What Does a Co-Signer Mean for Your Loan?
Many of us are familiar with the process of getting a co-signer when renting an apartment, especially when we first move out of our parent's house, but did you know that you can get a co-signer for a mortgage when the time comes to buy a house?
Mortgage co-signing situations are more common than you may think and have many positive benefits for the primary borrower. When it comes to a loan, you want to get the most competitive terms possible, as a mortgage that has even a slightly lower interest rate has the potential to save you thousands.
If you're considering asking a family member to co-sign a mortgage so that you can purchase a home, there are some important things to consider before doing so. Review these aspects of mortgage co-signers before deciding it's the right move for you.
Common Co-Signing Situations
Looking to purchase a home but have:
- Yet to establish credit?
- A stretch of unemployment?
- Income that doesn't qualify you for your desired terms?
- A financial mishap that impacted your credit score?
Or are dealing with any other situation that has affected your overall financial health? A mortgage co-signer could be your best option.
Note: lenders typically base decisions off the lowest credit score, so if bankruptcy or foreclosure are part of your financial background, a co-signer may not help much.
What's the most common situation for a mortgage co-signer? When a borrower wants to qualify for better rates. Co-signing is a common arrangement for first-time homebuyers.
What Does Having a Co-Signer Mean?
A co-signer is someone who states they will be held responsible for paying back a borrower's debt if the borrower becomes unable to do so. They will go on the mortgage application and thus, also become legally responsible for loan re-payment.
Typically, the co-signer will be on your mortgage documents, not the title of the property. The responsibility of a co-signer generally starts and stops with the loan application and repayment, not with the ownership of the property itself.
Can Anyone Co-Sign a Mortgage?
Most lenders require that the co-signer be related to the borrower, or have a family-type relationship, such as a long-term friend that you consider to be family.
If buying here in the states, the co-signer must also be a U.S. citizen, and many lenders also require that they live in the same state as the primary borrower and the property. There may be other requirements that a co-signer has to meet, so be sure you thoroughly understand them all before asking someone to co-sign on your mortgage.
Benefits of a Co-Signer for the Primary Borrower
Having someone with a better financial history than you also sign your mortgage paperwork has many benefits, the most obvious being the ability to secure more competitive terms and rates.
In addition to more competitive rates, having a co-signer could mean the primary borrower qualifies for a higher loan amount. Be careful though, as you don't want to stretch yourself and fall behind on payments, which would greatly impact your co-signer.
A co-signer may also be the difference between getting approved or being denied. Someone with a high credit score and low debt-to-income percentage instills more confidence in the lender, and makes them more likely to approve the mortgage.
Risks for the Co-Signer
If you're the primary borrower and are asking a friend or family member to co-sign your mortgage, don't take the situation lightly. The co-signer is doing more than just a simple favor. They can be legally tied to the mortgage until the home is paid off.
Should your financial situation take a turn for the worse, you are putting your co-signer at risk. Should you be unable to make your installments, it falls to the co-signer to meet those financial obligations. That can be a huge monetary burden to take on, so carefully choose your mortgage and make sure you have an emergency fund and healthy savings account so that you have things other than your co-signer to fall back on.
How Long Does a Co-Signer Stay on Mortgage Paperwork?
The best thing you can do for your co-signer? Release them from the responsibility as soon as possible.
Before signing any paperwork, be sure that both you and your co-signer understand the release terms. Some mortgages have provisions that allow for a release, while others require refinancing. In the first year or two, be sure that you're working on building up your credit score, lowering your debt-to-income ratio, and making your payments on time. These actions will help you get competitive rates on your own when you are ready to refinance and remove your co-signer.
Remember - Shop Around!
Your co-signer is taking on major risks. Be sure that you are protecting the financial health that they worked so hard to build by shopping around before selecting a lender.
Homeowners who obtain more than one mortgage quote may be able to save thousands of dollars over the life of their mortgage. Set yourself up for success so that you can release your co-signer from potential financial responsibility, compare lenders now!