The Pros and Cons of Adding a Co-signer to Your Mortgage Application
If you’ve got a lot of debt, spotty employment history, or a ding on your credit, it might be hard to get a mortgage.
Fortunately, bringing in a co-signer could help.
With a co-signer, another person agrees to share the responsibility of the loan with the primary borrower — meaning they will make monthly payments if you fail to. In exchange, their financials, credit, employment, and other details are considered when evaluating your loan application, which could make it easier to qualify — or even help you borrow more money.
Still, co-signing comes with some risks, both for you and for the person you ask to do it. Are you considering asking a trusted loved one to co-sign for your mortgage?
Let’s 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.
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.
Considering a co-signer?
If you’re thinking about bringing in a co-signer, choose who you ask carefully. Make sure it’s someone you’re close to and that you can talk openly and candidly about your income, credit history, and other sensitive topics. Before starting the application process, sit down and walk through the responsibilities of being a co-signer. They need to be absolutely clear on the risks they’re taking before making any kind of commitment.
You should also find out the rules of your loan program. In many cases, only certain familial relations can qualify as a co-signer (parent, sibling, aunt, uncle, etc.), so you’ll want to be sure you’re choosing the right person to ask.
Finally, don’t get a huge loan just because your co-signer helps you qualify for one. Make sure your monthly payment is within your budget and that you can afford it entirely (and comfortably) on your own — without your co-signer’s help. Don’t treat your home loan like any other credit card. You should also ensure you have enough buffer funds set aside in the event something unexpected happens. For example, if you have a surprise car repair bill, you’d want to still have enough money in your budget to cover it. This will safeguard their credit and ensure the payment responsibilities will never fall on their shoulders.
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.