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Should You Co-Sign A Mortgage? What Borrowers And Co-Signers Need To Know

Carey Chesney9-Minute Read
October 02, 2022

Co-signing a mortgage with someone means improving their chances of getting a loan with great terms that they may otherwise not qualify for. You’re using your stronger financial situation to improve theirs in the eyes of mortgage lenders. By co-signing on their mortgage, you can help ease the fears of the lender about the mortgage getting paid each month.

But should you co-sign a mortgage? What does it mean if you do? Read on to learn everything you need to know about the implications when you co-sign a mortgage so you know what you’re getting into if you agree to being a co-signer.

What Does It Mean To Co-Sign A Mortgage?

When someone co-signs a mortgage, they guarantee the loan for the primary borrower. As a co-signer, you need to really trust the person you’re co-signing for, because if they miss payments or default, you’ll have to assume the burden of making the monthly mortgage payments for the property.

As you can see, co-signing a mortgage comes with a lot of responsibility. It’s important to know what you’re getting into. You’ll need to weigh the financial risk you’re taking on, as well as any strain being on the mortgage may put on your relationship with the borrower.

The Responsibilities Of The Co-Signer

Co-signers have several key responsibilities when they agree to co-sign a mortgage. For starters, they assume full responsibility for the loan if the primary borrower defaults or misses payments. If this happens, the lender can pursue the co-signer for any missed payments and late fees.

If the primary borrower refuses to pay and the co-signer also refuses to pay, both will suffer a big hit to their credit. As a co-signer, you need to make sure you understand these consequences that can occur before you sign.

Responsibilities For The Primary Borrower

Even if there is a co-signer, the primary borrower is still responsible for the loan itself because they’re the one buying a house. That means they should be the one making payments each month, and shouldn’t rely on the co-signer to help them cover their mortgage payments.

If the primary borrower isn’t confident that they can afford the mortgage payment on a particular home without help, they may want to look for a more affordable property or wait until their finances improve.

In this way, they can make monthly payments that are more in line with their overall budget and not have to worry about defaulting on their loan. The co-signer isn’t there to make the mortgage payments for the primary borrower, just to help get the initial loan approved.

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Who Can Co-Sign A Mortgage?

There are no hard and fast rules about who can and cannot co-sign a mortgage. That said, most primary borrowers choose to ask their family members for help. Some borrowers will choose to ask a close friend for help qualifying for a mortgage.

If you’re a primary borrower looking for a co-signer, you want to make sure it’s someone who can help you secure the loan. Here are a few of the key things people should look for when choosing a co-signer:

  • High credit scores
  • Strong credit histories
  • Enough income to cover payments if the primary borrower defaults

Let’s break down what mortgage lenders look at to determine the eligibility of co-signers. We’ll talk about the differences between co-signing a conventional loan and an FHA loan.

Conventional Loan

When co-signing on a conventional loan, the lender will inspect your credit report and your debt-to-income ratio (DTI). Based on how good your credit is and the amount of debt you have, the lender will decide whether to proceed with the loan. As a co-signer, your name will be included on the mortgage loan but not on the home’s title.

Knowing your credit score and DTI ahead of time can make this process easier. Keep in mind that the standards among lenders vary for these requirements.

FHA Loan

FHA loans have their own requirements for borrowers and these standards also apply to co-signers. Along with those requirements, co-signers have additional criteria they must meet. Here’s a list of criteria you’ll need to meet to qualify as a co-signer on an FHA loan:

  • Co-signers must also meet the criteria for an FHA loan.
  • The co-signer must be a relative or close friend of the borrower.
  • If a close friend of the borrower, the co-signer must write a letter describing the history and nature of the relationship with the borrower.
  • The co-signer must be a United States citizen.
  • If the primary borrower’s down payment is under 20%, the co-signer’s DTI must be 70% or less.
  • The co-signer cannot have a financial interest in the property.

If you’re considering co-signing for an FHA loan, you’ll need to speak with the primary borrower’s lender to see if you’re a good fit. They’ll be able to look at your personal financial situation to help you determine which loan option is best for the primary borrower should you co-sign on the mortgage.

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Is A Co-Signer The Same As A Co-Borrower?

Lenders tend to treat co-signers and co-borrowers the same on mortgage applications. Though it might seem like co-signers and co-borrower are the same, the two are distinctly different. It all comes down to who has an ownership interest in the property.

Co-signers simply guarantee monthly mortgage payments should the primary borrower stop making payments or default on the loan. They do not live in the home. Co-borrowers are responsible for monthly mortgage payments if the other parties on the mortgage default, but they also have an ownership interest in the home and live in the home while making payments.

Co-borrowers must decide how to split ownership of the property – between tenancy in common and joint tenancy. These two types of co-ownership have distinct differences and benefits depending on your situation.

In a joint tenancy, the two owners of the property have equal ownership and get their interest in the property at the same time. Tenants in common, on the other hand, don’t always own equal shares of the property and may receive their interest in the property at different times.

Finding a co-signer or a co-borrower is a choice that depends on your specific financial and living situation. Regardless of which one you choose, both co-signers and co-borrowers can strengthen a primary borrower’s mortgage application by increasing the total amount of income available to cover the debt.

The Pros And Cons Of Co-Signing A Mortgage

The decision to co-sign a mortgage isn’t one that people should take lightly, as there is a great deal of financial responsibility involved. It’s important that both the primary borrower and the co-signer understand what they are getting into.

A co-signing offers several benefits to the primary borrower and a few potential downsides to the co-signer. Let’s take a look at how it can positively and negatively impact both parties involved.

The Benefits Of Having A Co-Signer For Your House

Let’s take a look at the benefits primary borrowers gain when using a co-signer for a home loan rather than buying the house on their own.

  • Credit score: Lenders are able to use the best credit score between a primary borrower and a co-signer. So, if you’re a primary borrower and your credit score is low, you can use the good credit score of your co-signer to get approved.

  • Loan amount: As a primary borrower, sometimes you can’t qualify for the loan amount you need to get the home you want. With a co-signer exhibiting a strong financial history and a good credit history and score, you can get approved for more.

  • Interest rates: Your interest rate is directly tied to your credit score and other factors that affect your overall financial health. With a strong co-signer, you can often secure a better or lower interest rate than if you applied for the loan on your own.

  • Down payment: Many lenders require a minimum down payment before they approve you for a loan. A co-signer may help reduce the amount required.

  • DTI: Your debt-to-income ratio measures the amount of debt you owe compared to your income. This is a key factor in determining your credit score and your loan approval amount. If your co-signer has a good DTI, it can help you qualify for a better loan.

  • Employment status: If you’re self-employed, it can be hard to find a lender to approve you for a loan unless you have at least 3 years of 1099 forms. If your co-signer has a more traditional job with W2 forms, the lender can use those to get your loan approved.

The Downsides Of Co-Signing A Loan

The benefits to the primary borrower are pretty enticing, but there are some potential downsides for the co-signer. Here are some of the ways that co-signing on a loan for a friend or family member can impact your financial situation.

  • Credit score: If you’re asked to be a co-signer, that means you must have a pretty good credit score. That can change if the primary borrower stops paying the mortgage each month and then you can't repay the loan. Payment history is the largest factor that goes into your credit score, so defaulting on a mortgage will bring it down significantly.

  • Monthly budget: Having to make monthly payments if the primary borrower defaults can seriously mess up your monthly household budget. Having to account for one mortgage each month is one thing, but having to pay two of them can be a big financial strain.

  • Liability: When you’re a co-signer on a mortgage, you have legal obligations to the lender without the benefit of living in the house. You also won’t be able to sell the house if the primary borrower defaults.

  • Relationship strain: Co-signing creates a financially dependent relationship between the primary borrower and the co-signer. This can create a unique and complicated emotional dynamic in the relationship, which sometimes can have negative results.

When Is Co-Signing A Mortgage The Right Move?

If you’re considering co-signing to help a relative or close friend get a mortgage, don’t make the decision lightly. Consider your relationship with this person and think about how that relationship could become complicated by being on their mortgage. Whether you decide to co-sign is up to you and the relationship you have with the borrower. It’s not a decision you should be pressured into. Do your research and take some time for reflection before signing your name on the dotted line. If you’re still not sure, here are a few signs that co-signing is a good idea.

You’re Willing To Assume The Risk

Co-signing a mortgage is mostly to the benefit of the borrower. All the risk is taken by the co-signer. If the borrower hits a snag and can’t pay, you’ll have to make it up to the lender. Any missed payments will negatively affect your credit. If you trust the primary borrower and are willing to assume the risk should they default, co-signing may be a good idea.

You Meet The Qualifications

Co-signing on a mortgage is similar to applying for a loan on your own. You still need to meet the lender’s qualification requirements if you want to help the primary borrower. If you’ve decided to co-sign a mortgage, contact the lender to see what criteria you must meet to qualify and improve the primary borrower’s chances of approval. The lender will have different requirements depending on the type of mortgage and the financials of the borrower.

You’re Confident In Their Ability To Repay The Loan

Primary borrowers should only use a co-signer if they can make payments on the mortgage without relying on the co-signer for assistance. If they think they’ll struggle to make payments on time and for the full amount each month, using a co-signer isn’t a good idea. Instead, they should focus on building their savings or choosing a property at a lower price point.

Co-signers should only agree to help if they’re confident in the primary borrower’s ability to repay the loan in full on their own. They need to have the utmost trust in the person they’re co-signing for, and feel sure that the primary borrower will do everything they can to keep the co-signer’s credit in good shape.

As long as you’re sure the primary borrower will be able to repay the loan, co-signing on the mortgage may be a good idea. Once you make your decision, encourage the primary borrower to start the application process as soon as possible.

Other Options Beyond Co-Signing On A Mortgage

Finding a co-signer isn’t the only way to qualify for a mortgage if you have bad credit or less-than-ideal finances. Below are some alternatives that might allow you to get a better mortgage without having someone else on the loan.

Look For Government-Backed Loans

Explore loans geared toward first-time home buyers and those with less-than-ideal finances, like the FHA loan program and the VA loan program. These loans allow borrowers to put little to no money down on properties that fit the minimum requirements.

Down Payment Assistance Programs

There are also various down payment assistance programs that first-time home buyers may be able to use to improve their applications like:

  • Down payment assistance loans
  • Down payment assistance grants
  • Local and national programs

Programs and requirements vary from state to state, so be sure to investigate what’s available in your area. These programs can be a great way to get the home you want independently. In most cases, it's a good idea to exhaust all of your other options before trying to find someone to cosign so you can get your mortgage.

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The Bottom Line

Buying a house is a long-term investment and loans take years to pay off in full. It’s a big responsibility and sometimes it’s not one you can undertake on your own. Using a co-signer can help borrowers get a better loan or qualify in the first place, but they still need to be able to pay the loan on their own.

Before getting a co-signer for a mortgage, look into all the other options available, as you might be able to afford more than you think. A co-signing relationship can get messy if things go array, so it's usually a good idea to avoid it if you can. Just remember, you’ll need to make sure you can afford the monthly payments on your mortgage whether you have a co-signer or not.

Understanding all of your financing options is the most important first step in your home buying journey. If you’re confident in your ability to make mortgage payments on time and in full, start the approval process today!

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Carey Chesney

Carey Chesney brings a wealth of residential and commercial real estate experience to readers as a Realtor® and as a former Marketing Executive in the fields of Health Care, Finance and Wellness. Carey is based in Ann Arbor and attended the University of Wisconsin-Madison, where he majored in English, and Eastern Michigan University, where he recieved his Masters in Integrated Marketing & Communications.