A Co-borrower on a Loan No Longer Means the Certainty of Approval!

Question: I have fallen in love with this house. I only have $9,000.00 of my own money for the down payment. My FICO score is 669. But, the real issue is that the house is priced at $188,000.00 and I only make $32,000.00 a year. I am told I do not qualify and I really cannot afford the payments without a room mate who will pay me an additional $400.00 per month. My parents are willing to co-sign and they have money to add to the down payment but I really would like to do this on my own. I need the absolute lowest interest rate possible so that I can afford the payments. What is your opinion about this and is there a loan product for me?

Answer: In the mortgage industry the standard reply is “it all depends” because today, there is a loan product for every probable scenario except for really bad credit. In our opinion, all mortgages come down to can you document the money to do the transaction, can you verify the income to justify the payment and do you have the credit scores necessary to establish that you evidence the intent to repay? To get the lowest rate, you are going to have to document all of the above. But, you have added a slight twist to this scenario in that your parents are willing to co-sign.

That was then!

In the past, a co signer on was a common fix to offset problems with a loan and insure an approval—but that was then. We in lending term this a non occupant co-borrower since lending wants to know if a property is for owner occupancy, a second home or for investment purposes. Today, a co-borrower on a loan carries scrutiny as to “why can’t this borrower qualify for the mortgage payments on their own”? Additionally, if you want the best rates, you will need to conform to Fannie and Freddie guidelines. These guidelines state that “ideally” ratios for a borrower should be approximately 28% of gross monthly income for the total housing expense of PITI, and that ratios should not exceed 36% of gross monthly income calculating the primary housing expense plus all consumer debt. Due to automated underwriting, these ratio guides are no longer cast in concrete. Basically, if you can get through automated underwriting, and you can document what you have entered into the computer, you have loan approval.

This is now!

We have a saying in the mortgage industry that due to the history of foreclosures, underwriting guides can change—and they did! Today, there is an additional twist to the ratio requirements of a loan with a co-signer. The borrower must be able to qualify for the primary housing expense plus all their personal debt and they must be able to qualify with total debt ratios of no more than 43% without the additional income or debts of the co-signer. Your scenario clearly does not work with only a 5% down payment on your behalf and with only you signing the loan. We also want to clarify that you cannot count the possible rental income from renting a bedroom to a roommate in a single family residence.

A possible solution!

Given that your parents are able and willing to gift you additional funds for down payment, and given that they are willing to co-sign, I would suggest a 20% down payment which lowers your qualifying loan amount and “strengthens” your loan. You could enter into what is termed an “equity sharing agreement” whereby your parents gift most of the money for down-payment and you fulfill the monthly obligations by making the payments. This agreement stipulates into the future as to how the equity will be dispersed between the parties when the property is sold. In this way, you can feel good that you are doing this transaction somewhat on your own, and with a 20% down payment your ratio requirements as a borrower do work. Good luck!