What Is A Co-Signer In A USDA Loan?
Co-signers are people who choose to take on the full legal responsibility of paying a loan if the original borrower fails to do so for whatever reason.
Co-signers are a part of many different loan processes. In fact, almost all federally supported loan programs can make use of co-signers if you choose. The major difference between a private and federal loan program is that government-supported mortgage loans do not typically require a co-signer. Rather, using a co-signer is an optional way to improve the loan terms.
In a private loan situation, there are many scenarios where a co-signer is required for your loan to be able to qualify at all. With a USDA loan, you will only be asked to use a co-signer if you do not meet the income requirements set forth by the program.
No matter what your goals are for purchasing a home, you can make the entire experience that much easier for you when you understand the premises on which the USDA loan program is founded.
One of the areas that people often don't know much about is the subject of co-signers.
Of course, our national network of top experts in USDA loans will be able to help you with any questions you may have. However, it's always a good idea to know the basics while you are looking for the right property to buy.
What do you need to know about the requirements for a USDA loan co-signer?
The co-signer does not necessarily need to be someone related to you or even someone you have a long-term personal relationship with, although this can make things easier in the long run.
Basically, the co-signer takes on several responsibilities if you default on, or cannot pay, your loan. USDA loan programs do allow you to take several steps that can make it easier to pay, but what if you must relinquish the property and give up on the loan?
If this worst-case scenario happens, then the co-signer will be held responsible:
- The co-signer will take on all the legal obligations associated with the loan
- The co-signer must be someone who also occupies the home along with you
- Having a co-signer helps to strengthen your overall creditworthiness
There are two major components to qualifying for any loan: Your credit score and your income verification. Income verification demonstrates that you can pay for the loan that you want, while credit score shows that you are typically responsible with money.
The USDA Guaranteed home loan program does not require any specific credit score to be considered. However, individual lenders can still decide whether or not you are qualified on the basis of your credit history.
If you are not deemed creditworthy based on your own history, then you can improve your chances of achieving a loan on favorable terms with the help of a loan co-signer. This could be a spouse, sibling, parent, or close friend.
In practical terms, having a co-signer means having two people who can both be held fully responsible for a loan. If the original borrower is not able to meet the repayment terms, then the loan becomes the responsibility of the co-signer.
The co-signer needs to be also living in the home. This is so the co-signer has a vested interest in making sure that the home is paid for. Likewise, it helps to ensure that the co-signer is someone who has something to gain by taking on such a responsibility.
Remember, even though the USDA loan program is defined by the federal government, that does not mean that you receive your loan from the government. Instead, agencies of the government set standards that lenders have to abide by.
Within these standards, there will always be some differences between lenders. One of these differences is what they might consider being a creditworthy credit score. However, they do need to make use of defined government formulas to make certain decisions.
If you have someone else who is going to live on the USDA financed property with you, then it may be possible to have them serve as a co-signer if their credit score or history is higher than your own.
Different kinds of borrowers make use of co-signers on a USDA loan. For example, an entrepreneur who has only been in business for one year may need a co-signer, because you must have two years of income to qualify.
Using a co-signer does not mean that you will get worse rates than others in the USDA program.
Likewise, you can select from many other federal government programs that also allow you to use co-signers. We can help you access a world of options when it comes to mortgage loans.
Who is qualified to serve as a co-signer for this loan program?
The co-signer must be a resident of the home that will be financed under the loan. In an ideal situation, this person has an income or credit score higher than your own. However, this is not always necessary: Even if your income is the same, you can often still qualify.
What if I don't have anyone living with me on the financed property?
If you don't have anyone living with you on the property, then you might consider an FHA loan instead. An FHA loan is also a federal government-backed mortgage loan but has a different set of qualifications.
What requirements do I need to meet?
Typical requirements include:
- A debt to income ratio of 29/41 or better when debts and mortgage are included
- A credit score no lower than 640 for most lenders beginning Jan. 2018
- An overall pattern of recent fiscal responsibility
Can anyone get a USDA loan?
Although anyone is eligible for a USDA loan, both the borrower and the property must meet some basic requirements. Borrowers must be at least 18 years of age, must be citizens or qualifying aliens, and must be unable to obtain conventional loan funding. Our team can help you to make sure that you qualify for the loan.
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