If you or someone you care about is concerned about qualifying for a home loan, co-signing a mortgage with help from a non-occupant co-signer may be an option to help with financing.
Prospective homeowners with small down payments, high debt-to-income ratios or credit score issues may have difficulties getting a mortgage on their own. However, the decision to use a co-signer has several pros and cons for both parties.
What is a co-signer?
A co-signer is an individual, sometimes a parent, close friend or partner, who promises to pay back a loan if the primary applicant is unable to pay. Essentially, they assume legal responsibility for the loan if the homeowner experiences any issues paying.
Common Reason you May Need a Co-signer
Lenders or mortgage brokers may suggest a co-signer if applicants experience one or more of the following:
- Little or No Credit History
- Low Down Payment
- Credit Score Difficulties
- High Debt-to-income ratio
Lenders see these situations as indicators that an applicant is high risk and might experience difficulty with their mortgage in the future.
Enlisting a co-signer lowers the risk for the lender and may also help the borrower get better terms. However, the role can become a big responsibility, or liability, for the co-signer if the homeowner’s finances hit rough waters.
The Responsibilities of a Co-Signer
- Share Legal Responsibility for the Debt with The Homeowner
- Make Payments If a Homeowner Misses Them
While the responsibilities of a co-signer are straightforward on paper, the situation can be quite complex, especially if personal relationships are involved. It’s important to understand all the pros and cons of being or having a co-signer before you make a commitment.
The Pros and Cons of Using a Co-signer
- Can help you become a homeowner faster than you could on your own
- May help you qualify for better terms on your mortgage
- Could improve your credit mix and credit score over time
- Your co-signer is legally responsible if you have trouble paying your mortgage
- Can affect your personal relationship with your co-signer
The Pros and Cons of Co-signing a Mortgage
We sorted the pros and cons of being a co-signer into three common scenarios.
- Scenario 1: The Homeowner Has No Issues Paying the Mortgage
- Scenario 2: The Homeowner Has Some Issues Paying the Mortgage But Recovers
- Scenario 3: The Homeowner Defaults on the Mortgage
Scenario 1: The Homeowner Has No Issues Paying the Mortgage
When a homeowner pays their mortgage on time the co-signer is unlikely to experience any issues. However, co-signing a loan will increase the co-signer’s debt-to-income ratio.
- Can build the co-signer’s credit over time when payments are made on time
- Help someone you care about achieve a financial milestone
- Increase the co-signers debt-to-income ratio
- May tie up the co-signer credit capacity
- Affect the terms of any new debt the co-signer may want take on
Scenario 2: The Homeowner Has Some Issues Paying the Mortgage But Recovers Quickly
- Negative effects can be temporary as long as the homeowner recovers quickly
- The co-signer could help pay the mortgage in the short to avoid derogatory marks on credit
- A few late or missed payments can affect the co-signer’s credit until they are resolved
- The co-signer may need to pay out of pocket to cover missed payments
Scenario 3: The Homeowner Experiences Long-term Payment Difficulty and/or Defaults on the Mortgage
- The co-signer is legally responsible for the unpaid debt and could be sued
- A foreclosure will damage the co-signer’s credit for 7 years
- The co-signer may need to spend money out of pocket to try and rescue the mortgage from foreclosure or cover legal fees
Is Getting or Being a Co-signer a Good Idea?
It’s never a good idea to take on a debt that you can’t afford. So any concerns about reliably making monthly payments on a mortgage should be a huge red flag to both the homeowner and their co-signer.
However, if your income is stable you may want to consider a short term co-signing arrangement in order to qualify for better terms.
Short Term Co-signer Arrangements
Although not offered by all lenders, some will allow a co-sginer to be removed from the mortgage after the homeowner makes 12 consecutive on-time monthly payments. This can be a great situation for both the homeowner and co-signer because the commitment is short term.
Co-signing Offers both Risks and Rewards
Co-signing is a great way to help someone you care about achieve their homeownership goals. Generally, there is more in iit for the homeowner than the co-signer. For that reason, the co-signer should be stable financially, will likely own their own home or multiple properties already and be able to absorb the risk without much difficulty.
Before entering into any mortgage agreement it’s important to do your research and understand what your finances can handle.
Already have a mortgage? Learn more about the the pros and cons of refinancing your home.