Many folks get asked to be co-signers by family members and relatives because they either have no credit or bad credit.  Co-signing for a relative and/or family member has its rewards but yet there are risks associated with co-signing for an auto loan, mortgage loan, or any other loans.  The rewards are that you are helping a loved one get a loan where without you co-signing they would probably not have qualified for a loan.  On the flip side, co-signing for a loan can have devastating negative factors on the co-signer if the person you have co-signed for is late on their monthly payments or default on their loan.

Defaulting On A Home Loan And Co-Signer

If the person you co-signed for defaults on their loan, then the creditor will come after you and technically, you are liable for the monthly payments and the loan.  Many folks who plan on purchasing a home are concerned about co-signing and debt to income ratio when it comes for them to qualifying for a mortgage loan in the future.  The good news is that co-signing and debt to income ratio calculation can have no impact on the co-signer after 12 months.  Many folks help family members and relatives by being a non-occupant co-borrower on a home purchase.   The Federal Housing Administration allows non-occupant co-borrowers from family members for home buyers who have higher debt to income ratios or those with no income verification.

Co-Signing And Debt To Income Ratio: Home Purchase

If you have co-signed for a family member and you now need to qualify for a residential mortgage loan for your own mortgage loan, the monthly housing liability for the mortgage loan you have co-signed is exempt from the mortgage lender as long as you can provide them that you are not liable for that mortgage payment by providing 12 months cancelled checks from the person you co-signer for.  As long as the person you have co-signed for can provide you with the past 12 months cancelled checks that has been paid timely,  that payment will not be used to calculate your debt to income ratios.

Other Installment Loans Where You Have Co-Signed

Co-signing and debt to income ratio does not just apply for residential mortgage loans.  Any other installment loans such as automobile loans, student loans, and other loans can be exempted from your debt to income ratios as long as you can provide 12 months cancelled checks from the person you have co-signed for.  Mortgage loan underwriters are very strict in requiring 12 months consecutive prior cancelled checks.  Any gaps in the 12 month period will automatically disqualify this exemption.  For example, if the person you have co-signed for has paid an automobile loan with checks for six months and on the 7th month has paid it with cash but has continued paying with checks on month 8, month 9, month 10, month 11, and month 12, this will not qualify.

Loans Under The Borrowers Name But Paid By Someone Else

There are situations where the mortgage loan applicant has a car loan or other loans under their names only but the monthly payment is paid by someone else.  If this is the case, the mortgage loan applicant is not liable for the monthly debt and the monthly payments will not be calculated towards qualifying their debt to income ratios.  The person that is actually paying for the monthly debt needs to provide 12 months cancelled checks.  Situations like this happens all the time where a parent might purchase an auto under their name but their son or daughter is the person actually making the monthly payment.

Installment Loans Under 10 Months

If you are a mortgage loan applicant and have installment loans under 10 months, most mortgage lenders will exclude this payment from calculating your debt to income ratios.  However, auto lease payments do not count.  If you have a automobile monthly payment of $400 per month and have less than ten months left on it, then this payment is discounted for calculating your debt to income ratios.  However, if this $400 per month automobile payment is a lease payment, then this exclusion does not apply.  Mortgage lenders view that with a auto lease payment, the person will get another automobile lease after the current lease payment terminates.

Gustan Cho

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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