Cosigning a Mortgage With a USDA Loan: How Does It Work?

Can mom cosign my USDA loan?

Parents co-signing a loanIf you have a low to moderate income and want to buy a property, becoming a cosigner for a USDA loan may be your best option.

Cosigners are responsible for signing a loan application and are usually prepared to do so if they believe the borrower will be able to repay the amount. Cosigning for a USDA loan can improve your chances of getting approved, and it's a vital step in the home-buying process.

What Is a Cosigner?

By cosigning the loan application and settlement paperwork, a cosigner assures debt repayment. The cosigner is liable for repaying the loan if the borrower is unable to do so. That's a large burden to bear. Each loan, including the USDA loan, has its unique set of cosigner requirements.

USDA Cosigners Requirements

The USDA's underwriting guidelines allow eligible cosigners to be added to a loan application in order to boost the borrower's buying power. However, the guidelines prohibit using a cosigner to compensate for a borrower with a bad credit history.

Unpaid federal debt, tax liens, or previous foreclosures can disqualify a buyer or cosigner. Cosigners must also have a debt-to-income ratio of no more than 41 percent and demonstrate the capacity to repay the loan.

What Are the Benefits of Using a Cosigner?

Using a cosigner has several advantages, including helping you qualify for a loan and obtaining a lower interest rate. The primary advantage of employing a cosigner is that it will facilitate your loan application. In many instances, a cosigner is essential to move ahead with a loan application.

What Are the Downsides of Using a Cosigner?

Someone who cosigns a loan with you is a cosigner. They offer to cover the whole loan amount if you default on your payments. They are responsible for any costs and penalties charged by your lender.

What Are the Requirements of a Cosigner?

Rural houseThe USDA loan rules are flexible. The USDA home loan does not need a down payment, and you may have a lower credit score. However, if your income is insufficient to purchase a home, you will need a cosigner. Here are the prerequisites for a cosigner:

  • The cosigner must occupy the property. Non-occupying borrower (s) are not permitted by the USDA.
  • The co-borrower does not need to be a family member.
  • The co-borrower must have a better credit score or greater income than the primary borrower.

Each lender is free to add additional requirements. Using a cosigner depends on the lender and the amount of risk they are willing to accept. It also relies on the specifics of your situation. In other words, it depends on how the lender perceives your application.

USDA Cosigner Requirements Continued

As stated above, the cosigner must have a higher income and/or credit score than you. Suppose you have a credit score of 500 with recent late payments. The USDA and lender will not accept this risk.

However, if you have a cosigner with a 700 credit score who is ready to cosign the loan with you, it may help your loan application. In addition to increasing your overall credit profile, a cosigner may help to improve your monthly income.

In turn, this reduces your debt-to-income ratio. The USDA authorizes a maximum front-end debt ratio of 29% (payment ratio) and a maximum back-end debt ratio of 41% (debt ratio).

If your income is insufficient to meet the USDA debt to income percentages, a cosigner could be the answer to purchasing a home with a USDA mortgage. However, keep in mind that the debt ratio includes the co-borrower's income and monthly expenses.

Cosigner Can’t Make Up For Bad Credit

A cosigner cannot erase some unfavorable items from your loan application. If you have any of the following, having a cosigner will not increase your chances of loan approval:

  •  Federal debt in default
  • Unpaid income taxes liens
  • Foreclosures, especially on a loan backed by the government

If you have any negative credit, you must either clean it up or wait the required amount of time to do so. If you have defaulted federal debt, you will almost certainly be ineligible for a USDA loan. The government doesn't take unpaid debt lightly.


An Alternative to a Cosigner: Fix Your Credit

If you have poor credit, you need to improve your credit score. This takes time, so do not anticipate an instant solution. You must first get your free credit report from each of the three bureaus: Equifax, Experian, and Trans Union. Then, you can discover what contributes to your poor score. Is it late payments? Do you have too much outstanding credit? Existing collection accounts?

Once you have identified the issue, you may start on a solution. Bring your past-due payments current and continue to make on-time payments.

Pay off your credit card debt. A good rule of thumb is to limit your outstanding debt to no more than 30 percent of your available balance. Additionally, you should pay off any outstanding collection accounts. Again, this will not increase your credit score overnight. But, if you continually make sound financial decisions, your credit score will continue to rise.

Speak with your lender about your possibilities of obtaining a USDA loan without a cosigner. If you find yourself in need of a cosigner, ensure that it is someone you trust and who trusts you.

Cosigning a loan is a serious matter.

Understanding the rules and ensuring that everyone is on the same page are essential for a positive conclusion in this circumstance.

Rotating question markUSDA Loan Questions and Answers

The following is a collection of the most commonly asked questions about USDA loans.

Are USDA loans assumable?

Yes, USDA loans are assumable. This means that the loan can be transferred to a new borrower, who then becomes responsible for the loan payments. There are a few restrictions on who can assume a USDA loan, so be sure to check with your lender if you're interested in taking over someone else's loan.

How much will the closing costs be for USDA loan?

The closing costs associated with a USDA loan vary depending on the loan amount, as well as any other loan variables and state settlement procedures.

What is the cost of the USDA guarantee fee?

To find out how much mortgage insurance will cost for your loan, use our USDA loan calculator. All USDA loans have a 1.00 percent guarantee fee, as well as 0.40 percent of the loan total calculated annually and split into 12 monthly installments, including your mortgage payment. As you pay down your loan sum each year, your monthly mortgage insurance payment decreases.

Is there a down payment with USDA loans?

A USDA loan does not require a down payment. You can, however, put money down if you choose.

Will the USDA finance land?

Yes. A USDA rural development loan can be used to acquire land, but only if it will be used to build a new home.

Is it possible to buy a foreclosed home with a USDA loan?

There are no limits on acquiring a foreclosed house with a USDA loan. However, the house must be move-in ready. It can't be in bad condition. In addition, any house, whether foreclosed or not, must be located in one of the qualifying zones. Check the status of the property on the HUD website to see if it qualifies for USDA home finance.

Are loans from the USDA available for financing of manufactured homes?

Yes

Are inspections required with the USDA?

The appraisal is the only inspection, and it will provide details on the property's condition as well as its worth. If you wish to have a different type of home inspection, such as a termite inspection, that is totally up to you; however, it is not required.

Is new construction eligible for a USDA loan?

Even though there are no restrictions on new construction, getting financing for it might be difficult.

If you wish to finance a new home, you'll need to call around to find a willing USDA lender to process the mortgage.

Are mobile homes covered by the USDA?

Yes

How much will the USDA loan me?

The maximum loan amount you may get is determined on your income. It's not so much about how much money you make as it is about how much debt you have compared to how much money you make (debt-to-income ratio).

To figure out how much you can borrow (after confirming your eligibility), add up your monthly household income, calculate your monthly debts, and then figure out what percentage of your monthly income your debts are.

Included are those debts that require a monthly payment and may be found on your credit report, such as credit cards, vehicle loans, student loans, and any other loans or credit obligations.


Your mortgage payment may be no more than 29 percent of your gross income.

So, if your family income is $4,000, the maximum mortgage payment you may make is $1,160.

The entire amount of your monthly bills, in addition to your mortgage payment, is now the most essential ratio.

This is referred to as the backend ratio. The maximum backend ratio that may be used is 41%.

As a result, your monthly loan payments and new mortgage payment cannot total more than 41% of your income.

This equates to $1,640 every month if you earn $4,000 per month.
Most lenders set the maximum loan amount that someone may get at the conforming loan limit for your county, which is $647,200 for most of the United States.

Read more about USDA loans with our questions and answers page

Conclusion

In conclusion, having a cosigner for your USDA loan can be extremely beneficial, as they can help you secure a lower interest rate and increase your chances of being approved. Whether you are considering applying for a USDA loan, you should ask relatives or friends if they will cosign for you.