Everything You Need to Know about a Co-Signer – In the process of applying for a mortgage, you may hear someone suggest you have a co-signer. There can be benefits to having a co-signer on your mortgage, but it is not necessary for everyone. Here’s what you need to know about applying for a mortgage with a co-signer.
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What is a co-signer?
When you apply for a mortgage or any type of loan, the lender will look at a list of factors to determine your eligibility. Your debt-to-income ratio, credit score, assets, income, and employment history will all be taken into account to determine how much you can borrow, your mortgage rate, and other details of the loan.
In some cases, your strength as an applicant may be lacking. When this happens, a person who would be a stronger applicant because of their high credit score or large amount of assets can co-sign your loan. This provides the lender with a safety net if you end up unable to make your mortgage payments because the co-signer has agreed to cover them.
In other words, a co-signer is someone who is on your loan to guarantee that the payments will be made even if the borrower cannot make them. They take on equal responsibility to pay back the loan, even if the primary borrower does not fulfill their obligations.
What’s the difference between a co-signer and a co-borrower?
In some ways, a co-borrower and a co-signer may seem to be about the same. Both are responsible to make sure the loan is paid back. However, a co-borrowers name will be on the property title, while a co-signer will not. In practice, the two are similar, but legally they are distinct. For example, if a lawsuit takes place because of injury to a person on the property, a co-borrower will be liable in court while a co-signer will not.
Related: How to Increase Your Credit Score
When would a co-signer be needed?
A co-signer is sometimes suggested when you apply for a mortgage and are not quite able to qualify. Perhaps you are confident that you can make the payments, but your credit score is still too low to qualify for the mortgage rate and terms you want. Maybe you have recently gotten a raise and can afford to buy a home, but your employment history is too short to qualify yet.
In cases where a co-signer (often a family member) is also confident in your ability to make the payments because they know you personally, they may be willing to boost your mortgage application by offering to co-sign when you are not yet ready on paper to be approved.
Are there any drawbacks to having a co-signer on your mortgage?
Having a co-signer can be the final boost you need to qualify for the home you want to buy. Before you decide to bring a co-signer on to the loan, keep in mind that there are some potential drawbacks to this scenario if something goes wrong.
For example, if you end up unable to make your mortgage payments, consider what your backup plan will be and discuss this with your co-signer. Decide what you will do if you find yourself unable to afford the home you buy, usually either moving out to have someone rent it, selling the property, or agreeing to pay your co-signer back in the future if they cover a missed payment. Protect your personal relationships by planning ahead for a worst-case scenario.
