Many homebuyers need help from friends and family to qualify for a home loan through co-signing. Of home purchase loans in the U.S. during the second quarter of 2017, 22.8 percent included a co-signer, up from 21.3 percent in the second quarter of 2016—according to a study by Attom Data Solutions, a property database in Irvine, Calif.
Go slowly and consider what co-signing the mortgage will do to your credit. Go slowly and consider whether co-signing that mortgage will actually benefit the buyer. Are you enabling them to get into a home that they couldn't afford otherwise? How are they going to pay for it each month if that is the case. Do you have the capacity to make the payments for them if they fall behind? Perhaps they are better off in a smaller home if that is an option. Here’s what you need to know before co-signing a mortgage:
Payments Are Now Your Responsibility
You’re now 100 percent responsible for someone else’s obligation. While you probably won’t be making a monthly payment on the house, as a co-signer you’re now just as responsible for repaying the obligation as the homebuyer is.
Your offer to help by using your income and good credit score as qualifying factors extends to paying the mortgage if they don’t make payments.
Your Future Credit is Affected
A co-signer is, in essence, lending their future credit worthiness for someone else’s current mortgage obligation. If the person you’re co-signing for loses their job and can’t make house payments, then their credit report will be hurt, and so will yours.
The delinquency will appear on your credit report too, as does the obligation to pay the mortgage bill on time each month. This could hurt your ability to get credit in the future if you apply for a home, auto, personal, business or student loan, or want to get a good rate on a credit card.
Even if the mortgage payments are made on time and in full each month, being a co-signer on the mortgage can count against you when qualifying for future loans. That large loan is still a risk that you’re obligated to pay, and could threaten your credit score. Think about that co-signed loan as taking up part of your debt to income ratio and restricting your ability to borrow additional money for your own purchases.
If you have any plans to purchase a home of your own or buy a new car in the near future, you may want to skip co-signing that loan or at least talk to the lender about how this act of generosity on your part will change your borrowing capacity going forward.
Your Debts Will Be Looked At
A co-signer’s debts will be considered in approving the home loan, with the expected outcome that debt and income from two borrowers will lower the debt-to-income ratio, or DTI, for the home loan.
For conforming loans, Fannie Mae and Freddie Mac will allow a “blended ratio” DTI that combines the incomes of the occupant and non-occupant co-borrowers. This can help when the co-signer isn’t going to live in the house and has most of the income, such as for parents helping their child buy a home.
As a co-signer, you should be prepared to provide paperwork for all of the same credit requirements that the borrower is subject to, such as bank statements and income tax returns.