Not everyone has the income, assets or credit score to qualify for affordable loans, but having a co-signer on a mortgage can give a borrower’s mortgage application a boost. However, whether you should co-sign a mortgage is a big – and very risky – financial decision.
Let’s walk through 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 Mortgage Co-Signer?
A mortgage co-signer is someone who vouches for a borrower in the eyes of a lender by agreeing to make the borrower’s payments if they’re unable to do so. However, co-signers are better off not making this commitment unless they have rock-solid confidence that the borrower will repay the loan.
That’s because the co-signer is taking on the legal responsibility of repaying the loan in full if the borrower – sometimes known as the “primary borrower” – defaults on repaying the loan.
What Does Co-Signing A Mortgage Mean?
When co-signing a mortgage, you’re agreeing to take financial responsibility for the home loan in the event the 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-borrower on the loan. Keep in mind, however, that you won’t have access to the property as a co-borrower would.
Mortgage lenders unwilling to take a risk on a borrower might very well take a second look if they add a co-signer to their application.
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How Does Co-Signing A Mortgage Work?
If you’re thinking about being a co-signer on a mortgage, it’s important to know and understand the impact your financial profile will have on the borrower’s chances of being approved for a mortgage.
Next up are two financial features of the co-signer that can significantly influence a lender’s decision, and one factor that will have no real effect.
Income
If you’ve been asked to co-sign a loan, it could be because you have more income and assets than the home buyer. Lenders will add your income and your debts to those of the primary borrower to evaluate your combined debt-to-income ratio (DTI).
The higher your combined income and assets, the more likely it is that the lender will approve the mortgage application. 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 of their own.
Credit Score
While a co-signer must have a reasonably good credit score for a lender to consider their mortgage application, the co-signer won’t be able to help the borrower if their credit score is higher than the borrower’s. That’s because lenders consider both the borrower and the co-signer’s credit score from each of the three major credit bureaus but go with the lower middle credit score of the two.
So, for example, if the borrower’s credit scores were 500, 520 and 540 and the co-signer’s credit scores were 600, 670 and 700, the borrower’s 520 credit score – the lowest middle credit score of the two loan applications – would be the basis upon which a mortgage lender makes their credit score evaluation.
Also, if you’re thinking about being a co-signer for a house mortgage, be aware that if the primary buyer falls behind on their repayment, or defaults altogether, their financial misdeeds will appear on your credit history.
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.
Many younger home buyers also face the problem of having an employment history or credit history that’s too short for them to qualify for a home loan at a favorable rate or with a lower down payment. It’s also possible that these prospective buyers may not qualify for a mortgage at all. A co-signer with steady full-time employment and a lengthy employment history can ease a mortgage lender’s mind in this situation, helping the borrower get approved for a loan – and at a more favorable interest rate than they otherwise would.
Who Can Co-Sign A Mortgage?
Before you apply for a mortgage, it’s important to be aware that each type of mortgage loan has its own rules pertaining to co-signers.
Typically, a co-signer on a mortgage will be a parent, spouse, friend or a family member. But, generally speaking, there are no clear restrictions on who can co-sign for a mortgage. That said, let’s take a quick look at who can be a co-signer on a conventional loan and an FHA loan.
Conventional Loan
In theory, as long as a co-signer can qualify financially, they’re good to co-sign a conventional loan.
However, some lenders might want to know the nature of the relationship between the borrower and co-signer. In most cases, conventional mortgage lenders 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 a property being purchased with a conventional loan.
FHA Mortgage
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.
Co-signers can’t hold any kind of financial or ownership interest in a property, and 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.
More likely to consider a co-signer’s relationship with the primary borrower than would be so with a conventional loan, the FHA prefers a familial relationship because families are more likely to remain in each other’s lives than are non-familial friends or partners. However, the FHA takes a broad view of who can be considered a family member. Based on the FHA’s definition of family members, a family member can be:
- A spouse
- A domestic partner
- Parents, including stepparents and foster parents
- Grandparents, including stepgrandparents 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 stepsiblings
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How Can Co-Signers On A Mortgage Avoid Problems?
Co-signing can really help a deserving loved one out, but it’s also a huge 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.
These ways include:
- Signing up for all notices related to the loan to have awareness of what’s going on with the mortgage
- Asking the primary borrower for online access to their mortgage statements
- Asking the mortgage lender to notify you immediately if the borrower misses a payment
- Setting enough money aside in case you suddenly need to make a monthly payment
- Making sure the title to the property passes to you through a trust if the primary borrower dies
- Staying in constant communication with the primary borrower
What Are The Risks Of Co-Signing A Mortgage Loan?
Co-signing a mortgage comes with a number of risks. In fact, it’s best to consult an attorney or financial advisor before you co-sign a mortgage loan. Here are the risks or downsides most commonly associated with co-signing:
- Responsibility for the loan: Co-signing the promissory note means you’re on the hook if the person you co-signed for misses a payment or defaults on the loan. If the borrower stops making payments altogether, the lender or another creditor will come to you for repayment of the loan, regardless of whether your circumstances or your relationship with the borrower has changed.
- The potential for damage to your credit: Any late payments from the borrower show up on both your credit report and theirs. It’s an even worse credit hit if the borrower goes into foreclosure, since the borrower’s foreclosure also becomes your foreclosure – making it hard for you to qualify for any kind of loan or credit line for the foreseeable future. Your credit score and credit report will also be damaged by the borrower’s actions if they make late payments or default.
- Having no rights to the property: As a co-signer, you don’t have any of the property rights that a borrower or co-borrower of a mortgage loan enjoys. So, if the 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 don’t get any rights in return.
Co-Sign Mortgage FAQs
Let’s take a look at a few frequently asked questions on the topic of co-signing for a mortgage.
Can a co-signer be removed from a mortgage loan?
After a long period of regular and on-time payments, the homeowner may ask the lender to release the co-signer from their obligations. In some situations, a lender may grant this request, but in most cases, the homeowner 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 a co-signer’s signature. At that point, the co-signer would be free from their 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.
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 carries certain risks that anyone contemplating this possibility should be aware of. Before taking on a responsibility that could become a major financial burden, it would be a good idea to meet with a financial advisor to discuss the various implications of co-signing. On the other hand, helping out a family member can provide emotional benefits that can’t be expressed in dollars and cents.
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Miranda Crace
Miranda Crace is a Staff Writer for Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University, where she studied PR writing, film production and film editing. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.
