When Should You Co-Sign A Mortgage?
UPDATED: Dec 29, 2022
For many, buying a home is one of the most important purchases you’ll make in your lifetime – if not the largest. And if someone close to you, such as a family member, close friend or partner, is currently house hunting, they might ask you to cosign a mortgage. Before you agree, you’ll want to fully understand what you’re getting into.
We’ll go over the nitty-gritty on what cosigning a mortgage entails, your financial responsibilities as a cosigner and when it might make sense for you to agree to cosignership.
What Does It Mean To Co-Sign A Mortgage?
When you cosign a mortgage, it essentially means that if the primary borrower can’t afford to make the loan payments, you’re on the hook financially. While you’re lending someone a hand, it’s quite a large responsibility. When you cosign, your credit, assets or income are used to help secure the loan. You’re also next in line to make payments should the primary borrower default.
Note that cosigning a mortgage is different from being a co-owner. When you’re a co-owner, you're on the title along with a friend or family member you’re helping. If you’re not on the title, there’s no ownership conferred even if you’re on the mortgage. In turn, you’re both responsible for making payments throughout the duration of the loan.
But when you’re the cosigner, the other borrower depends on your solid credit or income to qualify for the loan. When you’re a cosigner on a mortgage, you often don’t own the house. Someone might ask you to cosign if they don’t meet the income or credit requirements for a mortgage and need someone to help back the loan. You’re only responsible for making payments if the primary borrower can’t afford to.
When Should You Cosign?
You should only cosign if you fully understand the risks and downsides involved. As mentioned, you’re putting your creditworthiness and financial health at risk. Plus, you could be sued and suffer a credit hit if it’s on you to make payments and you can’t. You’re able to handle payments if the primary borrower can’t keep up with them.
Some Things To Consider Before Co-Signing
Besides helping someone you care about, from a financial standpoint, cosigning doesn’t reap a lot of benefits. You’re being saddled with a lot of responsibility and you’re contractually liable to cover payments.
Thinking of cosigning a mortgage? Here are a few things to mull over:
- Know what you’re getting into. It might seem obvious but treat it as if you are taking out the mortgage yourself, because in reality, you are. Comb carefully over the terms, rates and conditions of the mortgage. It’s not a bad idea to meet with the loan officer with any questions you might have.
- Understand how it affects your debt load. While you don’t have to worry about making payments unless the borrower isn’t able to, on paper you’ll be carrying a larger debt load. In turn, your debt-to-income ratio will be higher.
Besides knowing your legal responsibility, know your rights. The state you live in might have additional cosigner rights, so do your research so you know your protections.
Evaluate The Risks
Before you agree to cosigning, understand the risks to your financial health. You should also know how it could potentially affect your creditworthiness.
There are several risks to consider. Let’s say that neither you nor the primary borrower can make the mortgage payments. This being the case, your credit score could take a hit.
And because you’re taking on a sizable debt load, it increases your debt-to-income (DTI) and could limit the amount of credit you can borrow. You might be turned down for future debt, such as a business loan or car loan.
Another major risk? You could be sued for the debt, and the lender will look to you first to handle payments if the primary borrower isn’t able to. It might seem weird, but then again, you’re the one with stronger credit and a healthier financial position.
If you’re being asked to provide assets (whether that’s cash reserves or collateral, such as jewelry, valuable artwork, your car, or furniture), know that you might lose these assets should the borrower default.
And on a more personal level, if you’re cosigning for a good friend or close relative and things go south, it could put a strain on your relationship.
Manage The Risks
If you’re leaning toward cosigning a mortgage, you’ll want to do all you can to mitigate the risks. For instance, be sure that you can afford the payments. Should the worst-case scenario arise, and you end up being responsible for paying the mortgage, are you in a financial place to take over those payments?
Talk it out with the primary borrower. Before you agree to anything or sign any paperwork, discuss it with the borrower. Besides sharing any concerns and thoughts you had about agreeing to be a cosigner, see if the other party has any concerns.
Make sure you receive copies of all the important documents. This includes the loan agreement, warranties and the Closing Disclosure, which details the cost of your mortgage, such as your annual percentage rate. In case there’s a tiff between the borrower and lender, you’ll want to have these papers handy.
Ask the lender to notify you if the terms of the loan change or if the borrower ends up missing a payment. Getting a heads-up will help you deal with any issues and prepare to make mortgage payments.
See if you can negotiate your liability. For instance, maybe you can limit it to just the principal amount of the loan and not the interest. What’s more, ask to not be obligated to cover attorney fees, late fees or court costs. Request all this in writing as an addendum in the contract.
Check your credit score periodically. To make sure your credit score is in tip-top shape, order a credit report and check your credit for free with Rocket HQSM.
Alternatives To Co-Signing
If you’ve evaluated the risks and have found that cosigning a mortgage isn’t the right choice for you, consider the following options:
Borrow The Money Yourself
One way you can avoid some of the risks that come with cosigning a mortgage is to borrow the money yourself or draw it from your savings, then loan the money to a friend. If you decide to go this route, you’ll want to draft a loan agreement laying out the terms and conditions of the loan.
The good thing about this is that if your friend can’t afford to keep up with monthly mortgage payments, your credit won’t be impacted.
Offer Help In Other Ways
Aside from taking on that financial responsibility, be supportive by helping the borrower find different options to finance their home. If they’re new to the process, walk them through it and show them what to look for when doing their research.
If it’s not the right time to offer financial assistance, consider helping out down the line if the borrower can’t afford to make payments. Should they eventually refinance for a better loan, offer to serve as a backup.
By understanding the responsibility you’d bear as a mortgage cosigner, you’ll be able to understand the consequences of cosigning a 15- or 30-year mortgage. In turn, you can gauge whether it’s something you’d like to commit to.
If you have any questions about being a cosigner on a mortgage, Rocket Mortgage® is here to help. Having provided affordable loans and quality customer service for more than 30 years, we can help you determine if it’s the right choice for you.
Andrew Dehan
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