Can You Use a Cosigner Instead of Mortgage Insurance?

Mortgage insurance exists to protect the lender if you fail to repay your loan. When the ratio of your loan balance to the value of your home is high, many lenders will require you to purchase a mortgage insurance policy, which increases your monthly mortgage payment. While using a cosigner may help you qualify for a loan, it won't typically eliminate mortgage insurance.

LTV Ratios

Whether you need mortgage insurance depends on your loan-to-value ratio, which is the ratio of your loan balance to the purchase price. For example, if you purchase a home for $300,000 and make a downpayment of $25,000, your LTV ratio is 83 percent ($25,000 divided by $300,000). As you continue to make payments on your mortgage, the balance of your loan decreases, thus decreasing your LTV.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are the two largest buyers of conventional loans in the secondary loan market. Both of these companies require loans with LTVs higher than 80 percent to carry a mortgage insurance policy before they will agree to purchase them from the original lender. The policy can be financed by the borrower, or it can be paid for by the lender. However, if no such policy exists, neither company will service the loan.

FHA

The Federal Housing Administration guarantees loans for borrowers who can't qualify for conventional financing. At the time of publication, FHA requires all borrowers to pay mortgage insurance, regardless of their loan balance or any other compensating factors. For loans originated before April 1, 2013, FHA requires monthly mortgage insurance payments for a minimum of five years and until the LTV reaches 78 percent. For loans originated after April 1, 2013, FHA requires mortgage insurance payments over the life of the loan, regardless of LTV.

Implications

According to the "New York Times," FHA, Freddie Mac and Fannie Mae service 90 percent of loans in the United States. If you have an FHA loan, using a cosigner will never help you avoid mortgage insurance. Using a cosigner won't help you if you have a conventional loan that the lender plans to sell on the secondary market, either, unless the lender agrees to carry the policy for you. However, if you find a lender that doesn't plan to sell your loan, you may be able to convince him to waive mortgage insurance if you provide a cosigner.