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(All stories shared on Lending A Hand contain fictitious names with changes to insignificant details.  The privacy and trust of our customers is our top priority.)

Photo provided by Sarah McClain on Flickr
Photo provided by Sarah McClain on Flickr

We received a couple of calls in the past few days for potential home buyers looking to get qualified for a mortgage and both of them had questions about how Mom and Dad could help them qualify. Here are their situations:

#1 – Can a Co-Signer Help a Borrower with Low Credit?
Bert (fictitious name to preserve anonymity) emailed us looking to get qualified for his first home purchase. The email went something like this:

I’m looking to buy an inexpensive, first home and I know I need to get qualified for a mortgage.  I know my credit isn’t great but I do have some money for down payment.  Can you help?  Call me XXX-XXX-XXXX.

After receiving this email I picked up the phone and called Bert to see how I could help him out.  We started talking about what he was looking for.  We talked about the type of houses he was interested in and the problems he felt might stand in his way from getting qualified for a mortgage – credit.  He stated that his credit was horrible with late payments and probably some collections.  He wasn’t quite sure of his score but knew it wasn’t good.  He shared he was employed with a good income and enough money for down payment.  He also shared that his Mom would be willing to co-sign.

Can I qualify?

When it comes to qualifying for a mortgage credit is the one area that all borrowers must qualify independently.  The reason is because of the mortgage guidelines for credit.  The guidelines specifically state:

the representative credit score for a borrower is the middle of the 3 scores, lower of the 2 scores or the only credit score provided from a tri-merge credit report

AND

the representative score for a mortgage loan is the lowest of the borrowers’ representative scores

Let’s look at a hypothetical example:

Borrower #1

  • Experian = 650
  • Equifax = 672
  • TransUnion = 665

Borrower #2

  • Experian = 708
  • Equifax = 719
  • TransUnion = 703

In this example, Borrower #1’s representative score is the middle of the 3 scores (650, 672, 665) or 665.  Borrower #2’s representative score is 708.  To determine the representative score for the mortgage loan we take the lowest of all the borrowers’ representative scores (665, 708) or 665.

Based on this example and an understanding of the representative scores, you can see how one borrower with a low score can impact the qualifying of a mortgage negatively.  Getting back to our customer and to answer his question about whether a co-signer would help his situation – the answer is no.  If the minimum credit score for a mortgage loan today is, say, 580 and he has a 450 but the co-signer has an 850, the representative score would be 450, not allowing him to qualify for a mortgage even with a co-signer.  So, what solution do we have in a situation like this?  Mom could buy the home as an investment property (meeting all of the down payment, credit score, income and asset requirements for such a loan) and then rent the property to her son.  What about a higher down payment? Although the typical A-Paper mortgage options (FHA, VA and Conventional mortgages) other mortgage options may exist for such a situation, but since that is not my area of expertise I can not comment.

#2 – Mom and Dad are Willing to Help Me Anyway they Can…

The next customer, let’s call him Ernie, was also looking to make his first home purchase but he didn’t have a problem with credit, but just about everything else.  He had a credit score sufficient for qualifying, a part-time job with a little income, and a checking account with a small amount of assets.  Putting all of this together he would qualify for a mortgage but not within the price range he was hoping for.  He mentioned that Dad was willing to co-sign, gift down payment or anything necessary to assist him with making a home purchase and wanted to know how Mom could help.

Here is how Mom, Dad or any other person willing to co-sign impacts the qualifying on a mortgage loan:

Credit

As previously mentioned, all borrowers must qualify independently.

Income

All income, for all borrowers (including co-signers), is added together for qualifying purposes.

Debt

All debt, like income, is added together when calculating qualifying ratios (percentage of income used for house payment and debt).

Assets

All assets, for all borrowers, are added together when determining cash at the time of closing.

All Together?

As long as each borrower qualifies with their credit then the income, debts and assets are all combined when making a decision on the ability to approve the mortgage loan.  In this example, Dad could co-sign with her son and help him qualify.  Each mortgage type has different rules and guidelines related to co-signers.  Make sure to talk with a knowledgeable mortgage lender who can assist you with determining your qualifications.

To slightly modify Thomas Palmer’s famous phrase, “If at first you don’t qualify, try, try a co-signer”. 🙂

Lending A Hand

Scott Wynn

The Wynn Team

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