If you have good credit and a low debt-to-income ratio, co-signing on a mortgage is a common tactic for helping a child, sibling, or other family member purchase a home when they normally wouldn’t be able to. However, there are some things to keep in mind when deciding if co-signing is a good option for you. After all, you will have a stake in the property.
The Risks of Co-Signing a Mortgage
1. The Payments Show Up on Your Credit Report
While you may only be a co-signer on the mortgage, the payments will show up on your credit report as if you’re the one making them. The good news is this can be great for your credit. It can actually improve your credit score. However, the bad news is that missed payments can hurt your credit score.
2. The Mortgage is Considered Part of Your Debt
In alignment with the previous point, the mortgage will appear as part of your debt. If you plan to pursue another loan (home, auto, or otherwise), it will affect how well you qualify, because lenders take into consideration your debt-to-income ratio. Even if you are not making the payments, the extra debt may put you over your limit.
3. Co-Signing Does Not Raise the Buyer’s Qualifying Credit Score
If the primary borrower has bad credit and your intention is to help raise the qualifying credit score by throwing your own better score into the calculation, understand that lenders use the lowest middle credit score of all the buyers. Even if yours is excellent, they would use the primary borrower’s score. It’s a more accurate risk assessment for the lender.
4. The Co-Signer is Usually Last to Know
Once a mortgage is 2-3 payments (3-6 months) behind, the lender will begin the foreclosure process. More often than not, the co-signer is last to know when things get this bad. Stubbornness and pride can prevent communication between the co-signer and primary owner. The co-signer may also be slack in monitoring their credit history, as many people are when they have a solid control on their monthly finances. However, when it gets to this point, it’s often too late to reconcile the account and stop the home from being foreclosed on.
A Couple of Solutions
Make a financial contribution to the home purchase, instead of co-signing on a loan. As a co-signer, you are just as responsible for the loan as the primary borrower. However, by giving the buyer money, you eliminate financial responsibility, the additional debt, and the risk it places on your credit history. It also lowers how much money the buyer needs to borrow, which improves their ability to qualify for a loan alone.
If you don’t have the funds available to give and still want to co-sign, have a frank conversation with the primary borrower before signing on the dotted line.
- Do they need the additional support because they’re in a transition? (Are they starting a new job or marriage?)
- Are you making a short-term or long-term commitment? (Will they refinance in 1-3 years?)
- Are they responsible or kind of bad with finances? (Steer clear of the latter!)
If you co-sign, make sure you receive a loan statement every month. That way, you can monitor the health of the loan.
While there is not much financial benefit for a co-signer, helping a family member purchase can greatly improve their life and your relationship. Their pride and confidence will grow, as well as their equity. Of course, if they fall behind on payments and you take over the mortgage, that will be a temporary setback. However, you could convert the property to a rental or sell it, which would be an opportunity for you to grow your wealth through real estate.
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