Should You Co-Sign A Mortgage?
If your loved ones are struggling to buy a home in the current real estate market, it’s probably painful to see the hurdles some home buyers have to clear. Between high home prices, the amount of cash needed to buy or stringent mortgage approval requirements, you’re probably anxious to do what you can to help.
Not everyone has the income, assets or credit score needed to qualify for affordable loans, and in those situations, having a co-signer on the mortgage can give an application a boost. But whether you should co-sign a mortgage is a big – and very risky – financial decision.
Let’s go over what it means to co-sign a mortgage, who can co-sign a home loan and the risks of taking this step.
What Is A Co-Signer?
A co-signer is a person who vouches for a borrower in the eyes of a lender by agreeing to make their payments should they fail to. The idea is that co-signers wouldn’t undertake this commitment unless they had rock-solid confidence that the borrower would repay the loan.
However, the co-signer does more than merely vouch for the borrower. They’re taking on the legal responsibility of repaying the loan in full should the primary borrower default.
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What Does Co-Signing A Mortgage Mean?
When you co-sign a mortgage with someone, you’re agreeing to take financial responsibility for the home loan in the event the primary borrower can no longer make their monthly payments. Essentially, if you co-sign a mortgage loan, you’ll be evaluated as if you were a co-buyer of the home. Keep in mind, however, that you won’t have the same access to the property as a co-buyer.
Lenders unwilling to take a risk on someone as the primary borrower might very well take a second look if they add a co-signer to their application.
If you’ve been asked to co-sign a loan, it could be because you have more income and assets than the home buyer has. Lenders will add your income and your debts to those of the primary borrower to evaluate your combined debt-to-income (DTI) ratios.
The higher your combined income and assets, the more likely it is that the mortgage application will be approved. Because the co-signer will carry the mortgage loan as a debt, it may make it difficult for them to qualify for a home loan on their own.
Your Credit Score
If the primary borrower has a low credit score, a lender will use the co-signer’s score, or an average of the co-signer’s and primary borrower’s credit scores, when evaluating a mortgage application.
Although the primary buyer will still need to meet minimum credit standards for a loan, they may need a higher down payment or face a substantially higher interest rate on the loan’s repayment if their credit score is low. Having a co-signer with a good credit score can help home buyers get a better interest rate and lower monthly mortgage payments.
However, if you’re thinking about co-signing a mortgage loan, be aware that if the primary buyer falls behind on their repayment, or defaults altogether, their financial misdeeds will appear on your credit history. Proceed with caution.
Your Employment History
Mortgage applicants who are seasonally employed or self-employed may have a harder time getting a mortgage loan than those who are regularly employed. Or they may have to consider a non-conforming loan, often at a greater expense.
Younger home buyers also face the problem of having a too-short employment or credit history to qualify for a home loan at a favorable rate or with a lower down payment.
Having a co-signer – generally, a parent – can help solve those problems.
Who Can Co-Sign A Mortgage?
Typically, a co-signer on a mortgage will be a parent, spouse, friend or a family member. But there aren’t clear limits on who can co-sign for a mortgage.
In theory, as long as they can qualify financially, there aren't many restrictions on who can co-sign a conventional loan.
Some lenders might want to know the nature of the relationship between the borrower and co-signer. In most cases, they won’t allow anyone with a vested interest in the home sale to act as a co-signer. For instance, home builders, real estate agents and contractors won’t be able to co-sign the mortgage for the property.
If the primary borrower is planning on using an FHA loan to buy a home, co-signers – you can have up to two on an FHA loan – are subject to a bit more scrutiny. If you're looking to get an FHA loan with a non-occupant co-signer, there are a few other special restrictions.
Co-signers cannot hold any kind of financial or ownership interest in a property. Their sole obligation for repayment comes from signing the mortgage note. At closing, they must complete and sign all loan documents, except the security instruments, which are the documents that legally make the house or property the collateral for the loan.
The FHA is more likely to consider a co-signer’s relationship with the primary borrower, and prefers a familial relationship because families are more likely to remain in each other’s lives than non-familial friends or partners are. However, the FHA takes a broad view of who constitutes family, which includes:
- Domestic partners
- Parents, including step-parents and foster parents
- Grandparents, including step-grandparents and foster grandparents
- Aunts or uncles
- In-laws, including all siblings-in-law and parents-in-law
- Children, including all step-, foster and adopted children
- Siblings, including step-siblings
How Can Co-Signers Avoid Problems?
Co-signing can really help a deserving loved one out, but it's also a big responsibility. When you co-sign for someone, you're putting your own name and credit on the line as security for the loan. Even if you’re comfortable with the person you’re co-signing for and trust them to hold up their end of the bargain, you should think about ways you can protect yourself if they start to miss payments.
Some ways you can protect yourself can include:
- Sign up for all notices related to the loan to have awareness of what’s going on with the mortgage.
- Ask the primary borrower for online access to their mortgage statements.
- Ask the lender to notify you immediately if the borrower misses a payment.
- Set enough money aside in case you suddenly need to make a monthly payment.
- Make sure that the title to the property passes to you via a trust should the primary borrower die.
- Stay in constant communication with the primary borrower.
The Risks Of Co-Signing A Mortgage Loan
Co-signing a mortgage comes with considerable risks. Discuss whether you should pursue this course of action with your attorney or financial advisor before co-sign a mortgage loan.
You’ll Have Responsibility For The Loan
The fact that you co-signed the promissory note means that you’ll be on the hook.
If the person you co-sign for misses a payment, the lender or other creditor will come to you for repayment of the loan, regardless of whether your circumstances or your relationship with the primary borrower has changed.
Let’s assume that a friend – and for our purposes, “friend” refers to anyone to whom the primary borrower is not married – co-signs a home loan. 2 years later, the friendship dissolves. A year after that, the primary borrower defaults on the loan. Even though the friendship ended, the co-signer remains legally obligated to repay the loan because they signed a legally binding contract.
Your Credit Could Be Damaged
The primary borrower’s late payment also shows up on your credit report. It’s an even worse credit hit if the person goes into foreclosure.
Your credit score and report will be damaged by the primary borrower’s actions if they make late payments or default. Their foreclosure will become your foreclosure as well, which could make it very difficult for you to qualify for credit in the future.
You Won’t Have Rights To The Property
As a co-signer, you do not have any of the property rights that typically accompany a mortgage. That means that if the primary borrower doesn’t make their payments, you can’t evict them and rent the property out to stem your losses. As a co-signer, you bear responsibilities, but you do not get any rights in return.
FAQs About Co-Signing For A House
Can a co-signer be removed from a mortgage loan?
After a long period of regular and on time payments, the primary borrower may ask the lender to release the co-signer from their obligations. In some circumstances, a lender may grant this request, but in most cases, the primary borrower will need to refinance the loan to remove a co-signer.
Can the primary borrower refinance the co-signed mortgage loan?
Hopefully, the primary borrower will make all their payments in full and on-time. If so, their credit score will improve and they should be able to refinance their mortgage without your co-signature. At that point, you’d be freed from your responsibilities under the co-signed mortgage.
Can I co-sign a mortgage if I already have one?
Having a mortgage of your own won’t keep you from co-signing for another one. Be sure your finances can handle both monthly payments if the primary borrower misses theirs, though.
Keep in mind that your DTI will now include both mortgages, so you may have difficulty securing credit after co-signing for a mortgage.
How long is a co-signer responsible for a mortgage?
Co-signing on a mortgage makes you responsible for the loan for its full term, unless you can remove yourself from a co-signed mortgage, as described above.
The Bottom Line: Co-Signing A Mortgage Is A Financial Risk For An Emotional Reward
Co-signing a mortgage is a serious risk that you need to discuss with an attorney and your financial advisor before you commit yourself to a financial burden that may be hard for you to shoulder. On the other hand, helping out a family member can provide emotional benefits that can’t be expressed in terms of dollars and cents.
Ready to co-sign a mortgage? Apply online now with your primary borrower and get the initial approval process started.