The Pros and Cons of Adding a Co-signer to Your Mortgage Application

If you’re struggling to qualify for a mortgage loan due to factors such as debt, spotty employment history, or poor credit, you might consider bringing in a co-signer to help. However, it’s important to understand the potential benefits and risks involved.

On the plus side, a co-signer can increase your chances of qualifying for a loan and potentially allow you to borrow more money or obtain a better interest rate. The lender will evaluate both your and the co-signer’s financials, credit, employment, and other details to determine your eligibility for the loan.

Co-signers help young buyers enter housing market, not buy pricier homes

Based on the 2022 NAR Home Buyers and Sellers Generational Trends report, here are some key takeaways:

• First-time buyers accounted for 34% of all home buyers, up from 31% in the previous year. Of these, 81% of Younger Millennials and 48% of Older Millennials were first-time buyers, followed by 22% of Gen Xers.
• Older Millennials made up the largest generational group of buyers at 25%, with a median age of 36. Gen Xers followed closely at 22%, with a median age of 49.
• Gen Xers had the highest median household income of any generation at $125,000 in 2020, while Older Millennials had a median household income of $110,300.

Then, looking at data from the Home Mortgage Disclosure Act, it seems that young homebuyers are utilizing older co-signers primarily to gain access to the housing market, rather than to afford more expensive homes. This is supported by the fact that the median property values and down payment amounts for young buyers with and without older co-signers are similar. Specifically, young buyers with older co-signers have a median property value and down payment of $295,000 and $40,000, respectively, while all young buyers have a median property value and down payment of $285,000 and $30,000, respectively. However, both groups of young buyers fall behind the typical figures for all homebuyers, which have a median property value of $325,000 and a median down payment of $50,000.

However, bringing in a co-signer also comes with significant risks. If you fail to make the monthly payments, the co-signer will become legally responsible for the loan and may suffer financial strain or damage to their credit score. This could also cause tension or damage to your relationship with the co-signer.

Let’s take a closer look at the pros and cons of using a mortgage co-signer now

The pros of having a co-signer for your mortgage

The biggest perk is that a co-signer can make it easier to qualify for a loan. When they put their name on your mortgage application, the mortgage lender then considers both of your financial situations. 

They look at your credit history, credit score, debts, income, employment history, and more, as well as that of your co-signer. Then, they use all that data to determine 1) if you qualify for a mortgage and 2) how much you can borrow if you do. In many cases, you may be able to get a larger-sized loan or better interest rate with a co-signer in tow.

The cons of having a co-signer for your mortgage

Unfortunately, that’s about where the perks of co-signers end. Bringing in a co-signer on your mortgage can come with some serious risks — especially to the co-signer you choose. For one, they’re taking legal responsibility for your home loan, so if you fail to make payments, they’ll need to step in and pick up the slack. This could cause financial strain and affect their credit score if they’re not prepared.

If they don’t pick up those loan payments (or are just unaware you’ve fallen behind), it can have grave consequences financially. Not only could the non-payment hurt their credit score, but it could also make it harder to get other conventional loans, credit cards, and financial products, too. It might even impact their job and housing prospects, since many employers and landlords use credit reports when evaluating new hires and tenants. 

Another issue is that it could cause tension in your relationship with the co-signer. If you make a late payment too often or your non-payment starts to impact their financial situation or credit, there may be some resentment or anger to deal with. It could even cause your relationship to fall apart entirely if the situation gets bad enough.

Co-signer prevalence higher in expensive states

States in the West and Northeast, which generally have higher home prices, have more young homebuyers relying on co-signers, while the Southeast and Central U.S., with more affordable housing markets, have fewer. According to research by Porch using data from the Federal Financial Institutions Examination Council’s Home Mortgage Disclosure Act, states were ranked by the percentage of young homebuyers (34 years old or younger) with an older co-signer (55 years old or older). In case of a tie, the state with the higher median property value for young homebuyers with an older co-signer was ranked higher.

Who should use mortgage co-signers?

Co-signers are best used if you’re on the cusp of qualifying — meaning you have a slightly high debt-to-income ratio, your job history is a little spotty, or you have some late payments on your credit report. 

They’re also best reserved for very close family members or relatives — people who you trust to pick up the slack on your mortgage payment should you fall on hard times. You also want to make sure it’s a person you have a good foundation with. 

Should you be unable to make your payments to your lender, it could put a strain on the relationship. Having a strong foundation from the start can help make any challenges with your mortgage loan a bit easier to overcome.

Choosing a trustworthy co-signer

Before considering a co-signer, it’s important to exhaust all other options for improving your credit score, reducing debt, or increasing income. Additionally, you should carefully choose a co-signer who is trustworthy, responsible, and understands the risks involved. You should also have an open and honest conversation with them about the responsibilities and potential consequences.

Ultimately, it’s important to ensure that you can afford the mortgage loan on your own and have enough buffer funds set aside for unexpected expenses. Bringing in a co-signer can be a helpful tool, but it should be used with caution and careful consideration of the potential risks.

The bottom line on co-signers

Mortgage co-signers can help you more easily qualify for a loan, but they’re not perfect. In fact, they come with quite a few risks — both to the co-signer and to your relationship with them.

Before you bring in a co-signer, get in touch with an Embrace Home Loans office near you to see if you’d qualify for a mortgage loan on your own. Your loan officer can also discuss how a co-signer could impact your mortgage application.