Should You Co-Sign A Mortgage?
Sometimes, not everyone meets a bank’s rules for getting a mortgage. When people can’t qualify on their own, they might ask someone with better finances to co-sign their mortgage. This means they use the other person’s good credit to help them qualify.
Co-signing a mortgage can be a helpful strategy for securing a loan, but it’s essential to grasp the commitments and potential risks at stake. Before agreeing to co-sign a mortgage, here’s what you should be aware of.
What Does Co-Signing A Mortgage Mean?
Co-signing a mortgage involves a close friend, family member, or trusted individual—often called a co-borrower—agreeing to share equal responsibility for repaying the mortgage. If the primary borrower misses payments or defaults, the co-borrower must cover those missed payments.
Lenders might approve the mortgage if a co-borrower has good credit, even if the primary borrower wouldn’t qualify alone. This is because lenders see a mortgage co-signed by a strong co-borrower as extra security. It assures them that someone reliable can intervene if the primary borrower can’t repay the loan.
Besides being on the mortgage application and contract, co-borrowers are listed on the property’s title, which means they co-own the property.
Joint Tenancy Vs. Tenancy In Common
When you co-sign a mortgage, you become a partial owner of the home. The type and extent of ownership depend on whether you choose joint tenancy or tenancy in common with the other borrower.
In joint tenancy, two or more people have full and equal ownership of a house, meaning each owns 100% of the property together. If one joint tenant passes away, the surviving joint tenants automatically inherit their share, keeping full ownership undivided.
On the other hand, tenancy in common lets borrowers divide ownership by specific percentages they decide on. For instance, two borrowers might each own 50% of the property, or one could own 99% while the other owns just 1%. In a tenancy in common, a borrower can sell their share or designate a beneficiary to inherit it if they pass away.
Co-Borrower Vs. Guarantor
Similar to a co-borrower, a mortgage guarantor helps someone qualify for a mortgage by including their financial information on the application.
However, unlike a co-borrower, a guarantor’s name is not on the property title, meaning they do not own the property. Co-borrowers must cover the primary borrower’s missed payments, whereas guarantors are only responsible if the mortgage goes into default.
Lastly, while a co-borrower might be brought in to strengthen a weak application, a guarantor is usually used to enhance an already relatively strong application that nearly meets the lender’s requirements.
Mortgage guarantors are not as frequently used as co-borrowers, and applying with one might necessitate special permissions from the lender
Reasons a Borrower Might Request a Co-Signer for Their Mortgage
A potential homebuyer might look for a co-borrower when they can’t get a mortgage on their own or have a low chance of approval. They might need a co-borrower if:
- They are self-employed with fluctuating income.
- Their credit score is low.
- They do not have enough income.
- They have a short or nonexistent credit history.
Putting aside the application’s challenges, the primary borrower should feel reasonably sure they can handle mortgage payments alone, with the co-borrower serving as a backup plan.
Borrowers who have a lot of debt or other financial obligations that might affect their ability to pay back a mortgage should consider getting their finances in better shape before applying for a home loan, whether or not they have a co-borrower.
Understanding How Mortgage Co-Signing Works
When someone co-signs a mortgage, they join the primary borrower’s application and, if approved, become part of the mortgage itself. Co-signers also get listed on the property’s title, showing they share home ownership.
When applying for a mortgage with a co-signer, both the primary borrower and the co-borrower must:
- Show proof of income and other assets
- Provide personal identification documents
- Consent to a thorough credit check
Primary borrowers and co-borrowers can decide to split the initial costs, like the down payment, evenly. Alternatively, one person might take on most or all of these expenses.
Co-borrowers must show good enough credit for the lender to approve the co-signed mortgage. They also need to have enough money to cover the mortgage payments if necessary.
Keep in mind that a hard credit check can lower the co-borrower’s credit score and will remain on their credit report for 3 to 6 years. Additionally, the co-borrower’s debt-to-income ratio will be affected if the loan is approved.
Advantages and Disadvantages of Co-Signing a Mortgage
Co-signing a mortgage has its advantages and disadvantages for both the primary borrower and the co-borrower. Both parties need to weigh the pros and cons before making a decision.
Advantages
- Co-borrowers can assist friends, family members, or others in qualifying for a mortgage that might otherwise be difficult to secure.
- Co-signing can lead lenders to offer better interest rates than the primary borrower could get alone.
- Making on-time payments can boost the credit scores of both the primary borrower and the co-borrower.
Disadvantages
- If the primary borrower misses payments or defaults on the mortgage, co-borrowers could face a significant financial burden.
- If the primary borrower misses payments, it can negatively impact the co-borrower’s credit.
- A co-signed mortgage adds to a co-borrower’s total debt load. It could affect their ability to secure other financing in the future.
- Removing a co-borrower from a mortgage can be challenging.
Taking a Co-Borrower Off a Mortgage
Co-borrowers typically stay involved until the mortgage is completely paid off. Yet, if the primary borrower can handle payments alone or the removal of the co-borrower request, the primary borrower can seek mortgage refinancing to solely hold responsibility for the loan.
To refinance, the primary borrower must qualify based on their income and credit score. If they don’t meet the requirements, the co-borrower might need to stay on the mortgage until the situation improves.
The primary borrower should budget for mortgage refinancing expenses. Unless there’s an urgent need to remove the co-borrower, they might choose to refinance closer to the end of their mortgage term to avoid penalties and high fees.
Alternatives to Co-Signing on a Mortgage
If your initial mortgage application is denied, there are other options to consider besides applying with a co-borrower:
- Explore assistance programs: First-time homebuyer or down payment assistance programs can provide financial support to help you secure the financing needed for homeownership. Research grants and programs that align with your homeownership objectives.
- Improve your credit score: Boosting your credit score increases your chances of future mortgage approval. A higher score may also lead to lower interest rates if approved.
- Explore alternative mortgage options: Different lenders offer various mortgage products with varying requirements. If you’re turned down for a conventional mortgage, consider applying for alternative mortgages from B lenders, which may have more flexible credit scores, debt levels, and income standards.
- Save for a larger down payment: A larger down payment reduces your mortgage amount, lowering risk for lenders and potentially improving your chances of securing financing.
Final Word
Co-signing a mortgage can help a family member or friend secure home financing, but it also involves significant risks for the co-borrowers.
The primary borrower and co-borrower should carefully consider the pros and cons of co-signing before proceeding with the arrangement.