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Should You Co-Sign A Mortgage? Everything You Need To Know

Andrew Dehan5-Minute Read
February 12, 2021

If a relative of yours or a very close friend needs help getting a loan because they don’t qualify, they may ask you to co-sign a mortgage. The idea is that, if you have good credit, your credit will help boost their application.

Technically, they’re asking you to become what is referred to by lenders as a nonoccupant co-client (NOCC). This means you won’t be living on the property and don’t have any ownership of it.

This article will define what it means to co-sign a mortgage and the difference between a co-signer and a co-borrower. We’ll also break down some requirements for co-signing a mortgage and talk about the pros and cons of entering into this financial agreement.

Let’s get started.

What Does It Mean To Be A Co-Signer For A House?

If you co-sign on a mortgage, that means you’re vouching for your friend or family member on the mortgage loan. You’re using your credit as leverage to help someone get a loan. Someone may need a co-signer because of having a bad credit score.

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.

You must put a lot of trust in the person you’re co-signing for, because if they miss payments or default, you’ll be liable to pay the lender.

Co-Signer Vs. Co-Borrower

The difference between a co-signer and a co-borrower is simple. Co-signers don’t live in the home. They also don’t have ownership rights to the home.

Co-borrowers do occupy the home. 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.

Co-Signer Requirements For A Home Loan

Let’s break down what mortgage lenders look at to determine eligible 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 repot 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. Knowing your credit score and DTI ahead of time can make this process easier. The standards among lenders vary for these requirements.

Note: the co-signer’s name isn’t included on the home’s title.

FHA Loan

FHA loans have their own requirements for borrowers and these 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.
  • A co-signer must be a United States citizen.
  • If your 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.

Responsibilities When You Co-Sign A Mortgage

You’re putting your financial reputation down as collateral when you co-sign a mortgage loan or home refinance. If the borrower misses a payment or defaults, you’re next on the list to call for payment. This means it’s extremely important to keep open communications with the borrower about missed payments or complications.

Co-signing can not only impact your relationship with the borrower, it can impact your credit. You can be removed from the mortgage if the borrower refinances, but until then, the only way to be removed is by requesting removal from the lender. Whether they will remove you is entirely up to them.

Pros And Cons Of Co-Signing A Mortgage

Here we’ll list and discuss the benefits and drawbacks of co-signing a mortgage. Notice that there aren’t pros listed for the co-signer. While there may be personal benefits to co-signing a  mortgage, there aren’t many financial benefits beyond a bump in credit when the borrower makes on-time payments.

Let’s weigh the major benefits for the borrower against the risks the co-signer takes on.

Pros For The Borrower

  • Having a co-signer means more flexible credit score and DTI requirements. You may be able to get a loan you otherwise wouldn’t qualify for.
  • You could qualify for a lower down payment with a co-signer.
  • A self-employed borrower can more easily qualify for a loan with a co-signer who has a steady employment history.

Cons For The Co-Signer

  • A co-signer can become solely responsible for the mortgage if the original borrower defaults.
  • The borrower missing a payment affects the co-signer’s credit as well.

Alternatives To Co-Signing

While co-signing may seem like a simple win for the buyer, it can complicate the relationship between the buyer and the co-signer. That’s especially true if there’s a problem paying the loan.

It’s well worth it to investigate alternatives to avoid the difficulties with co-signing. Look into first-time home buyer grants and programs. Every state offers different programs aimed at getting new people in homes. From grants for down-payment assistance to programs that discount the property or loan, these may be better options than co-signing.

Every program or grant will have different requirements the borrower must meet to qualify. Even if the borrower isn’t a first-time home buyer, it’s worth researching if there are local programs available.

Is Co-Signing A Good Idea?

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. How could that relationship become complicated by being on their mortgage?

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.

Before co-signing a mortgage, a borrower should explore other alternatives to help them get a mortgage. There are many state and local grants and programs to assist people into homeownership. A grant to help them make a large down payment may be all they need to get the mortgage.

If you’ve decided to co-sign a mortgage, contact the lender to see what criteria you must meet to qualify. The lender will have different requirements depending on the type of mortgage and the financials of the borrower.

Whether or not 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 some reflection before signing your name.

Check out the home buyer’s guide at Rocket Homes® for more answers to your home buying questions.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.