How it works, requirements, pros and cons
- When you co-sign a mortgage, you use your finances to help the main borrower qualify.
- Unlike fellow debtors, co-signers have no claim to the home to which the mortgage is attached.
- Co-signing a mortgage can hurt your credit if the borrower defaults on their payments — and the lender may not warn you when this happens.
Signing for a mortgage can be a helpful gesture when you have a loved one who can afford the cost of home ownership but whose credit or employment history prevents them from qualifying for a mortgage.
But as a co-signer, you take many risks, with few benefits and little recourse if things go wrong.
What does it mean to co-sign a mortgage?
Similar to co-signing a credit card or lease, when you co-sign a mortgage, you are using your own finances to support someone else’s application.
When approving an applicant for a mortgage, lenders examine the applicant’s debt, income, and creditworthiness. When someone signs the mortgage, their finances are also taken into account. Borrowers who need a co-signer usually turn to friends or family members who have a more positive credit history or a lower debt-to-income (DTI) ratio, which can increase the chances of approval and help the borrower get a better interest rate or larger loan amount.
Co-signers are legally obligated to repay the mortgage, just like the main borrower. If the borrower stops paying, the lender contacts 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 don’t own the home.
Co-borrowers are two or more borrowers who jointly take out the mortgage and become the legal owner of the property. An example of this is two spouses who take out a mortgage together to buy a house that they will both own.
Pros and cons of co-signing a mortgage
- Help the borrower qualify for a mortgage they otherwise wouldn’t get. Some prospective homebuyers have enough monthly income to pay for a mortgage, but have trouble getting approved due to things like student debt or a short credit history.
- Increase the chances of approval for people with unusual employment histories. Lenders can be a bit harsh when it comes to borrowers’ employment history. Those who have gaps in employment or who have recently changed careers may have difficulty qualifying. Self-employed borrowers with less predictable incomes may also encounter problems.
- Your loved one can start building equity. If the person you’re co-signing for has a solid history of making rent payments on time, helping them qualify for a mortgage means they can start investing the money they paid as rent into the equity of their home.
- If the borrower is late on a payment, your credit will suffer (and you may not get any warning before it happens). Your loan is tied to a co-signed mortgage as if you were the primary borrower. If the borrower misses a payment, your credit will suffer. The lender may agree to notify you before this happens, but this is not required.
- You are responsible for a mortgage on a house that you do not own. Co-signing essentially takes on the responsibility of obtaining a mortgage without the benefits of home ownership. Any payments you make go into a house that you have no equity in.
- To get out of the agreement, the borrower would likely need to refinance. If you no longer wish to be a co-signer, the borrower must be financially sound enough to refinance into a self-qualifying mortgage.
- Co-signing a loan can affect your ability to take on your own debt. Even if all is well with the mortgage and the borrower makes payments each month, co-signing can affect your future chances of loan approval. Any debt you co-signed can be included in your DTI, and if your DTI is too high, banks could refuse to lend you.
- Legal consequences, low recourse claims if the borrower stops paying completely. Since you are legally responsible for the debt but have no claim to the house, your options in this situation will likely be to make payments on a house that you have no equity in, or have it go into foreclosure and taking a great deal of damage to your bankroll. And if the foreclosure doesn’t bring in enough to pay off the balance of the mortgage, the lender may be able to sue you for the difference.
Because being a co-signer can be very risky, it’s important to keep lines of communication open between you, the borrower, and the lender.
Much like lenders look at applicants’ payment history 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 are in a good place to make future mortgage payments.
This includes making sure they don’t borrow more than they can handle. Their combined income could help them qualify for a larger loan, but they shouldn’t make more monthly payments than they can comfortably afford.
You can also partially mitigate your credit risk by asking the borrower to give you access to credit information, e.g. B. via an online payment portal so that you can be sure that the borrower will make payments.
Minimum credit rating for a mortgage with a co-signer
As a co-signer, you must meet the minimum credit requirements for the type of loan for which the borrower wishes to qualify.
Co-signer requirements by mortgage type
Not all mortgage programs and lenders allow co-signers.
“Not all banks allow co-signers on all of their lending programs, and if they do, they may charge an increase in the fee or interest rate to allow a co-signer,” said Shmuel Shayowitz, president and chief lending officer at Approved Funding.
Co-signers are eligible for conventional mortgages provided they meet the general requirements to qualify. The co-signer cannot be someone involved in the sale (e.g. your real estate agent).
Mortgages backed by the Federal Housing Administration allow co-signers, but there are limits on who can be a co-signer. Co-signers of FHA mortgages must have a primary residence in the United States. As with traditional 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 usually must be a spouse or other veteran who meets VA mortgage eligibility requirements.
USDA mortgages are secured by the US 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.
Alternatives to the co-signer
If you’re a borrower considering asking someone to be your co-signer because you’re not sure you would qualify on your own, you may have other options, such as:
- Get a government-backed mortgage. These loans, which include FHA, VA, and USDA mortgages, often have more flexible loan requirements and allow for lower down payments, which can make obtaining a mortgage more affordable.
- Take the time to work on your credit. If you don’t currently qualify for a mortgage, you might want to focus on improving your score. Paying off debt and limiting the amount of credit you have available (e.g. with a credit card) can give you a significant boost.
- Look for down payment help and home ownership programs. Government housing agencies and nonprofits sometimes offer things like grants that can help you pay down a down payment or affordable mortgage programs for low-income people.
- Wait until you have a stronger work history. Typically, lenders want to see borrowers who have been employed in the same industry continuously for the past two years.
Frequently asked questions about co-signing a mortgage
Does co-signing affect your credit score?
Yes, co-signing a mortgage affects your credit score.
Even if the borrower stays current with their payments, co-signing can increase your DTI, making it harder to borrow on your own. In some cases, however, lenders may view co-signed debt differently.
“There are circumstances where the mortgage can be omitted, but you would have to show six to 12 months of satisfactory payments from someone else’s account,” Shayowitz says.
Any negative information related to 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 typically stay on the mortgage until it is paid off, either through refinancing, selling the home, or when the borrower reaches the end of the loan term.
Why shouldn’t you co-sign a mortgage?
It’s up to you whether or not you want to co-sign a mortgage, but make sure you understand all the risks involved with co-signing before agreeing to assume the debt.
When you co-sign a mortgage, you are responsible for the debt, but you do not own the home. This can put you in a financially dangerous position if the borrower stops making payments.
Does a co-signer of a mortgage own the home?
no By co-signing, you only agree to repay the debt. If you want to keep the title of the home, a better option would be to sign the mortgage as an unoccupied co-borrower. As a co-borrower who is not occupied, you do not live in the house, but you are the legal owner of the house and are also legally responsible for the mortgage.
Can a co-signer be removed from a mortgage?
Generally, the only way to remove a co-signer from a mortgage is through refinancing. This will likely require the borrower to have improved their financial situation in order for them to qualify for a mortgage themselves.