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When you co-sign a mortgage, it shows that you trust a friend or family member enough to put your own finances at risk to help them qualify for a mortgage. However, becoming the co-signer for a home loan isn’t a decision to be taken lightly. Not only can it have a significant impact on your finances and credit report, but it could also put a strain on your relationship with the person buying a home.
In this guide, you’ll learn everything you need to know about co-signing for a mortgage to help you make a more informed decision.
What Is a Co-Signer?
Co-signing any kind of loan requires you to become the “backup” borrower in the event the actual borrower defaults on their loan. Essentially, you provide information to the lender to show that you have a good credit history and sufficient income to make payments.
Lenders will look at both your and the borrower’s financial qualifications. Assuming you have better credit than the borrower, acting as a co-signer can help improve the borrower’s credit in the eyes of the lender. This can allow the borrower to qualify for mortgages or more favorable terms.
If the borrower can’t meet the obligations of their mortgage, the co-signer must make payments for them. If this situation arises, you won’t take ownership of the property. You’re just the financial guarantor and have no claim to the property. This is why you should carefully consider whether or not to co-sign a mortgage before making a decision.
Becoming a co-signer is the equivalent of taking on the financial risk of a mortgage while someone else reaps the rewards. This is why prospective borrowers typically ask close family members or friends to co-sign a loan, as it requires a great deal of trust.
Co-signing isn’t just a useful tool to qualify for mortgages. You can also co-sign for personal loans, student loans and auto loans – just to name a few.
What does co-signing for a mortgage involve?
Typically, primary borrowers will reach out to people about becoming co-signers if they’ve already been denied a loan or if they know their credit history isn’t good enough to qualify on their own.
When someone asks you to be a co-signer, it’s always a good idea to evaluate their financial situation. This can be somewhat uncomfortable, especially if you’re close to the person. However, if anyone wants you to co-sign a mortgage, you’ll want to know that they can and will pay off the loan. Otherwise, you could be on the hook to pay the loan for them.
Co-signer vs co-borrower
It’s also important to know the difference between a co-signer and a co-borrower. As previously mentioned, a co-signer acts as the financial guarantor but only has to make payments if the borrower is unable to do so.
A co-borrower has their name on the property title and must contribute toward paying down the loan.
Whether you become a co-signer or a co-borrower, you accept a certain degree of financial risk. Defaulting on the loan as a co-borrower could force your home into foreclosure and negatively impact your credit.
How Does Co-signing Work?
The co-signing process begins when a prospective borrower applies for the loan. They’ll list you as a co-signer, and you’ll be required to provide information and documentation to prove that you’re a good candidate. This may include pay stubs, tax returns, bank statements and verification of employment.
Assuming the borrower wants to proceed and accept the offer, you’ll need to sign the mortgage agreement to signify that you take complete financial responsibility for the loan in the event the primary borrower can’t make their payments.
After the application process has been finalized and the primary borrower has closed on the home, you’re not required to do anything else.
However, if the primary borrower can’t make payments on time and ultimately defaults on the loan, the lender will contact you to take over the loan. Again, this doesn’t mean you’ll take ownership of the home – you’ll just take ownership of the loan.
How long does a co-signer stay on a mortgage?
Unless you, the borrower and the lender agree to have your name removed from the mortgage, it’ll remain for the life of the loan. Generally, you’re eligible to have your name removed after 2 – 3 years of on-time payments. The exact length of time varies by lender.
To be removed as a co-signer, the primary borrower must contact their lender and request the removal. This takes the financial responsibility for repaying the loan away from you and puts it fully on the borrower. Once you’re removed as a co-signer, you’ll have much more freedom to pursue loans or lines of credit for yourself.
Do All Mortgages Allow a Co-Signer?
Co-signers are most often used for conventional and Federal Housing Administration (FHA) mortgages. However, there are some mortgages and lenders that won’t allow borrowers to use co-signers. Therefore, the ability to become a co-signer can vary from one loan to the next. Fortunately, there are plenty of loans that allow borrowers to use a co-signer.
Co-signing a conventional mortgage
If a borrower has mediocre credit, they may want the help of a co-signer to get a conventional mortgage. This is especially useful if the borrower wouldn’t otherwise qualify for an FHA or U.S. Department of Agriculture (USDA) loan. However, the lender will need to consider the co-signer’s financial background, including their debt-to-income (DTI) ratio, credit score and owned assets before making a decision.
Co-signing an FHA loan
FHA loans help people with fair credit get access to a mortgage without the need for a large down payment. However, the credit score of the borrower can directly impact exactly how much they need to pay upfront.
If the borrower has a credit score between 500 – 579, they need to pay 10% down. If their credit score is above 580, they may only need to pay 3.5% down.
With a qualified co-signer, an FHA loan applicant could get their credit score above 580 and be able to buy a home with a smaller down payment requirement.
Risks of being a co-signer
There are three different “worst-case” scenarios to consider as a co-signer.
- Occasional late payments: If the primary borrower misses or makes late payments but doesn’t default on their mortgage, it will still hurt your credit score. This can make it harder to qualify for loans in the future.
- Borrower falls behind: If the primary borrower is unable to catch up on missed payments, the burden of the mortgage is passed to you. Naturally, this could have major consequences, as you’ll be expected to pay down a mortgage for someone else without any legal claim to the property.
- Short sale or foreclosure: If both you and the borrower are unable to make payments, the lender may exercise their right to either require a short sale or foreclosure on the home. This means the primary borrower loses any potential profit from the home. It also means the foreclosure will appear on your credit report as well as the primary borrower’s. That can hurt your ability to take out loans or access credit, and it can stay on your credit report for up to 7 years.
Pros and Cons of Co-Signing a Mortgage
Co-signing a mortgage often results in a better interest rate for the borrower, but it also comes with various drawbacks. Be sure to consider all of the pros and cons of becoming a co-signer before making a decision.
PROS Pros of Co-signing a Mortgage👍
If you have a friend or family member who really wants a house, but doesn’t qualify because of a low credit score, you can help them qualify by co-signing the mortgage.
If you have better credit, you can help the borrower qualify for lower interest rates, lower monthly payments or a lower down payment.
Some lenders have strict employment requirements for borrowers. As a co-signer, you can help cover for the loss of employment or a gap in the applicant’s resume.
CONS Cons of Co-signing a Mortgage👎
If the primary borrower misses payments or defaults on the loan, it can hurt your credit as well as the borrower’s.
Co-signing isn’t just an agreement between you and the borrower. It’s a legally-binding agreement with the lender. Unless the borrower agrees to take full financial responsibility for the loan, and the lender agrees to it, you may find it very difficult to get your name removed as a co-signer.
If the borrower defaults on their mortgage, you’ll be responsible for paying off the remainder of the loan.
If a borrower can’t find someone to co-sign a home loan, there are a few alternatives to consider. These options can make it easier to qualify for mortgages or better loan terms without a financial guarantor.
Build up your credit score
Taking the time to build up credit scores can make lenders more comfortable approving a mortgage without a co-signer.
Explore home buyer assistance programs
If you have credit to qualify for a loan, you may be eligible for first-time home buyer programs, down payment assistance or closing cost assistance programs. These programs provide access to education, grants and loans that can make it easier to get a loan without a co-signer.
Loans backed by the FHA, the USDA and the Department of Veterans Affairs (VA) don’t require large down payments. If borrowers meet the criteria, they can qualify with lower credit scores.
Co-Signing Frequently Asked Questions
If you’ve been asked to co-sign a home loan, you likely have a lot of questions. Below are some frequently asked questions to help you better understand the potential risks and benefits of co-signing a mortgage.
The act of co-signing a loan won’t immediately affect your credit score. However, your score may go up or down based on the primary borrower’s ability to make on-time payments.
Yes, you can still get a mortgage if you’ve already co-signed for one, though it will be more difficult. To qualify for a new mortgage, you’ll need to prove that you can make the payments of the new mortgage and the payments of the co-signed loan.
Yes, you can co-sign a mortgage if you have an existing home loan. You just need to show proof that you have the financial means to comfortably make both loan payments.
Signing on the Dotted Line
Co-signing a mortgage can be a great way to help someone close to you, but it’s important to consider the risks before committing. If you’ve been asked to co-sign a mortgage, make sure you trust the primary borrower and request proof that they can pay the loan. If you’re unsure about their ability to pay the loan, you should definitely think twice before becoming a co-signer.
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Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved November 2022 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf