Do I Need a Cosigner to Apply for Home Equity?

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Any homeowner can apply for a home equity loan but having a cosigner can help or hurt the application. Lenders allow homeowners to use home equity loans as first or second mortgages. Before approving a loan application, the lender determines whether the house has sufficient value to support the loan and if the borrower can afford the payments. Applicant's who cannot qualify for a home equity product often reapply with a cosigner. Depending on the reason for the original declination this may help the loan get approved.

Credit Score

Prior to ordering an appraisal or asking a loan applicant to provide supporting documentation, lenders check credit reports. Generally, lenders have a minimum score requirement. If you have a score below that level, you cannot qualify for an equity loan with or without a cosigner. If you have a low score that meets the minimum, you could benefit from having a cosigner with a higher credit rating. Banks base interest rates and loan amounts on credit scores, and the addition of a cosigner with a high score raises the overall credit rating of the application.

Income

Lenders determine how much to lend an applicant by calculating the applicant's debt-to-income ratio. This ratio includes all of the applicants existing debt as well as the projected home equity payment. Typically, debts cannot exceed 40 or 50 percent of an individual's gross income. If you add a cosigner with minimal debt to the application, it helps the overall debt-to-income ratio. The opposite occurs if you add someone with significant debt. Applicants with shared debt often have problems because shared debts show up on both applicants' credit reports. Lenders who do not catch this may wrongly disqualify applicants on the basis of high debt-to-income ratios.

Ownership Interest

Legally, someone without an ownership stake in a house can sign as a borrower on a loan secured by it. However, lenders typically are reluctant to allow cosigners with no ownership interest in the property. Lenders do not like to have situations in which the homeowner relies on the goodwill of a nonowner to make mortgage payments. Lenders have limited recourse against nonowners who refuse to make payments. Therefore, few lenders allow cosigners unless the cosigner owns or lives in the home being financed.

Funds Access

Home equity lines of credit are similar to credit cards except the loans are secured by residential property. If you add a cosigner to your home equity line of credit, that cosigner has equal access to the line of credit. Most lines of credit stay open for 10 or 15 years, which means the cosigner could draw on the funds at any time in the future, without your consent, and legally use the funds. You, along with the cosigner, must make payments on funds used but, unlike the cosigner, you stand to lose your home if payments are not made.

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