If you cosign a mortgage for a family member or friend, you can help them buy a home or get better terms. It can be rewarding to help other people, but you should also be aware of the risk you’re taking. Even if the primary borrower never misses a payment, having a mortgage on your credit report could make it harder for you to get your loan or line of credit. Read about What to Know Before Cosigning a Mortgage.
What to Know Before Cosigning a Mortgage
How does it work to cosign for a mortgage?
When you cosign for a mortgage, you agree to pay the total amount if the primary borrower stops making payments. But you won’t own the house with them, and your name won’t be on the title.
Co-borrowers, on the other hand, also called co-applicants or joint applicants, share both the financial responsibility and ownership of the home. Couples, partners, or friends who want to buy and live in a home together often use a joint applicant arrangement. However, there can also be non-occupant borrowers on a mortgage.
This may happen more often when someone wants to help a family member get a mortgage. For example, a parent might cosign a mortgage for a child who can’t get one on their own because they’re just starting their career, working for themselves, or getting divorced.
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When an applicant doesn’t have a steady income or enough income to qualify, a cosigner can often help. A cosigner with a steady income and low debt-to-income ratio (DTI) may give the lender peace of mind that the mortgage payments will be made. The cosigner may also help with the down payment, though the lender may require the primary borrower to make at least the minimum down payment.
The credit scores of the cosigner will also be taken into account. But mortgage lenders usually use the lower middle score of the two applicants’ credit scores from all three credit bureaus (Experian, TransUnion, and Equifax). So, if the primary borrower doesn’t have a high enough credit score, a cosigner might not be much help.
Who Can Cosign a Mortgage Loan?
Depending on the type of mortgage and the lender, you may or may not need a cosigner.
Some lenders, for example, want the cosigner to be a close friend or family member of the primary borrower, like a parent or sibling. Cosigners who have a financial stake in the sale of the home, like the seller or a real estate agent, may not be allowed by the lender.
Most loans have minimum credit score requirements for cosigners. These are 620 for conventional loans and 500 to 580 for Federal Housing Administration (FHA) loans backed by the government. Read about brrrr method.
The cosigner will also have to give copies of their ID and financial records and agree to a credit check. A government-issued ID, a Social Security card, tax returns, and bank statements may all be needed.
How having a cosigner can hurt your credit.
Cosigning a mortgage can have the same effect on your credit as getting a mortgage since you are taking on financial responsibility for the loan. Check an online rental application for your use.
The first credit checks and hard inquiries may lower your score a little. A sizeable new debt can also cause your score to drop at first.
- When you pay your mortgage on time, it can help your credit.
- Your credit can be hurt by late payments or foreclosure.
- The mortgage can affect your credit as long as you have the loan and for up to 10 years after you pay it off or refinance it.
- Even if you don’t make the mortgage payments yourself, other creditors may include them in your DTI, regardless of your credit score. Even though a high DTI doesn’t affect your credit score, it can make it harder to get a new loan or line of credit.
What’s good and bad about cosigning a mortgage?
When you cosign a mortgage, you take on a lot of risk for not much money in return. If you’re thinking about cosigning, you should want to help someone buy a home.
- Why cosigning a mortgage is a good idea.
- You can help a friend or family member buy a home.
- Your credit may improve if you pay your mortgage on time.
- Cosigning a mortgage has its downsides.
- You are legally obligated to pay off the debt.
- You don’t have any right to the house.
- Your credit rating will change.
- If the primary borrower can’t make the payments, it could strain your relationship.
- After you cosign on a mortgage, getting your name off of it will also be hard. You might have to wait until the primary borrower can qualify to refinance the mortgage on their own.
Before you offer, check your credit.
Cosigners help mortgage applicants most when they have a steady income and a low debt-to-income ratio (DTI), but your credit score is still important. Experian lets you check your FICO® Score 8 for free to see where you stand. If you have time to prepare, you might also want to work on your finances. You might be more valuable as a cosigner if you pay off other debts, make more money, and improve your credit score.