A co-signer is the most common way a buyer who comes up short on income closes the gap, and it's how most of the buyers AAA Capital Funding gets approved make the numbers work. A parent, grandparent or other relative signs the loan with you, and the lender adds their income to yours. They don't go on the title or move in, and their Social Security or SSI counts as income. FHA and Conventional handle co-signers a little differently, and the co-signer's own debts come along for the ride, so the example further down runs the real math on a grandmother's Social Security.
Co-signer, co-borrower and non-occupant co-borrower
The agencies use a few overlapping terms, and the difference is ownership.
HUD's FHA handbook separates two roles. A co-borrower signs the mortgage note and takes title to the home, so they own part of it. A cosigner signs the note and is responsible for the debt but has no ownership interest in the property. Either one can be a non-occupant, meaning a person who won't live in the home.
Fannie Mae, which sets the rules for most Conventional loans, uses "guarantor or co-signer" for someone who signs the note, shares liability for the debt with the buyer, has no ownership interest on the title, and has no stake in the sale. Its "non-occupant borrower" is anyone on the loan who doesn't live in the home, whether or not they're on the title.
In plain terms, when AAA Capital Funding talks about a co-signer, it means the relative who signs the loan with you, doesn't go on the title and doesn't have to live in the home. The house is yours.
Who can co-sign
On FHA, a family member can co-sign and you keep FHA's full financing on a single-family home: 3.5% down, or $0 down with FHA 100% financing. Family includes parents, grandparents, children, brothers and sisters, aunts and uncles, and in-laws. A co-signer who isn't family limits the loan to 75% loan-to-value (LTV, the loan divided by the price), which means 25% down.
On Conventional, the co-signer doesn't have to be related. With a non-occupant on the loan, Fannie Mae's Desktop Underwriter (DU) caps the loan at 95% LTV, so plan on 5% down instead of the usual 3%.
On both, the co-signer can't have a stake in the sale, so the seller, the builder and the real estate agent can't co-sign. The co-signer's credit is pulled along with yours.
Age and income source don't matter. A retired grandparent living on Social Security qualifies the same way a working parent does, as long as the income is steady and documented, usually with an award letter and bank statements.
USDA doesn't allow co-signers or non-occupant co-borrowers at all; only the people who will live in the home can sign. VA expects the people on the loan to live in the home. When you need a co-signer, FHA or Conventional is the route.
How a co-signer's income and debts count
The lender adds the co-signer's monthly income to yours and adds the co-signer's monthly debts to yours, then runs the combined numbers against the program's debt-to-income limits. Debt-to-income ratio, or DTI, is the house payment plus monthly debts divided by gross monthly income. FHA allows 46.9% for the house payment and 56.9% for all debts with automated approval. Conventional allows 50% total. The debt-to-income ratio guide covers the full formula.
Non-taxable income gets grossed up
SSI is never taxed, and for many retirees some or all of their Social Security isn't taxed either. Because that money isn't reduced by taxes, the agencies let the lender "gross it up" so it compares fairly with a paycheck.
| Co-signer receives $1,450 a month | FHA counts | Conventional counts |
|---|---|---|
| SSI or non-taxable Social Security | $1,667.50 (plus 15%) | $1,812.50 (plus 25%) |
| Taxable pension or wages | $1,450.00 | $1,450.00 |
Fannie Mae's standard is 25%, or more if the actual tax rate a wage earner in that bracket would pay is higher. AAA uses 15% on FHA.
The co-signer's own debts come along
Everything on the co-signer's credit report counts: a car loan, credit card minimums, other mortgages. Their own housing cost counts too. If they rent, that's the rent. If they own a home free and clear, it's the property taxes and insurance. A co-signer with steady income and few debts adds the most.
To see what one particular relative adds before anybody signs, call AAA Capital Funding at 888-601-8344. We'll run the two of you together.
A grandmother on Social Security, in numbers
Alexis earns $3,900 a month gross and has a 640 credit score, a $310 car payment and $55 in credit card minimums, so $365 a month in debts. The examples use a 5.75% 30-year fixed rate, property tax of 0.95% a year (Broward County) and homeowners insurance of $283 a month.
Alexis alone, FHA 100% financing. FHA 100% financing is a 96.5% FHA first mortgage plus a down payment assistance second that covers the 3.5% down, so Alexis brings $0 for the down payment. On $3,900 a month, the 46.9% housing limit is $1,829.10, and that stops Alexis at a $222,000 price.
Adding her grandmother. Her grandmother receives $1,450 a month in Social Security that isn't taxed, so FHA counts $1,667.50. She owns her home free and clear, and her $320 a month in taxes and insurance counts as debt.
| Alexis alone | With grandmother | |
|---|---|---|
| Qualifying income | $3,900.00 | $5,567.50 |
| Monthly debts counted | $365.00 | $685.00 |
| Highest FHA price | $222,000 | $315,000 |
At $315,000 the numbers look like this:
| Line | Monthly |
|---|---|
| Base loan $303,975 plus 1.75% upfront MIP ($5,319.56), total $309,294.56 at 5.75% | $1,804.96 |
| Property tax | $249.38 |
| Homeowners insurance | $283.00 |
| Annual MIP at 0.55% | $139.32 |
| House payment | $2,476.66 |
MIP is FHA's mortgage insurance premium. The house payment is 44.5% of the combined $5,567.50, and with $685 in debts the total is 56.8%, inside FHA's 56.9%. Her grandmother adds $93,000 to what Alexis can buy. The 15% gross-up alone is worth $17,000 of that: if the same $1,450 were a taxable pension, the price would be $298,000.
On Conventional, Alexis alone reaches $172,000 with 3% down, where the 50% total DTI limit stops her. With her grandmother's income grossed up 25% to $1,812.50 and 5% down, she reaches $260,000.
FHA and Conventional side by side
| Rule | FHA | Conventional (Fannie Mae) |
|---|---|---|
| Who can co-sign | Family for full financing; others limited to 75% LTV | Anyone without a stake in the sale |
| Minimum down, single-family | 3.5%, or $0 with FHA 100% financing | 5% |
| 2 to 4 units | 25% down (75% LTV) | 5% |
| Non-taxable income gross-up | 15% | 25% |
| On the title | No | No |
| Lives in the home | No | No |
The 2 to 4 unit rule
FHA limits a loan with a non-occupant co-borrower to 75% LTV on a 2 to 4 unit property, and that applies even when the co-signer is family. On a $500,000 duplex, that's $125,000 down. A buyer house hacking a duplex or fourplex usually does better with FHA's 3.5% down and no co-signer, because 75% of the other units' expected rent is added to the buyer's income. The FHA house hacking guide runs that math.
What the co-signer signs up for
The co-signer is fully responsible for the loan along with you, and it shows on their credit report as their debt. Your on-time payments report on it too. Once you've made 12 months of payments from your own account, Fannie Mae lets a lender leave this loan out of your co-signer's DTI if they apply for a loan of their own, as long as the lender sees those 12 months of statements.
The co-signer doesn't need to stay on forever. When your income grows enough to carry the payment alone, you refinance into your own name and their obligation ends.
To see what a co-signer adds to your price, enter both incomes in the co-signer calculator. If cash is the other thing holding you back, the FHA 100% financing guide shows how the down payment assistance second covers the 3.5%. Before you ask a parent or grandparent to sign, it helps to talk it over with someone who sets these loans up every day. AAA Capital Funding is at 888-601-8344, and we're happy to walk both of you through it.