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In order to get approved for a mortgage, it takes some financial strength. Unfortunately, some people are unable to get approved, which is where a co-signer may come into the picture. In this article, we’ll explain how having a co-signer on a mortgage works.
Do you have an adequate income required to carry mortgage payments on top of all the other bills you have to pay? Is your debt load low? Is your credit score high?
All these actors are taken into consideration when a mortgage lender determines whether or not you are able to get approved for a mortgage. The thing is, many people are not able to secure a home loan because of their income, debt load, or credit score, among other things. Does this mean they have to forgo their dreams of homeownership? Not necessarily. Getting a co-signer to sign with you on a mortgage can help you get approved. Like credit cards or car loans, some mortgages allow borrowers to have co-signers on the loan with them, enhancing their loan application.
However, a co-signer on a mortgage loan doesn’t have the same impact that it might on another loan, and it poses serious drawbacks for the co-signer. That’s why anyone who chooses to co-sign should be fully aware of their obligations before committing to this position.
A mortgage co-signer is a person that isn’t an owner-occupant of the house. However, the co-signer is on the hook for the loan. Usually, a co-signer is a family member or close friend that wants to help the primary borrower qualify for a mortgage. But it could be anyone who has the financial and credit strength needed to be approved for a mortgage and is willing to assume the potential burden should you be unable to continue making your mortgage payments at some point in the future.
As a co-signer on a mortgage, they bear full responsibility for the payments, which can have serious consequences if the primary borrower does not make the payments. If you stop paying your mortgage at any time, the co-signer will then have to take over the payments. That means they will have an added bill to pay every billing period without the benefit of ownership of the property.
When a co-signer applies for a mortgage, the lender considers the co-signer’s credit score. So, the co-signer should ideally have a decent credit score of at least 650 or more in order to be qualified to become a co-signer on a home loan.
Further, the lender will consider the co-signer’s income and savings along with the borrower’s. For instance, if a borrower only has $3,000 per month in income but wants to have a mortgage that, when added up with his other payments, works out to a total debt load of $1,800 per month, a lender might not be willing to make the loan.
If the borrower adds a co-signer with $3,000 per month in income and no debt, the lender looks at the $1,800 in payments against the combined income of $6,000 and is much more likely to approve it.
Co-signers can add income, but they can’t mitigate credit problems. Typically, the lender will look at the least qualified borrower’s credit score when deciding whether or not to make the loan. This means that a co-signer might not be able to help a borrower who has adequate income but doesn’t have adequate credit. Even if the co-signer has good credit – which they will be required to have in order to become a co-signer – this arrangement still might not be enough if your credit score is below a certain level that the lender is comfortable with.
Not only will the borrower be put under a microscope by the lender when it comes to determining whether or not a mortgage approval will result, so too will the co-signer. The mortgage lender is going to require a full application from the co-signer in order to gain a full and clear understanding of their financial health, including information on properties they currently own, their current debts that they are servicing, and all financial housing obligations.
There are a couple of options that the co-signer can take. For instance, the co-signer can become a co-borrower. Much like a spouse or partner would be part of the transaction when buying a home, so can a co-signer. In this way, the co-signer becomes a co-borrower like spouses would. In this case, the co-signer’s name will be placed on the title of the property, and the mortgage lender will deem them equally responsible for the loan amount if the mortgage defaults.
Alternatively, the co-signer can become the guarantor. In this situation, the co-signer will be guaranteeing the loan and vouching for you. By taking this role, the guarantor will be required to continue making payments for the home loan if the mortgage goes into default.
Co-signing arrangements carry risks for both the borrower and the co-signer, especially since the co-signer gets all of the downsides of debt without the benefits. He or she doesn’t get to use the house, but they are responsible for it if the mortgage goes unpaid. Moreover, the co-signer’s credit could be ruined, and he could be sued (in some states) if the borrower doesn’t pay and he doesn’t step in.
For the borrower, having a co-signer may add an additional level of pressure to make payments since defaulting on the loan will hurt him and his co-signer. That said, a borrower should never even consider asking someone else to co-sign on a mortgage in order to help them get approved if they do not believe they will be financially capable of keeping up with payments. Ultimately, as borrower, it’s imperative that you take the time to contemplate their financial strength and the ability to add another bill to their budget before asking someone they know to be a co-signer. At the same time, co-signers should also assess not just their own financial situation and tolerance for risk but also the borrower’s financial habits and responsibility before making such a major commitment.
Finally, it is important that you and your potential co-singer evaluate the alternatives. Get creative and identify several options that accomplish what everybody needs and what will benefit you both in the long run. For instance, rather than having them co-sign, you might want to have them help out with a down payment instead. A bigger down payment could result in lower required monthly payments—making it easier for a borrower with limited income to be approved. Obviously, if you and your potential co-signer choose to go with a co-signing alternative, then that person will need to have substantial cash on hand, need to be willing to lose that money, and you will both need to communicate about how to handle that down payment. Remember to discuss whether or not the down payment assistance is a gift or if you need to set up a formal private loan agreement. Ultimately, this is just one alternative to cosigning that you both should consider.
Do you have questions about home loans or having someone cosign on your mortgage? Or are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
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