"Can I borrow more if I have a co-signer, who won’t live in the house but has much better credit than me?"

A co-signer with good credit cannot overcome your bad credit. Where the income used to qualify comes from more than one person, the lower of the credit scores is used in pricing the loan. That would be your score.

While a co-signer cannot improve the credit score used to price the loan, the co-signer’s income may be added to yours in determining the size of loan for which you qualify. On FHA loans, 100% of the co-signer’s income can be used to raise the qualifying loan amount, up to the FHA loan limit in the county in which the property is located.

Note, however, that the co-signer’s debt is added to your debt in determining the qualifying loan amount. If your combined debt is high, his inclusion could add little or nothing to the qualifying loan amount.

On conventional (non-FHA and non-VA) loans, the picture is very different. Most conventional loan programs don’t allow non-occupant co-signers at all. Those that do typically limit the incremental income to 50% of the co-signer's income, but they include 100% of the co-signer’s debt. As a result, there aren’t many co-signers on conventional loans.

Anyone you ask to be a co-signer for you should be made aware of the potential pitfalls. See The Hazards of Co-Signing.

Copyright Jack Guttentag 2004