Co-signing a Mortgage: A Helping Hand or a Burden?
- by Business Insider
- May 06, 2024
- 0 Comments
- 0 Likes Flag 0 Of 5
An curved arrow pointing right.
Share FAQs
Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate mortgages to write unbiased product reviews.
When you co-sign a mortgage, you're using your finances to help the primary borrower qualify.
Unlike co-borrowers, co-signers don't have any claim to the home the mortgage is attached to.
Co-signing a mortgage can hurt your credit if the borrower is late on their payments — and the lender might not warn you when this happens.
Co-signing a mortgage can be a helpful gesture if you have a loved one who can afford the costs of homeownership but whose credit or employment history prevents them from qualifying for a mortgage.
But as a co-signer, you take on a lot of risks — and with few benefits and little recourse if things go south.
Are you considering co-signing a mortgage for someone you know? Here's how to protect yourself when co-signing a mortgage — what to think about before signing on that dotted line.
What is a co-signer on a mortgage?
Similar to co-signing a credit card or a lease, when you co-sign a mortgage, you're using your own finances to back up someone else's mortgage application.
Co-signers have a legal responsibility to pay the mortgage back, the same as the primary borrower. If the borrower stops paying, the lender will turn to the co-signer for payment.
Why it might be necessary
When approving an applicant, mortgage lenders look at the applicant's debts, income, and credit history. If the borrower has too-high debts, little income, or spotty credit, it may be challenging for them to qualify or — if they do — get an affordable mortgage rate.
However, if someone co-signs the mortgage, their finances will be considered as well. This could help offset any risks the primary borrower presents to the lender.
Helping someone qualify
Borrowers who are having trouble qualifying for a loan will typically turn to friends or family members who have a more positive credit history, a higher credit score, or a lower debt-to-income ratio (DTI). These can all increase approval odds and help the borrower get a better mortgage rate or larger loan amount.
Risks for the co-signer
When you co-sign a mortgage, you're taking on responsibility for the mortgage, but you have no claim to the house. This is different from a co-borrower — often a spouse — who has legal ownership of the property.
Here are all the risks of cosigning a mortgage:
Impact on credit score
Your credit is tied to a co-signed mortgage the same as if you were the primary borrower. If the borrower misses a payment, your credit will take a hit. The lender might agree to notify you before this happens, but it isn't required to.
Liability for the full debt
As a co-signer, you'll be responsible for a mortgage on a home you don't own. Co-signing is essentially taking on the responsibility of getting a mortgage with none of the benefits of homeownership. Any payments you make will go toward a home you have no equity in.
There are also legal consequences if the borrower stops paying completely. Because you're legally responsible for the debt but have no claim to the house, your options in this situation will likely either be to make payments on a home you have no equity in, or let it go into foreclosure and take a major 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.
Difficulty obtaining other loans
Co-signing a loan can impact your ability to take on debt of your own. Even if all goes well with the mortgage and the borrower makes their payments every month, being a co-signer can still impact your future loan approval odds.
Any debt you've co-signed may be included in your DTI, and if your DTI is too high, banks could refuse to lend to you.
Considerations before co-signing
Co-signing a mortgage can be a great way to help a friend or family member, but it's also a big decision that can impact you both financially and legally. Make sure you take these factors into consideration before co-signing a loan.
Financial strength of the primary borrower
Because being a co-signer can be so risky, it's important to have an open conversation with the borrower about their finances and income.
Similar to how lenders look at applicants' payment histories to understand how they've handled debt in the past, you might also want to get some sort of confirmation from the borrower you're co-signing for that they have a good history of on-time payments, and that they're in a good place to make future mortgage payments.
This includes ensuring that they aren't borrowing more than they can handle. Your combined incomes might help them qualify for a larger loan, but they shouldn't take on a higher monthly payment than what they can comfortably afford.
Your own financial security
You should think about your own finances, too. Do you have the income available to make the borrower's mortgage payments if they can't? Do you have savings available, if not? What would be your backup plan should you need to take over payments?
If you have inconsistent income or are short on savings, taking on extra debt — even if there's only a small chance you'll need to make payments on it — can be a big risk.
Relationship with the borrower
Your relationship with the borrower should also play a role. How well do you know and trust them? Will they make a concerted effort to make their payments and protect their credit? You may also want to think about how your relationship may be affected if things go south.
A quick tip: You may be able to minimize some of the risk to your credit (and your relationship) by asking the borrower to give you access to loan information, potentially through an online payment portal, so you can be sure the borrower is always making payments.
FAQs
Please first to comment
Related Post
Stay Connected
Tweets by elonmuskTo get the latest tweets please make sure you are logged in on X on this browser.
Sponsored
Popular Post
Tesla: Buy This Dip, Energy Growth And Margin Recovery Are Vastly Underappreciated
28 ViewsJul 29 ,2024