How it works, requirements, advantages and disadvantages
- When you co-sign a mortgage, you use your finances to help the primary borrower qualify.
- Unlike co-borrowers, co-signers have no rights to the house to which the mortgage is attached.
- Co-signing a mortgage can hurt your credit if the borrower is behind on their payments – and the lender may not notify you when this happens.
Co-signing a mortgage can be a helpful move if you have a loved one who can afford homeownership costs, but whose credit or employment history prevents them from qualifying for a loan. mortgage.
But as a co-signer, you take a lot of risk, with little upside and little recourse if things go wrong.
What does it mean to co-sign a mortgage?
Similar to co-signing a credit card or a lease, when you co-sign a mortgage, you are using your own finances to support someone else’s claim.
When approving a mortgage applicant, lenders look at the applicant’s debts, income, and credit history. If someone co-signs the mortgage, their finances will also be taken into account. Borrowers who need a co-signer generally turn to friends or family members who have a more positive credit history or a lower debt-to-income ratio (DTI), which can increase the chances of approval and help the borrower get a better rate or a larger loan amount.
The co-signers have the legal responsibility to repay the mortgage, just like the main borrower. If the borrower stops paying, the lender will turn to the co-signer.
The difference between co-signers and co-borrowers
When you co-sign a mortgage, you take responsibility for the mortgage, but you have no rights to the house.
Co-borrowers are two or more borrowers who take out the mortgage together and will have legal ownership of the property. For example, two spouses together obtain a mortgage loan to buy a house that they will both own.
Advantages and disadvantages of co-signing a mortgage
- Help the borrower qualify for a mortgage they wouldn’t otherwise have. Some potential home buyers have enough monthly income to afford a mortgage, but due to issues such as student debt or too short a credit history, they struggle to get approved.
- Increase the chances of approval for those with unusual work backgrounds. Lenders can be somewhat strict about the work history of borrowers. Those with job gaps or who have recently changed careers may find it difficult to qualify. Self-employed borrowers with less predictable incomes may also encounter problems.
- Your loved one can start building capital. If the person you’re co-signing for has a strong track record of paying rent on time, helping them qualify for a mortgage means they can start using the money they used to pay in rent for value. clean of his house.
- If the borrower is late on a payment, your credit will suffer (and you may not be notified before it happens). Your credit is linked to a co-signed mortgage as if you were the main borrower. If the borrower misses a payment, your credit will take a hit. The lender may agree to notify you before this happens, but is not required to do so.
- You will be responsible for a mortgage on a house that you do not own. Co-signing is basically taking on the responsibility of getting a mortgage without any of the benefits of home ownership. Any payments you make will go to a home in which you have no equity.
- To get out of the deal, the borrower would likely need to refinance. If you no longer want to be a co-signer, the borrower will need to be in a sufficient financial position where they can refinance into a mortgage that they qualify for on their own.
- Co-signing a loan can affect your ability to take on debt yourself. Even if everything goes well with the mortgage and the borrower makes their payments every month, being a co-signer can still impact your future chances of loan approval. Any debt you have co-signed may be included in your DTI, and if your DTI is too high, banks may refuse to lend to you.
- Legal consequences, little recourse if the borrower stops paying completely. Because you are legally responsible for the debt but have no rights to the house, your options in this situation will likely be either to make payments on a house in which you have no equity, or to let it go into foreclosure and take a big hit to your credit. And if the foreclosure sale doesn’t earn enough to pay off the remaining mortgage balance, the lender may be able to sue you for the difference.
Since being a cosigner can be very risky, it’s important to keep the lines of communication open between you, the borrower, and the lender.
Similar to how lenders look at applicants’ payment history to understand how they’ve handled debt in the past, you may also want to get some sort of confirmation from the borrower you’re co-signing for that they have a good history of overdue payments and that they are well placed to make future mortgage payments.
This includes making sure they don’t borrow more than they can afford. Your combined income could help them qualify for a larger loan, but they shouldn’t accept a higher monthly payment than they can comfortably afford.
You can also minimize some risk to your credit by asking the borrower to give you access to loan information, such as through an online payment portal, so you can be sure the borrower is making payments.
Minimum credit score for a mortgage loan with a co-signer
As a co-signer, you will need to meet the minimum credit score requirements for the type of loan the borrower is trying to qualify for.
Cosigner Requirements by Mortgage Type
Not all mortgage programs and lenders allow co-signers.
“Not all banks allow co-signers for all of their loan programs, and where permitted, they may require a fee or rate increase to allow a co-signer,” says Shmuel Shayowitz, president and chief loan officer at Approved. Funding.
Co-signers are permitted on conventional mortgages, provided they meet the general requirements to qualify. The co-signer cannot be someone who has an interest in the sale (for example, your real estate agent).
Federal Housing Administration-backed mortgages allow co-signers, but there are limits on who can be a co-signer. FHA mortgage co-signers must have a primary residence in the United States. As with conventional mortgages, FHA co-signers cannot have a financial interest in the sale and must meet basic FHA mortgage credit requirements.
VA mortgages are available to current service members and veterans who meet minimum service requirements. The VA allows co-signers on the mortgages it guarantees, but they will generally need to be a spouse or another veteran who meets the eligibility criteria for a VA mortgage.
USDA mortgages are backed by the United States Department of Agriculture and are intended for middle to low income individuals in eligible rural and suburban areas. According to the USDA handbook, co-signers are not allowed on these types of mortgages.
If you’re a borrower considering asking someone to be your co-signer because you’re not sure if you qualify on your own, you may still have other options, such as:
- Get a government guaranteed mortgage. These loans, which include FHA, VA, and USDA mortgages, often have more flexible credit requirements and allow for smaller down payments, which can make getting a mortgage more affordable.
- Take the time to work on your credit. If you are unable to qualify for a mortgage right now, you may want to focus on improving your score. Paying off your debts and limiting the amount of available credit you use (like with a credit card) can give you a significant boost.
- Look for down payment assistance and home ownership programs. Government housing agencies and nonprofit organizations sometimes offer grants that help you pay a down payment or affordable mortgage programs for low-income people.
- Wait until you have a stronger work history. Generally, lenders like to see borrowers who have been consistently employed in the same industry for the past two years.
Co-signing a mortgage FAQ
Does co-signing affect your credit?
Yes, co-signing a mortgage will affect your credit.
Even if the borrower stays current on their payments, co-signing can increase your DTI, making it harder to underwrite your own loans. Although in some cases, lenders may view co-signed debt differently.
“There are circumstances where the mortgage can be omitted, but they would be required to show six to 12 months of satisfactory payments on someone else’s account,” Shayowitz says.
Any negative information associated with the loan, including late or missed payments, will also appear on your credit report.
How long does a co-signer stay on a mortgage?
Co-signers will generally stay on the mortgage until it is paid off, either by refinancing, selling the home, or when the borrower reaches the end of the loan term.
Why shouldn’t you co-sign a mortgage?
Whether or not you want to co-sign a mortgage is up to you, but make sure you understand all the risks of being a co-signer before agreeing to take on the debt.
When you co-sign a mortgage, you are responsible for the debt, but you have no rights to the house. This can put you in a financially dangerous position if the borrower stops making payments.
Does a co-signer of a mortgage own the house?
No. When you co-sign, you only agree to repay the debt. If you want to be on title to the house, a better option would be to sign the mortgage as a non-occupying co-borrower. As a non-occupying co-borrower, you do not live in the house, but you are the legal owner of it, in addition to being legally responsible for the mortgage.
Can a cosigner be removed from a mortgage?
Generally, the only way to remove a co-signer from a mortgage is through refinancing. To do this, the borrower will likely need to have improved their financial situation in order to qualify for a mortgage on their own.