Sometimes you can’t get approved for a mortgage. It may mean that you’ll need a cosigner. When someone cosigns on a loan for you, they take on the responsibility of the mortgage if you stop paying. That’s a big responsibility. Each loan has its own requirements regarding cosigners, including the USDA loan.
The Basic Cosigner Requirements
The USDA loan offers flexible guidelines. You don’t need a down payment and you can have a low credit score. In fact, you have to have low income in order to qualify for the loan as well. But, if your income is too low, you’ll need someone to cosign with you. Here are the requirements this person must meet:
- The person signing on the loan with you must live in the home. They can’t be a non-occupant borrower. This gives the borrower a vested interest in the home.
- The co-borrower does not have to be a relative.
- The co-borrower should have a higher credit score or income than you.
Each lender may add other requirements onto this scenario. It depends on the lender and what risks they want to take. It also depends on your exact circumstances. In other words, it depends on how risky your application looks to the lender.
Things a Cosigner Can’t Make Up For
A cosigner can’t make certain negative things disappear from your loan application, though. If you have any of the following, having someone sign on the loan with you will not get you an approval:
– Defaulted federal debt
– Liens due to unpaid income taxes
– Foreclosures, especially on a government-backed loan
If you have any of these items, you’ll have to clear them up or wait the appropriate time for them to disappear. In the case of defaulted federal debt, you’ll likely be ineligible for a USDA loan at all. The government doesn’t take lightly to defaulted debt.
The Cosigner Must Meet USDA Guidelines
As suggested above, the cosigner must have better income and/or credit than you. Let’s say for example you have a 500 credit score with recent late payments. The USDA won’t accept this risk. However, if you have someone willing to sign on the loan with you that has a 700 credit score, it can help your situation. Someone signing on the loan with you can also help increase your total monthly income. This, in turn, helps lower your debt ratio. The USDA allows a maximum debt ratio of 29% on the front-end and 41% on the back-end. If your income doesn’t quite get your ratios that low, you can have someone sign on the loan with you. Keep in mind, though, any debts that person has get included in the debt ratio as well.
Fixing Your Credit – An Alternative to a Cosigner
There is one alternative to a consigner if you have bad credit. You can work on fixing your credit up. This takes time, so don’t expect it to be an overnight fix. First, you must pull your credit from each of the three bureaus – Equifax, Experian, and Trans Union. Then you can determine what makes your score low. Is it late payments? Do you have too much credit outstanding? Are there collections?
Once you know what is wrong, you can work on fixing it. Bring your late payments current and continue making your payments on time. Pay your credit card debt down. A good rule of thumb is to have no more than 30% of your available balance outstanding. You should also clear up any collections. Again, this won’t make your credit score skyrocket overnight. But, regular habits of good financial choices will help your score consistently increase.
It’s important to talk to your lender about your chances of getting approved for a USDA loan without a cosigner. If you find that you need one, make sure it’s someone you trust and that trusts you. Cosigning on a loan is a big deal. The person takes on the responsibility of a very large loan in the event that you default. Understanding the terms and making sure everyone is on the same page is crucial to a successful outcome of this situation.