Can a Co-Signer or Guarantor Help You Get a Mortgage in New York?
For many buying a home is a dream they don't they could actually qualify for either because they have bad credit or low income.
However, there is more than one way of being approved for a mortgage.
One possible answer is either signing on a co-applicant (or a co-signer) or bringing on a guarantor.
You might have heard these terms for New York City rental apartments, but it can be applied to mortgages as well.
Can I Have Co-signer or Guarantor on a Mortgage?
- A co-signer and guarantor are very similar in that they can help you qualify for a mortgage and provide security to the lender should you have a weaker financial or credit profile.
- A co-signer is equally responsible for the monthly mortgage payments and is also put on the title for the property.
- A guarantor will be liable for payments after the borrower defaults, and his or her name does not appear on the title or deed.
- Low funds, not great credit, or a high debt-to-income ratio can cause you to seek a co-borrower or guarantor for your mortgage application.
- Missing or defaulting on your mortgage payments will not just seriously affect your credit, but also any co-borrower or guarantor.
- Ways you can avoid using a co-signer or guarantor is by improving your credit, reducing your debt, and using an FHA or VA loan.
What is a Co-Signer for a Mortgage?
A co-signer (also known as a “co-borrower” or "co-applicant") is someone whose name is on a mortgage, along with yours—and responsible for the regular, monthly mortgage payments as well.
There’s an emphasis on “regular” to distinguish a co-signer’s role from that of a guarantor, which we’ll discuss later.
Your co-signer's name will also be on the title for the home you jointly purchased, and will be considered equally responsible for those monthly payments.
Usually, the lender will collect the mortgage payments from the original applicant, but if they miss a payment, the co-signer is directly responsible for making the payment.
Conversely, co-signers may make these monthly payments jointly with the primary mortgage holder.
Typically, co-signers are married or romantically involved, but they could also be relatives or friends.
Note that people who are not married are specifically referred to as “co-applicants.”
Also note that, while their name is on the mortgage or deed, a co-applicant may choose to own but not live in the home that he or she helped to purchase.
If you apply as a co-signer, you will fill out one mortgage application form together, as a couple.
For co-applicants, although you’ll be applying for the same mortgage, you will be filling out separate applications.
It’s also possible to have co-signers whose names are on the mortgage, but not on the deed. This is typical of parents who leverage their credit and financial history to help their child obtain a mortgage.
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What is a Guarantor for a Mortgage?
A guarantor is akin to having a silent partner in a business—they play a major role, but largely behind the scenes.
Like a co-borrower, a guarantor should have a strong credit history and income and asset levels to help you close on a mortgage your individual financial profile might fail to qualify you for.
However, unlike a co-borrower, a guarantor does not pay monthly mortgage payments.
That’s your responsibility.
In addition, a guarantor’s name won’t be on your deed.
A guarantor swoops in to cover mortgage payments if you temporarily fall behind or to help the lender absorb the financial hit if you default, but only once the bank has exhausted every avenue with the borrower.
But…you don’t want to fall behind or default.
Another mortgage-lender safety net for defaults is having the guarantor put a one-time lump sum into an interest-bearing savings account set up by the lender.
When the loan value of the mortgage decreases (usually to around 80%), the bank will release the guarantor from the loan agreement—and refund the money.
A guarantor gives a lender peace of mind about extending a mortgage to you.
Your guarantor is the fiscal security blanket that lets your lender sleep at night.
|Type of Borrower||Responsible for Payments||Property Title holder||Credit is Affected by Default|
|Guarantor||No, only if borrower defaults||No||Yes|
When Should You Use a Co-signer or a Guarantor?
Co-signers or co-borrowers really are not out of the norm as many married couples go into buying a house together and automatically become co-borrowers.
Not as common are co-applicants and guarantors.
The single biggest reason why people combine forces with a co-signer is upping their chance of being approved for a mortgage.
There are a couple of scenarios that might help a home buyer in need of a mortgage.
If you have weak credit and/or financial profile; are just starting a career; and/or have a low down payment—or none, applying for a mortgage with a co-signer or co-applicant can be very helpful.
Poor or no credit
A guarantor mortgage best suits applicants with a low deposit—or no deposit; someone with a week credit score or no credit profile; and/or a borrower who seems like they can’t afford the property on their own.
We should assume if you are using a guarantor that their credit is good or excellent as if it is not, it defeats the purpose of using a guarantor.
Your guarantor's strong credit should override your poor one.
If you don't make enough to satisfy the banks, combining a co-applicant's income combined with yours would definitely increase your financial profile.
In turn, a guarantor might also be able to help you in this respect.
Your debt-to-income ratio (DTI) is high
Whether a co-signer or a guarantor is required, a key factor lenders consider when processing your loan application is your debt-to-income ratio (DTI).
You calculate your DTI by totaling all your monthly debt payments and dividing it by your gross monthly income.
A low DTI is what lenders desire.
A co-borrower with a better financial profile can help to lower your collective DTI when you calculate the average DTI between you both.
In general, lenders are looking for guarantors who are property owners; earn enough to cover missed mortgage payments—if need be, and have a strong credit report and score.
Combining your income and profile with those of a guarantor could also help to qualify you for a higher mortgage amount.
Lender down payment terms vary: Some lenders let borrowers with a guarantor get a mortgage with no down payment—while others still require one.
What If My Mortgage Payments Fall Behind?
If you hit a bump and fall behind on mortgage payments, several things could occur:
- Your lender extends your loan-repayment schedule
- Your lender asks your guarantor to cover the missed payment
- You incur a fee
- If you miss several payments, your lender could withdraw money from the savings account that holds the guarantor’s lump-sum deposit—if such an account was established
- Last resort would be the lender repossessing your home—and, in some cases, your guarantor’s home as well, for full debt recovery
When Co-signers Don't Help You Get a Mortgage
Unfortunately, there are some situations where bringing in a co-borrower will not benefit you. The following scenarios will require you to take other actions.
Poor or no credit
A co-signer or co-applicant will not be able to help you if you are suffering from a low credit score or don't have any credit as lender typically use the lower of the two credit scores.
This a situation perhaps that is better suited for a guarantor to step in since they are basically guaranteeing the loan.
However, using a guarantor with a low credit score is not a possibility as this is the number one requirement for a guarantor.
Your co-signer has a lot of debt
If you have some debt but your co-applicant has significantly more, it may hurt your chances instead of helping.
Instead of focusing on higher income, you should work on reducing debt.
There are programs like FHA loans that may be more forgiving with your income level and your DTI.
You're interested in purchasing an NYC co-op apartment
Co-ops outnumber condos in NYC—by about 75%. There are more co-ops in New York City than in any other part of the country.
While some co-ops will accept guarantors, some will not.
Co-ops in New York’s five boroughs are notoriously finicky about who they will let in and may feel that those who can’t afford the property on their own are not the right kind of people for that building.
That said, you may have an easier time buying a condo with a guarantor than purchasing a co-op.
What should you do if your spouse will hurt your chances for a mortgage?
If you plan on bringing on a co-borrower who is your spouse, but they have bad credit or a lot of debt, it will hurt your chances of being approved for a loan or you could possibly be faced with higher interest rates.
In that scenario, it is actually possible to go it alone for the mortgage and just put your spouse's name on the deed.
Future refinancing will give you an opportunity to add or remove the other person’s name from the mortgage or lease.
Ways You Can Avoid Using a Co-signer or Guarantor
Using a co-borrower or guarantor because you can't afford a mortgage or because your credit is less than great, should always be a last resort.
With some smart decisions, you can avoid this situation.
Don't purchase a house you can't afford
Parents and family members who act as guarantors to help a child afford a first home is one thing.
Guarantors who put their financial reputations (and potentially their own money) on the line to help someone pursuing more home than they can afford is something different.
So, your responsibility: Be responsible. Do your due diligence and be wise about the home purchase.
If you default, your guarantor can not only potentially lose money but literally the roof over his or her head if your guarantor used his or her home as collateral.
So…make sure that the home you buy is one that you can actually afford!
Work on building your credit
Getting your credit score from bad to fair should definitely be a priority if this is why you're investigating co-signers and guarantors.
However, there is even merit in getting your credit score from good to excellent.
Applicants with credit scores in the excellent range normally qualify for the lowest interest rates, so it's definitely worth, taking a pause in your home search to work on your credit, even if it's already good.
Reduce your debt
Again, lenders generally price lower debt than having a higher income, after all taking out a mortgage is putting you further in debt.
If a lot of debt is weighing you down, you should take measures to cut out your monthly expenses.
Cut down on your spending and then concentrate on paying down your debt.
Just in case, you can pay down every creditor each month, you should target cutting big chunks into those who impose higher interest rates, so you're not incurring even more debt.
If you can pay down your credit cards in a hurry, just get a statement your bank and send it to your loan officer or mortgage broker to show that your debt has been lowered.
One way to reduce your debt is to offer a lower down payment than 20%, and use some of those savings to pay down your personal debt.
You may be required to purchase PMI, but it may be worth it to you to be able to purchase your dream home.
Take out an FHA or VA loan
FHA-backed loans and VA loans typically accept a higher DTI (up to 50%), so if for some reason you can't reduce your debt, this might be a better option.
There is a caveat for the New York City market, however. Taking out an FHA loan will limit your choices on what you can buy.
Just as co-ops can be finicky about co-borrowers and guarantors, they are not likely at all to take an applicant with an FHA-backed loan.
Furthermore, most co-ops take a serious look at your DTI and personal finances, so they may have more stringent guidelines and reject your application on that basis.
Even most condo buildings will not take FHA-backed loans because they do not want to deal with the financial vetting process, which is an annual affair if they want to stay approved.
You can try each condo individually and see if they would be willing, but the chances aren't great, especially with new developments.
FHA and VA loans are also not popular in New York primarily for the reason that applicants for these loans tend to put less than 20% down
These options, however, may still be viable for some condos on a case-by-case basis and certainly single-family homes.
Look for local and state programs to help you out
The New York State runs a program under the State of New York Mortgage Agency (SONYMA) to help first-time homebuyers qualify for a low cost, low-interest 30-year mortgage called Achieving the Dream.
Under this program, applicants can get a mortgage with low-interest rates, minimal cash contribution requirements, and low down payment even for co-ops and condos.
SONYMA even assists with loans for down payments.
Being Careful When Using a Co-signer or Guarantor
Being financially cautious can prevent future problems
Whether it’s a co-signer, co-applicant, or guarantor, all these scenarios center around relationships—familial, marital, or otherwise.
If people are willing to enter such financial arrangements, it means that the personal relationships between them are (currently) amicable.
The goal is to keep it that way.
In addition to the contract with the lender, the borrowers should have a legally binding contract between themselves.
The contract may state, for instance, that if the borrower finds him or herself on the verge of default, they will proactively sell the property, rather than engaging in protracted litigation with the bank—where the guarantor’s assets might be seized as well.
How guarantors can protect themselves
If you feel uneasy about becoming a guarantor, but you want to help a loved one, you can simply make a gift to help with the down payment. This eliminates having your name on the mortgage or deed.
There are limits on how much of a down payment you can gift without being taxed (in the case of an FHA loan, the entire 20% down payment can be a gift) as long as they meet the IRS's guidelines.
So, check with your accountant, real estate attorney, and real estate broker to contribute within lending and tax guidelines.
As a guarantor, you can also ask that the person you’re helping to show monthly proof that he or she is making mortgage payments (for the length of the guarantor relationship).
That way, there are no nasty surprises, where the first person you’re hearing from about arrears or default is the bank!
Appreciate you co-signer or guarantor
If you’re on the receiving end, be conscientious and gracious that what a co-signer, co-applicant, or co-borrower is doing for you isliterally a gift.
Reward that individual’s generosity through good homeowner stewardship that doesn’t dent or damage your gift giver’s credit score and financial reports—or worse….
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