What Co-Mortgagors Can and Can’t Do for a Borrower

Many borrowers who are attempting to buy, and sometimes even refinance a home, wind up needing to resort to obtaining co-mortgagors in order to complete their transaction. I thought I’d take the opportunity to explain here what doing going down this road can do and cannot do for a borrower trying to purchase a home.

First off, it’s important to distinguish between a co-mortgagor and what is typically, and sometimes mistakenly, referred to a co-signor. A co-mortgagor winds up purchasing a home along with the primary mortgagor (homebuyer) and becomes no less important to the loan that is the primary borrower, whereas a co-signor may sign the note and Deed of Trust but not necessarily go onto title of the newly purchased property. Or in some cases, the co-signor may go onto title, and while being required to sign an affidavit of responsibility, will not necessarily be required to sign the primary note or Deed of Trust. In this day and age, however, most lenders do not accept co-signors- they want full blown co-mortgagers who have equal responsibilities to the primary mortgagor in maintaining a timely payment record on the loan. This is why those who put themselves into this position are referred to as co-mortgagors- not sub-mortgagors. For this reason, we are going to concentrate on honest-to-goodness co-mortgagors in this report.
The number one reason, at least from personal experience, that a prospective borrower cannot qualify for a loan usually has to do with credit- very often most relating to credit scores that are too low for the program for which they are qualifying. This is one aspect of trying to qualify for mortgage financing where a co-mortgagor cannot be of help. All credit scores of all borrowers on a transaction must meet minimum standards. This can be considered the "weakest-link" concept of qualifying. A strong co-mortgagor does not assuage the problems of a primary mortgagor with sub-par credit scores. It also does not help when there is a foreclosure, short sale, or loan modification less than three years old in the primary borrower’s credit history or, for that matter, a bankruptcy that is less than two years old. All borrowers must meet minimum guidelines regarding their credit history.

Where a co-mortgagor does help is when the income of the primary borrower is insufficient to meet acceptable guidelines as they pertain to debt ratios. Then it’s all a matter of the arithmetic. These days, it’s common with an FHA lender, for instance, that a prospective borrower not spend more than 50 percent of their gross income on what will be their new house payment (including principal, interest, taxes, homeowners’ insurance, mortgage insurance, and association fee, if any) plus all other consumer debt. Let’s say that that ratio winds up being 60 percent. If by adding a co-mortgagor that total debt ratio can be brought down below the 50 percent mark, the loan will probably fly.

This is not always as easy as it seems because, keep in mind, not only the total income of all applicants taken into account, but so is all debt- and that includes what might be a house payment of the co-mortgagor. So if a co-mortgagor owns a home, both the primary and co-mortgagors will have to qualify for two house payments, plus all other debt. This assumes that the co-mortgagor stays in their current residence and does not move into the home, with the primary mortgagor that is being financed. If the co-mortgagor is to move in with the primary borrower, their housing expense can be ignored if they are currently renting their abode, or considered against rent if they plan to rent out of their current residence. If the transaction in question is FHA, then 90 percent of the rent of the property being left behind can be utilized against the mortgage debt on that property. For example, if the PITI on the home being vacated is $2,000.00 a month and the rent to be received (as evidenced by a rental agreements and a copy of the security deposit made out to the new landlord) is $2,500, the 90 percent of the $2,500 ($2,250) is used against the housing debt of $2,000. This would wipe out the housing debt of $2,000 and allow for a tidy profit for qualifying purposes of $250 per month. But here’s the rub- there must be, under FHA guidelines, equity of 25 percent in the house being left behind in order to count any rent in the qualifying ratios; otherwise, the entire PITI must still be counted in the qualifying. This 25 percent equity must be evidenced with a “drive-by” appraisal of the property.

For a conventional transaction, only 75 percent of the rent of the vacated property can be utilized, and there must be 30 percent equity in the property. Again, a drive-by appraisal must be utilized in order to determine the equity position within the property.     

Going back to an FHA transaction, blended ratios are allowable. What that actually means is that all income of all borrowers along with all their debt is considered in qualifying. This is also allowed with a Freddie Mac conventional transaction when there is a down payment of 20-25 percent. (This is required because mortgage insurance companies, which get into the act with less than 20 percent down on a conventional loan, don’t allow for blended ratios). Fannie Mae, on the other hand, does not allow a non-occupying co-mortgagor unless the primary mortgagor’s total debt ratio does not exceed 43 percent. But guess what? If a borrower’s total debt ratio is under 43 percent, they can usually qualify on their own without a co-mortgagor. (Go figure!) This tends to make Fannie’s co-mortgaging requirements appear to be nonsensical. But beware; there are many lenders who, despite the fact that they may sell a loan to Freddie Mac will utilize Fannie Mae’s more restrictive co-mortgagor requirements in order to allow for flexibility as to which entity they sell the closed loan to on the secondary market. My advice is that if you want to buy a property with 20% or more down to avoid the mortgage insurance, but you will need a non-occupying co-mortgagor to get yourself qualified for the loan, that you call around to lenders to make sure the transaction will work out before you get yourself ensconced into an escrow. My even more sensible advice is that if you’re going to utilize a co-mortgagor, go with FHA whenever possible.

By the way, V.A. allows only veterans, or a veteran and spouse, to co-mortgage together. This is the case under all circumstances.

Many first time buyers, and subsequent buyers for that matter, wind up needing to utilize co-mortgagors to obtain mortgage financing. If this is the situation you as a potential buyer find yourselves in, be sure you get the whole group fully qualified by a professional Mortgage Loan Originator. Not only will your transaction depend on it, but more than likely, so will your piece of mind.


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