Cosigning a Mortgage

TAGS: HomebuyingHomeownershipFAQs
Cosigning a Mortgage
Article Excerpt

There are advantages and possible disadvantages to cosigning on a mortgage. Here's what you need to look out for.

You may have cosigned a loan for your first car, but you can cosign on a mortgage? The answer is yes! In fact, around one-in-five single-family home purchases involve multiple, non-married borrowers listed on the mortgage. One of the most common situations is when borrowers cosign a mortgage with their parents.

Cosigning can be a good tool for making homeownership a reality. But you should know a few things first.

The advantages of cosigning

The main reasons why some borrowers have a cosigner on their mortgage are to either help them qualify or to get better terms.

A cosigner can add more income to the application to help with qualification. Sometimes borrowers choose to get a cosigner due to having a stretch of unemployment. But depending on the lender, a cosigner can’t always make your credit score look better. Many lenders use the lowest middle credit score among all the borrowers on the mortgage application.

» READ MORE: Why do you have several different credit scores?

Even if you can qualify for a mortgage, you may not score the best terms. Your lender may require you to make a larger down payment than you can afford or your interest rate may be higher than you’d like. Cosigners can help improve these kinds of terms.

The risk of cosigning a mortgage

Think of cosigning a mortgage as basically purchasing the home for yourself. Your responsibility is equal to the primary borrower in ensuring each month’s mortgage payment is made on time. If they can’t make their payment, it’s completely on you.

How much do you trust the primary borrower to make their payments on time for years to come?

Cosigners vs co-borrowers vs guarantors

Cosigners and co-borrowers are both legally connected to a loan. These two terms are often used interchangeably, but not always.

While a cosigner also co-owns the home, they’re often not living in it. Co-borrowers have more of an ownership interest, and regularly help make payments. In other words, a cosigner mainly functions as a safety net in case of default while co-borrowers are usually coinhabitants.

Guarantors do not co-own what they’re signing a loan for. They’re only agreeing to help make payments in case one is missed. They’re usually family members of the primary borrower. You’ll probably never hear the word “guarantor” during a typical mortgage process.

Father and adult son on moving day

Can cosigning a mortgage hurt your credit?

In short - yes, it can. Since you’re equally responsible for ensuring house payments are made, it’ll count toward your debt-to-income (DTI) ratio. DTI is one of the most important factors when applying for any kind of credit or loan.

For instance: if your monthly gross income is $10,000 and your current mortgage is $3,000 per month, your DTI is 30% (assuming no other debts counting toward your DTI). Then, you cosign on someone else’s mortgage at $1,500 per month. Now your DTI increases to 45%.

Can you still buy your own home after cosigning on a mortgage?

Yes, you still buy your own home after cosigning on a mortgage - assuming you have sufficient income to do so. Your debt-to-income ratio matters when applying for any kind of loan. As you approach the mid-forty percent DTI range, you may find it more difficult to secure additional loans for yourself.

If you think you may want to purchase a home after cosigning on someone else’s mortgage, make sure to ask your loan officer about the underwriting guidelines on the mortgage you’re cosigning on.

After twelve months of the primary borrower making on-time payments, your part of that debt may not be counted toward your list of contingent liabilities on your next mortgage application. But this does not mean that all your responsibility as the cosigner is removed after twelve months. It would only lower your debt-to-income ratio and improve your chances of qualifying for another mortgage. If the primary borrower defaults on the loan (at any time during the entire mortgage term!), you’re still on the hook.

Having multiple mortgages

Can you cosign a mortgage if you already have one?

Yes, you can cosign on a new mortgage even if you already have one of your own - as long as your income is sufficient to pay both mortgages if need-be.

Can you get out of a cosigned mortgage?

The only two ways to remove your responsibilities as a cosigner are to either:

  • Pay off the loan in full
  • Refinance the loan into a new one without your name on it

Like we said – cosigning on a mortgage is a big commitment. You should treat it just as if you’re buying the property yourself.

Wrap Up

Cosigning or co-borrowing on a mortgage is not necessarily a bad idea. Cosigning helps many homebuyers turn their dream of homeownership into reality, and they never miss a payment. Just be aware of the responsibility you’re taking, and who you’re cosigning with.

Have more questions? We can help! Answer a few quick questions and speak with an experienced mortgage adviser near you.