Dennis' Mortgage Blog

Question of the week:  Can my parents co-sign because of my credit?

Answer:  Often I am asked the same, or similar, question several times over a short period and this is one I have had several times over the past few weeks.

A client has some spotty reports on their credit report, enough that they are unable to qualify for the purchase or refinance mortgage they want, looking for a solution they ask if someone, typically parents, can co-sign on the account so they can get approved.

No.  Credit is the one area where a co-signer cannot help a file.  We can co-sign to get more income for qualifying, we can co-sign to bring more assets to an application to qualify, but we cannot co-sign to eliminate bad or less than required credit.

It used to be that our credit component was based primarily on the primary borrower as defined by who makes the most money.  All the debts of the borrowers on the application would be counted for the debt to income ratios, however the middle score of the primary borrower was the score used for the application.  (For instance if Donna earned more than Phil and Donna’s middle score was 718 and Phil’s was 765 the score used for qualifying was 718; if Donna’s was 765 and Phil’s was 718 then we would use Donna’s score of 765.)

Today the lowest middle credit score of all borrowers is used as the score for the file, regardless of who makes what income.  If in the above scenarios Phil did not work and Donna did, it would make no difference as in both scenarios the 718 score is the lowest and would be used.

Hence, if you have a 650 credit score and do not qualify for a mortgage product because you do not meet the 720 threshold (for many jumbo products) then adding your parents who have scores over 800 points would not matter, the lowest of the credit scores, yours, is what would be the score used for underwriting.

Taking this a step further, you can eliminated low credit scores if one spouse is able to qualify on their own for the mortgage.  There are some wrinkles however.  For FHA mortgages we will need a credit report for the non-signing spouse and any debt s/he has will be counted in the file, however low credit scores will not.  For Fannie Mae and Freddie Mac no credit report is required and no debt on the non-signing spouses credit report that is not on the borrower’s report will be counted.

Since you cannot co-sign poor credit it is best to be aware of what your credit scores and reports show, if there are derogatory accounts that impact your score determine what steps you need to take to raise your scores to the levels needed so you can purchase your new home or refinance your current mortgage.

Have a question?  Ask me!

Next Wednesday is a major deadline.  Not only to make sure you have your turkey and it is fully thawed, since there is little chance it will thaw in one day, but also for the “Super Committee” that was put together over the summer in Congress.  As you may recall the task of the Super Committee, which is comprised of members of the House and Senate from both political parties, is to cut $1.2 trillion from the federal deficit over the next ten years.  With deficits running at approximately $1.5 trillion the past few years cutting $120 billion each of the next ten years seems pretty simple—that is about twenty five percent of what is paid in interest on the national debt each year—but with five days left until the deadline to present their plan to cut future deficits there is no plan yet and evidently the committee is not near to one.

If there is no deficit cutting plan by Wednesday’s deadline then automatic cuts split between defense and domestic spending of $1.2 trillion over the next decade will automatically go into effect beginning in 2013.  Which of course gives Congress plenty of time to find a way to get around the automatic cuts.

Why does this matter?  Against the backdrop of the European fiscal crisis that has affect Greece, then Italy and now Spain is starting to show stronger symptoms, the national debt for the United States is causing greater concern for investors and taxpayers.  During the summer’s debate of the budget that led to the creation of the Super Committee one of the major credit rating agencies downgraded U.S. debt.  While interest rates have dropped since that August downgrade allowing the message to be lost, should Congress and the  White House not take serious measures to not only cut the national deficit but reverse it so that the national debt, which surpassed $15 trillion yesterday, can also drop.

Failure to cut the deficits and national debt puts our country on the same fiscal path that is causing Greece, Italy and now Spain to pay very high interest rates on their national debt.  Higher rates on the debt leads to higher rates for consumers and borrowers and chokes off economic growth at a time our economy is showing very, very modest signs of growth.

Economic data this week included reports for PPI (Producer Price Index, cost to producers for the goods needed to manufacture their goods) and the CPI (Consumer Price Index, what you and I pay for goods and services).  Both numbers for October came in lower than expected and lower than September.  The CPI is the primary gauge of inflation and is used by the Federal Reserve in determining whether to raise short term interest rates or not.  With the numbers released this week there is little threat to higher rates.

Retailers continue to smile, or at least grin a little, with retail sales increasing 0.5% from September to October and running the streak to several months of positive growth. This bodes well for the holiday shopping season which officially kicks off one week from today.  Consumers are the major force of the economy, estimated to be 70% of the Gross National Product as a result of their spending.  Increasing retail sales, however slight, is a positive for the economy.

Rates for Friday November 18, 2011: Mostly off of a bounce on Wednesday when Spain’s financial woes became part of the news cycle rates for the week are down slightly from last Friday.  We are in a narrow range the past two months on conforming and FHA mortgages, I see nothing to break us out of the range one way or the other in coming weeks.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.75%               Down  0.125%

30 year high-balance conforming           4.00%               Down  0.125%

30 year FHA*                                                   3.75%               Flat

30 year FHA high-balance*                   3.75%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  Rates are based on 20% down (3.5% for FHA)  with 740 FICO score for purchase mortgages.

* Current rates include credit towards closing costs, call for quote on rate and credit.

Longtime members of the Long Beach real estate will know the name Barbara Farrow.  I met Barbara in the late 1980’s and she had a big impact on my career, and that of many other affiliates in the lending, title, escrow and home inspection industries.  She mentored many new agents over her long career and was always introducing people in the industry.  She was a mentor for me and a friend, always calling to check up on me and Leslie, who knew Barbara before I did from when she, Leslie, worked at the old Long Beach Board of Realtors.

In 1999 I called Barbara and told her that Leslie was pregnant with our first child.  I will remember always the joy in her voice and genuine excitement for us.  At one point in our conversation she said, “Dennis I know you may get nervous over this, how will a baby affect your relationship with Leslie, how will you fit in with her being a Mom and having a baby, how can you give Leslie and your new child each the love they need.  Dennis I don’t know how but your heart always has more room for more love, to both give and to receive.  I know, I have three children and six grandkids, and each time one was born my heart got bigger and I had more love.”  She was right of course, and as Blaire was born and grew I thought of Barbara’s words and how much more capacity to love I had than I thought I could, and it was proven again two and a half years later when Jenna was born.

Barbara taught me many lessons in real estate, and in life.  This morning, along with many other old friends from the industry, I attended Barbara’s memorial service.  She touched many lives with her work and more importantly with her friendship and willingness to offer counsel, advice or an ear.  A woman of deep faith we take solace in her passing knowing her strong faith and love for God carries her on her next journey.

God bless you Barbara and thank you for all your kind words and deeds for Leslie and me.

Have a great week,

Dennis