Debt to Income
Lenders calculate your debt-to-income ratio by dividing your monthly debt payments into your gross monthly income. Lenders have different DTI limits for different types of loans but few lenders approve loans for people with DTI levels in excess of 40 or 50 percent. If you add a co-signer to your loan, then the co-signer's income gets added to yours but the co-signer's debt also becomes part of the equation. If the co-signer has no income but has some debt, then you weaken your application in terms of DTI by adding the co-signer into the equation.
Income takes many forms and there are many unemployed people who regularly receive income from different sources. As an applicant or a co-signer, you can use income from Social Security, a pension or alimony to help you qualify for a loan. You can also use investment income or income from rental properties but only if you can substantiate that income by providing your lender with your tax returns or copies of lease agreements. Therefore, not having a job, does not necessarily mean that a co-signer has no income.
If your co-signer has no income source of any kind, you may still benefit from adding that person to your loan application but only if that individual has a good credit score. If you have mediocre or poor credit, you may find yourself unable to qualify for a loan even if you have more than enough income to cover the debt. Adding a co-signer with a good credit score to the equation may enable you to get the loan since the lender looks at your combined credit scores and DTI levels.
When you co-sign on a loan, you promise to repay the debt. In reality, you may rely on the primary applicant to repay the debt, but if the primary applicant becomes unemployed or simply refuses to pay the money back, then the lender can pursue you for repayment of the debt. If you have no income, the lender could potentially place a lien on your home. Therefore, think carefully about the risks involved with co-signing a loan, especially if you cannot afford to repay the debt in the event that the primary borrower proves unwilling or unable to do so.