Co-Signing
Read this Before Using a Co-Signer on a Mortgage
Co-signing seems like the logical answer when you can’t get approved for a loan. Friends and family members are always willing to help, so why not?
Is it a way to get the mortgage approved?
Possibly.
Is it the only way or the right way?
Not always.
Do you Know your Co-Signer?
Before you ask someone to co-sign your loan, get to know their finances. Yes, it’s tricky as no one likes to talk about finances, but it’s important.
What are their credit scores? If they have scores lower than you, there’s no use in using them. Lenders use the lowest ‘middle’ score from both borrowers. Everyone has 3 credit scores, so lenders compare your middle score to your co-signer’s middle score and use the lowest one. Lenders base your APR on your credit score, which affects your monthly payment and the loan’s total cost.
How much debt does your co-signer have? Lenders total up all debt, not just yours. It should be less than 43% of your combined gross monthly income.
What’s the Co-Signing Process?
Applying for a mortgage with a co-signer works the same as applying by yourself. You’ll both complete the loan application and agree to a credit check. The co-signer, like you, must provide his/her income and asset documentation.
How Much Down Payment do you Need?
First-time homebuyers within certain income limits may put down just 3% on a conventional loan. If you add a co-signer with significant income, you may lose this benefit and need a higher down payment.
If your co-signer won’t go on the mortgage deed, your lender may require as much as a 10% down payment to make up for the risk of a non-occupying borrower.
The Downsides of Being a Co-Signer
Co-signing a mortgage with a friend or family member may feel like the right thing to do, and it can be helpful, but there are downsides to consider.
It could put your relationship at risk. Money and relationships don’t go hand-in-hand. Your situation may work, but keep it in mind.
When the lender pulls your credit, it’s a ‘hard inquiry’ on your credit report which lowers your credit score temporarily.
If you don’t own your own home now, it may be hard to qualify for your own mortgage if you already have a mortgage in your name.
It costs money to refinance yourself off the loan and deed. You’re also relying on the fact that the borrower can qualify on his/her own at some point.
You’re on the hook for the debt if the borrower defaults. Lenders don’t care if you’re the primary borrower or co-signer, you must pay the debt and it shows up on your credit report, which is bad if you don’t pay.
Should you use a Co-Signer?
Sometimes a co-signer is a good thing. It helps you get the loan you need/want. But think about it carefully. Will you ruin your relationship? Are you taking on a loan you may not be able to pay? Will you leave the co-signer with a debt on a house they don’t live in?
Sometimes a co-signer can be the difference between buying and not buying a home, but not always. There are other options available that preserve your relationship and keep others out of your financial business.
Thanks for reading,
Paige Park
