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Summary: Co-signing on a home mortgage in Washington State is a significant responsibility financially and could hinder your relationship with the primary signer. In this blog post, we go over eight questions to ask yourself before co-signing on a home mortgage. From the impact on your credit score, debt-to-income ratio, and your own ability to be approved for financing to assuming full financial responsibility there is a lot to take into consideration before signing.
A mortgage for a home in Washington State is a significant responsibility. For this reason, many people have someone co-sign with them on their mortgage. Before agreeing to co-sign on any mortgage, it is important to ask the right questions. There are several crucial questions that everyone should ask before they co-sign on someone else’s mortgage.
Before signing that piece of paper, it is important to understand the responsibilities involved. Co-signing on a mortgage for a home in Washington State is different than co-signing for a credit card.
The person who is buying the home, the primary signer, lives in the property in question. The co-signer, typically, does not and is considered a non-occupant co-borrower. Both people signing the mortgage take on the financial risk of the mortgage equally. As a co-signer, your risk isn’t lessened just because you aren’t occupying the property. It is essential that you understand all the risks involved before agreeing to co-sign on a mortgage. We’ve put together seven questions to ask yourself before co-signing on a mortgage. Read on to learn more.
One of the most important questions to ask is whether or not the borrower can be trusted. Remember, if the primary signer cannot make the payments on the mortgage, the co-signer is on the hook for those payments. Before placing any financial assets on the line, make sure the borrower can be trusted to maintain gainful employment, make smart financial decisions, and keep up with the mortgage payments.
In today’s mortgage environment a co-signer is often needed when the primary borrower doesn’t have enough income to qualify on their own. In the past, a co-signer was used if the primary borrower had credit issues or insufficient credit. Today, most loan programs base their decision off of the lowest credit score for any borrower on the loan which makes co-signing for credit purposes less beneficial.
If the borrower is a young professional with a high probability of significant future income increases co-signing could make sense. On the other hand, if the borrower can’t qualify for the loan based on their current income, and future income increases aren’t likely, then co-signing takes on a lot more risk.
Another reason you would want to co-sign is if you are providing a down payment to the primary borrower but don’t want the down payment to be a gift. By co-signing you do take on the risk of being a borrower on the loan but you also have ownership in the property, which can be a positive trade-off for provided down payment assistance upfront.
Before co-signing, make sure you know the terms of the loan. For instance, how much is the primary borrower putting towards their down payment, what are the monthly payments and how long will it take to pay off the loan. By co-signing you are taking on the financial responsibility of the loan so it’s important to know the details of the mortgage.
Even though you aren’t making the monthly payments of the primary borrower’s mortgage, the payment amount could affect your debt-to-income ratio for the life of the loan. This could affect your ability to be approved for a loan of your own. Thus, before co-signing on a mortgage for a home in Washington state make sure you know the details of the loan and think about how it will affect you until the loan is completely paid off.
If the primary borrower misses a mortgage payment you will be held responsible for making that payment so it’s important to make sure that you know the monthly payment amount and can afford the payment in addition to your own monthly expenses.
Co-signing on a mortgage can have positive and negative effects on your credit score. When you co-sign on a home mortgage, you are essentially applying for a home loan with the person who is purchasing the home. As a result, your credit score will be pulled for the application and determine whether you and the primary buyer are approved for the loan or not.
Once the home financing is approved, and if the primary borrower is consistently making the monthly mortgage payments on time, your credit score could see improvement from built-up credit history. However, your credit score could be damaged if the primary borrower fails to make the monthly payments on time.
The amount that you are co-signing for will appear on your credit report for the life of the loan. And as we mentioned above, this could affect your debt-to-income ratio and hinder your ability to take out a loan for yourself.
In addition to financial risk, there are relationship risks that you should think about. Most people co-sign a mortgage for a family member or friend. Having this type of financial arrangement can complicate relationships among loved ones. Before you sign, weigh the outcomes of your relationship with the primary signer if the arrangement went south to make sure it is entirely worth it.
Another thing to protect yourself against is any unforeseen expenses. One common expense most people don’t consider when co-signing is excise tax. When the primary borrower refinances a non-occupied co-borrower off of the loan, the excise tax is triggered just like it would be if you sold the property. In this situation, the excise tax will be calculated based on half of the new loan amount being borrowed. This is less than it would be for a property sale which would require the excise tax be based on the sales price but it still can be a shock if you’re not prepared. It is helpful to discuss ahead of time which party will pay the excise tax beforehand so there are no unexpected surprises.
These are only a few of the many questions that people need to ask when they are thinking about co-signing on a mortgage. Everyone who is considering co-signing must consider the financial health and responsibility of the primary signer in addition to the risks they will be taking on. Co-signing on someone else’s mortgage is a big decision. Consider the various factors involved in this decision.
As always, you can speak with your trusted mortgage finance professionals at Sammamish Mortgage for advice on your personal situation. Sammamish Mortgage currently lends in all of Washington, Oregon, Idaho, and Colorado and offers a wide variety of mortgage programs and tools with flexible qualification criteria. Contact us today with any questions you have about mortgages.
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