buying assistance or government-backed loans. Both options can help you qualify for a loan with lower standards.
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