Should You Co-Sign a Mortgage Loan?

You could co-sign a loan for a friend or relative if you have good credit, a steady income and can prove that you are a reliable person. If you are considering co-signing a mortgage, you need to consider whether or not you are willing to take on the financial risk and the credit risk.

What Does it Mean to be a Co-Signer of a Mortgage?

Co-signers share the responsibility of repaying a loan. The co-signer must pay the loan back if the borrower ceases to make payments.

Dawn-Marie Joseph of Estate Planning & Preservation, Williamston, Michigan, says that when you co-sign a loan, you agree to be responsible for its repayment. If you don't make your mortgage payments, it can affect your credit score as well as future borrowing ability.

A co-signer can provide assurance to a lender if a mortgage application has been initially rejected because of the risk involved. A co-signer is needed if the applicant has a bad credit rating or a low salary to make monthly payments.

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What is the difference between a co-borrower and a co-signer?

Co-signing differs from co-borrowing. As a co-borrower you have the right to receive the loan proceeds, or the asset that the loan is secured by. Both co-borrowers are on the title of the house if it is a mortgage.

Joseph says that a lender might sometimes prefer a coborrower to a signatory after collecting all of the information. Joseph explains that the debt-to income ratio of a cosigner is not always considered in the qualification process. If the DTI of the primary borrower is too high, then the lender will require a secondary co-borrower in place of a signer.

The Pros and Cons Of Co-Signing A Mortgage

You're taking a huge responsibility when you co-sign for a mortgage. It's best to weigh up the pros and cons before you do.

The Benefits of Cosigning a Mortgage

Help someone. Joseph says that when you co-sign on someone's mortgage, you help them get the mortgage. Your credit score can be improved by making timely payments. Improve your credit mix. Your credit score can be improved by having a variety of loans listed on your report.

Cons of co-signing a mortgage

Late payments can damage your credit. Payment history accounts for 35% of FICO scores, so a late payment can cause your score to fall. Missed payments remain on your credit history for seven years. You might have to pay yourself. You could be responsible for the mortgage if your co-signer does not make payments. Late fees may be charged. Limits your borrowing ability. A co-signed loan can prevent you from getting a second loan, even if you are making payments. You could damage your relationship with the principal borrower. The relationship could be compromised if the borrower does not pay their mortgage.

Be prepared if you decide to become a cosigner. Be sure to have all of the important documents with your name on it, as well as an idea on how you'll communicate and manage the loan.

You can, for example:

Ask the borrower to notify you if they are likely to be late with a payment. Learn how to login into your mortgage account online so that you can monitor your loan.

When Are Mortgage Co-Signers Allowed?

Co-signers are not allowed by all lenders and types of loans. These are the types of mortgages that allow co-signers.

Conventional loans Private lenders have their own rules regarding co-signers. FHA will accept co-signers for home loans that it insures. Co-signers must generally have a primary residence in the U.S. to qualify. However, there are some exceptions. USDA loans. USDA loans. Co-signers are prohibited in the Single Family Housing Guaranteed loan program.

What are the Alternatives to Cosigning?

Understand your options if you are asked to sign as a cosigner.

Find out how to help the applicant. There are several programs that help borrowers.

FHA loans. Down payment assistance. HomeReady Mortgages. Fannie Mae offers loans with low down payments, income requirements that are lower and credit scores above 620.

Give a gift. Cash gifts can help applicants make a bigger down payment. This could lower their mortgage payments to the point where they are able to sign themselves. Chase says that the gift is a mortgage. The donor is often required to sign a letter stating that they don't expect reimbursement.

Purchase the house yourself. You'd have to be able to afford the monthly payments as a co-signer. It might make sense to buy the home and collect the rent. Chase says, "You won't need to worry about whether the mortgage payment is made because you are making it."

Rejection of a mortgage application could indicate that it is not financially advisable for a person or couple to purchase a house. Chase suggests that they could save money by renting or buying a smaller house. "Maybe this is not the best time to purchase that home."