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Mar 2017

To Co-Sign or Not to Co-Sign, That Is the Question

So, you’re ready to take the leap to homeownership – but perhaps you don’t qualify for the mortgage you want. Did you know you could have someone co-sign on your home loan, just as you could for any other type of loan? Or maybe you have excellent financial history, and a close friend or family member who doesn’t has asked if you’d be willing to co-sign so they can get a taste of the American dream. Either way, there are some serious considerations that must be made on behalf of both parties. Read on as we explore the implications of being a co-signer on a mortgage application.

What is a co-signer?

As mentioned above, most types of loans allow an individual to become a co-signer, and this is usually done so the borrower will qualify for the loan amount they’re in need of obtaining. A co-signer’s income, assets, and credit worthiness are all taken into consideration in an effort to help the borrower qualify for a mortgage. Co-signers would be just as liable for repaying the loan as the borrower, except they typically have no ownership interest in the home.

Difference between co-signer and co-borrower

You may think a co-signer and a co-borrower are one and the same. However, there is a very important difference between the two. Unlike someone who co-signs, a co-borrower usually does have ownership interest in the property. Co-borrowing is more common among spouses, who are trying to secure a larger loan by pooling their finances and credit worthiness.

Shared responsibility

When it comes down to responsibility for repaying the loan, however, there are few differences between a co-signer and a co-borrower. If one person becomes unable to make the monthly payment, the other person will be responsible – which is why the decision to co-sign or co-borrow should not be taken lightly.

Requirements for being a co-signer

Similar to a borrower, a co-signer will have to undergo an extensive review of their income, assets, liabilities and credit by an underwriter. For an FHA loan, for example, the co-signer will need to:

  • Exceed a specific credit score threshold

  • Have a valid Social Security number

  • Reside in the U.S. or its territories

These are just a few examples of the co-signer requirements. Additionally, the co-signer will need to sign all loan documents, with the exception of the security instrument (deed), since they do not hold title.

How significant credit history can help you secure a loan

Having a good credit score is about more than making on-time payments – it’s also about the length of credit history and other factors. The better your credit score, the better your interest rate will be on a home loan. That’s why having someone with a strong, well-rounded credit score is crucial when applying for a mortgage. It’s also worth noting that the co-signer’s credit report will look nice if regular, on-time mortgage payments are made each month – even though they aren’t the ones paying the bill.

Consider the risks of becoming a co-signer

Chances are, neither you nor your family member or close friend went into buying a home with the thought of defaulting. However, there are certain circumstances – like losing a job – that can make it impossible to afford monthly mortgage payments. In a scenario like this, if the borrower was unable to make their payments, the co-signer is obligated to repay the loan. As you can imagine, this can create a huge, uncomfortable strain on your relationship. While you may not think this will happen to you, it’s important to consider the possibility and how it could affect your relationships if it did come to fruition.

Be smart

Most people have good intentions and it’s probably hard to imagine a situation where your close friend or family member would suddenly stop paying their monthly mortgage payment – but the reality is, you should always protect yourself. It’s important to separate your personal relationship from this ‘business arrangement’ – you should be aware of this person’s income, work history and existing debt if you plan to lend your signature on his or her mortgage application. If your research turns up questionable financial behavior, you should politely decline joining him or her on the home buying journey.

Protect yourself

If you’re considering co-signing on a home loan, you should always find a way to protect your own interests and finances.

  • One way in which you can do that is by having your name on the title of the home – which would allow you to sell if the borrower isn’t able to pay the mortgage.

  • You may also be able to apply as a non-occupant borrower with ownership interest in the property, which means you would be able to deduct mortgage interest if you have to chip in with monthly payments. Note that for FHA Loans, at least one borrower must live in the home as the primary residence and the loan may be classified differently with special rules in place.

  • Rather than co-signing or co-borrowing, you could give a monetary gift to help your friend or family member purchase a home. There are certain rules depending on loan type, but ultimately, it takes you off the hook since your name will not be on the mortgage loan.

  • If you’re interested in making an investment, consider buying the home yourself and renting it out to your friend or family member who may be unable to qualify for a mortgage. This is of course a big decision, but owning an investment property can certainly pay off in the long run.

Making the decision to co-sign on a mortgage loan is not something to be taken lightly, but taking the time to carefully consider the implications can help you determine the best plan of action.