When home prices rise, many first time home buyers or home buyers with less than perfect credit often look to family or friends to help them buy a home. This is evident in the recent rise of mortgages that have co-signers. A co-signer is a person who is obligated to pay back the loan, just as the borrower is. A co-signer may be a spouse, parent, grandparent or friend. Co-signers should be aware of their financial obligations before agreeing to do so. It is best that they sit down with a lender or financial planning professional before taking action.
Here are some important factors to consider before agreeing to co-sign.
1. The co-signer is 100% responsible for the loan. If the person benefiting from the loan (i.e. the one actually buying and livign in the home) loses his or her job or has a reduction in income and can no longer pay the mortgage, the co-signer is responsible for the payments.
2. It does affect the co-signer's credit. Let's say the primary borrower is late on a few payments, the delinquency will show on the co-signer's credit report. ****This is something I learned first hand in my early twenties when I co-signed on a loan for a boyfriend who was late on numerous payments and I had no idea until I received a notice in the mailing saying it was 90 days behind and I was obligated to pay. Lesson learned!
3. Even if payments are made on time each month, the debt can affect the co-signer's ability to borrow beacuse it can affect their debt to income ratio.
4. The co-signer must also qualify for the mortgage. This means the lender will review their credit the same as they do the primary borrower's credit.
5. Are you really helping the buyer? If the buyer needs a co-signer, the potential co-signer needs to find out why they are needed in the first place. If the buyer isn't well qualified to borrow, they may not be well qualified to pay either.
The home buyer and co-signer must talk to a lender or finacial consultant to determine if the situation is a good idea for the parties involved.