What Does a Cosigner Mean for Your Loan?
Many of us are familiar with the process of getting a cosigner when renting an apartment, especially when we first move out of our parent's house, but did you know that you can get a cosigner for a mortgage when the time comes to buy a house?
Mortgage cosigning 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 cosign a mortgage so that you can purchase a home, there are some important things to consider beforehand. Review these aspects of mortgage cosigners before deciding it's the right move for you.
Common Cosigning Situations
Are you looking to purchase a home, but you 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 cosigner 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 cosigner may not help much.
What's the most common situation for a mortgage cosigner? When a borrower wants to qualify for better rates. Cosigning is a common arrangement for first-time homebuyers.
What Does Having a Cosigner Mean?
A cosigner is someone who states he or she will be held responsible for paying back a borrower's debt if the borrower becomes unable to do so. The person will go on the mortgage application and thus also become legally responsible for loan repayment.
Typically, the cosigner will be on your mortgage documents, not the title of the property. The responsibility of a cosigner generally starts and stops with the loan application and repayment, not with the ownership of the property itself.
Can Anyone Cosign a Mortgage?
Most lenders require that the cosigner 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 cosigner 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 cosigner has to meet, so be sure you thoroughly understand them all before asking someone to cosign on your mortgage.
Benefits of a Cosigner 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 cosigner 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 cosigner.
A cosigner 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 Cosigner
If you're the primary borrower and are asking a friend or family member to cosign your mortgage, don't take the situation lightly. The cosigner 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 cosigner at risk. Should you be unable to make your installments, it falls to the cosigner 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 cosigner to fall back on.
How Long Does a Cosigner Stay on Mortgage Paperwork?
The best thing you can do for your cosigner is to release him or her from the responsibility as soon as possible. Before signing any paperwork, be sure that both you and your cosigner 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 FICO 5 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 cosigner.
Remember to Shop Around!
Your cosigner 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 cosigner from potential financial responsibility, compare lenders now!