We all have people in all of our lives that we’d do anything for. But should that include cosigning on a mortgage? Here are some factors to consider before helping someone out with their home loan.
What Is a Cosigner?
Imagine you’d like to finance a loan to buy a house. You apply, but the lender sees that your financial track record isn’t the best. At this point, they might either deny your application or request that you find a cosigner. A cosigner is someone who finances the loan with you. That way, they can step in and make loan payments if you’re ever unable to. The lender may determine that requiring you to get the loan with a cosigner would minimize the risk of the loan not being paid back in full.
Who Can Cosign?
Many people finance their home loans with cosigners. Although they are often family members, this is not always the case and it is not required. This means a cosigner who may not even be living in the house or isn’t necessarily making payments on the loan is just as financially responsible for the home as the primary borrower. Whoever you choose to cosign, you’ll want to make sure they’re in a good enough standing to be approved for the loan. If they aren't, you could either be denied for the loan or told to find someone else to cosign.
When Are Cosigners Necessary?
A cosigner may be requested by a lender for various reasons, including: If the primary borrower’s credit history is either unestablished or unfavorable; their credit score is not high enough to be approved for the requested loan amount; the primary borrower has insufficient or no income to pay back the loan; or their debt-to-income ratio (DTI) is too high. A DTI compares the amount of an individual’s debt in comparison to their income. This helps lenders determine whether or not an applicant would be able to make payments on a loan.
What Are the Risks of Cosigning?
When cosigning on a mortgage, the process is just as though you were buying the home yourself. This means that you authorize the lender to complete a hard inquiry on your credit, resulting in a decrease of your credit score. Depending on your personal situation, cosigning could also make it difficult for you to qualify for future loans if you already have several other lines of credit open (click here to learn more). If the primary borrower makes late payments or stops paying altogether, this may also affect your credit (unless you take charge of making the payments yourself). If a default takes place on the loan, it will affect both parties equally.
On a personal level, it could also affect your relationship with the primary borrower. This is a business agreement and needs to be treated as such. Make sure your expectations are outlined clearly and that you both understand what the consequences will be if they're not met.
How Long Must Cosigners Remain on a Mortgage?
As a cosigner, you will usually have to remain on the loan until the primary borrower’s credit improves or they have sufficient income. Then, you can request to have your name removed from the loan by working with the primary borrower and the lender.