Cosigning A Mortgage Is Not What Most People Think It Is
Most people who cosign a mortgage for another party think that its something of a casual arrangement that will not negatively affect them in any material way.
That thinking is completely wrong.
When you cosign a mortgage for another party, you are legally obligated to make good on the loan in the event that the primary borrower defaults. I believe that most people are at least vaguely aware of this connection, but they quickly dismiss it with thoughts of Junior will never default, so theres no problem.
But theres more that can go wrong when you cosign a mortgage than just default and the possibility of default itself should never be dismissed lightly either. When you cosign a mortgage, you put yourself into the classic you jump, I jump conundrum .
Lets look at some examples
When Do I Need A Mortgage Co
Put simply, you need a co-signer if you cant qualify for a mortgage on your own. The most common reasons why people get denied for a mortgage are for having poor credit, no credit history, or insufficient income, according to Experian.
While loan requirements can vary by lender, borrowers typically need a credit score of 620 or higher to qualify for a conventional loan. A conventional loan is a mortgage that meets the underwriting requirements set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that purchase home loans off the secondary market, package them, and sell them to investors.
In addition, conventional loans usually have a debt-to-income requirement of 36%. DTI compares how much money you owe to your income.
If your credit score is below 620 or your DTI ratio is greater than 43%, enlisting a co-signer who has a higher credit score or income can strengthen your loan application, since their financials are taken into consideration during the underwriting process.
Is The Loan For A Worthy Cause
When you co-sign, youre doing someone a big favor.
It had better be for something important perhaps even life changing such as education or buying that first clunker car to get to a job.
Dont even think about co-signing a loan the would-be borrower cant really afford. Tweet this
If an expensive car or a motorcycle is out of their reach, theyre better off saving money and improving their own credit until they can get it themselves.
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How Is My Mortgage Affordability Affected With A Co
As with credit history, if a prospective cosigner has a low DTI, they may have the opportunity to considerably boost the primary borrowers application through the approval process.
Although a cosigners income can be used to help a buyer to qualify for the loan, again, many lenders have maximum DTI requirements which must not be exceeded by the occupying buyer to be accepted.
Who Should You Ask
If you are an applicant, you might begin by asking friends or relatives to be your co-signer. Do not do this unless you have the means to make your mortgage payment each month. Co-signing a mortgage is a major act of trust for a person to make for you, and if you jeopardize that persons credit by falling behind on that mortgage, you are likely to damage the relationship beyond repair. Do not ask a friend or relative who is already in precarious financial circumstances. First of all, his credit is not likely to be high enough to help your application receive approval from the bank. Second, if you fall behind at all on your payments, that will place considerable stress on your relationship.
If someone has asked you to co-sign a loan with him, there are several things to consider before you go in and fill out the paperwork. How reliable is your friend or relative? If he does not make the payments one time or at all your credit history will receive the same bashing that his does. This mortgage also factors into your debt-to-income ratio and can influence your ability to get additional financing of your own.
Should You Be A Co-Signer?
So youve been asked to co-sign for a mortgage in Canada. Read on as well educate you on everything you need to know so you can make a sound decision.
To Be a Co-signer or Not to BeThat is the Question
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How To Get A Co
If the lender tells you that you need a co-signer, you may feel as if finding one will be an impossible task. However, it will probably not be as difficult to get a good co-signer as you think. If your spouse qualifies financially to be a co-signer, you will probably have no problems at all in fact, you are likely to be co-applicants anyway. Should you need someone else to be your co-signer, the best route to take is to talk to a family member with whom you have a good relationship. Nevertheless, a good relationship with the person is not sufficient to qualify that person as a co-signer. The potential co-signer must also have a good income.
Can A Parent Co
This is a very common question, especially with first time home buyers. A parent may wish to cosign on a mortgage loanif he or she wishes to provide help to their child to qualify to purchase a home. Many adult children may not have good credit or adequate experience with credit to obtain a mortgage on their own. By cosigning, a parent can help the child to get the loan he or she wants or needs. However, there are good and bad things about this process that you should know about.
How it works
When a parent cosigns on a mortgage for a child, the child and the parent partially own the home together. While the child may live in the home as a primary residence and be the primary person responsible for repayment of the loan, the lender can come after the parent as a way to get payment if the child stops making payments towards the loan. This can negatively affect both the child and the parents credit score.
The parent will need to go through the application process with the borrower and will sign legal documents with the lender at the time of the loan closing. As a result, the parents credit score and employment information is taken into consideration during the application process. In addition, the childs information is also used.
Words of caution
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Work On Boosting Your Credit Score
You can work on improving your credit score, reducing your debt, and increasing your savings. Of course, you need to first obtain your credit score and get a copy of your . The Consumer Financial Protection Bureau, which is a government agency, has helpful information on their website to obtain a free credit report. The report will list your credit history, your open loans, and credit card accounts, as well as your track record for making timely payments. Once you have the report, you’ll be able to obtain your credit score from one of the three .
Individuals are allowed one free credit report a year from each of the three credit rating agencies.
Should I Have A Parent Co
If youre thinking about asking a parent or in-law to co-sign your home loan, its a good idea to ask yourself these questions and answer honestly.
These questions are crucial to think long and hard about. As is the question of: Will this change our relationship? It can be difficult to lend money to family, let alone cosign a major life purchase. Be sure that your relationship wont be harmed with such a transaction.
The bottom line? Having a parent co-sign your mortgage is a big decision that has to be weighed carefully by both parties.
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Can A Third Party Cosign A Mortgage
After the wedding bells ring, many young couples dream of buying a home. But limited or bad credit can create an obstacle to achieving this dream. Your mortgage lender may recommend asking a parent or family member to co-sign the loan for you.
FHA and traditional mortgage lenders allow co-signers to use their income and credit to secure the loan on your behalf. Co-signing the loan gets the keys in your hands sooner, but comes with many disadvantages.
While a parent can co-sign your mortgage loan to increase your chances of approval, you should be aware of the downsides that come this decision.
What Does It Mean To Cosign A Mortgage
Generally speaking, a prospective home buyer will get somebody to cosign their mortgage because their own income and credit wont allow them to qualify by themselves. In fact, if youre financially stable and have good credit, its possible that one of your friends or family members will ask you to cosign their mortgage someday.
By cosigning a mortgage, youre agreeing to cover the buyers loan if they default or are unable to afford their payments. You wouldnt see any of the typical benefits of the mortgage but you would be a co-borrower until the primary buyer pays off their loan or has your name removed from the contract when theyre financially stable enough.
This essentially gives the lender a guarantee that the loan payments will be made, whether or not the primary borrower is the one making them. As such, the buyer usually has an easier time qualifying for a decent loan, interest rate and payment plan.
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Build Your Credit History
If you don’t have a lot of credit history, it can hurt your chances of getting approved for a mortgage. Consider opening a secured credit card with a small credit limit. Secured cards require you to have an amount of cash saved with the credit card company that matches the card’s available credit. A secured card eliminates the credit card company’s risk, which improves your chances of getting approved. Also, a secured credit card is a great way to build your credit history and show banks that you can borrow from a card and pay off the balance each month. However, if you have too many cards open, opening another one may hurt your credit score.
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Who Can Be A Co
A cosigner is someone who goes on a mortgage application with primary borrowers who are not fully qualified for the loan on their own. The cosigner may be necessary to shore up weaknesses in the primary borrowers profile. This includes the debt and income situation, as well as credit. The addition of the cosigner makes the loan application more attractive to the mortgage lender.
Generally speaking, a cosigner will be on the loan documents, such as the note and the mortgage and deed of trust. The cosigner will not be on title to the property, and will not sign the deed. The cosigners role is strictly on the loan application, and not with ownership of the property.
To be eligible, a cosigner must have a family relationship with the primary borrower. This includes a parent, grandparent, sibling, aunt or uncle. But it can also be a family type relationship. This can include someone with whom you have a close, long-term relationship very similar to that of a family member.
The purpose of this restriction is to eliminate the possibility of a cosigner being someone with an interest in selling the property. That includes a real estate agent, builder, or even a mortgage broker. Each would stand to gain if your loan application is approved, and are therefore ineligible.
Using A Gift To Make A Down Payment On A First Home
The cleanest and easiest way for a family member or friend to help with a down payment is by giving a cash gift. That said, there are still rules, limits and best practices for using a gift for a down payment. There can also be different requirements for using a gift depending on the loan program that will be used. Because of the variables, the buyer will want to work with a personal loan officer to ensure they are going about things the right way.
In most cases, if the buyer is receiving a cash gift to make or help with the down payment, lenders will like to see it as a check, wire transfer or bank transfer. These methods are easy for a lender to trace and verify on their end.
This money should also be placed into the buyers account three to four months prior to applying for a mortgage. The lender may also request a letter from the giver declaring that the money is indeed a gift and not a loan that would require repayment.
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Your Credit Is On The Line
When you co-sign a loan, both the loan and payment history show up on your credit reports as well as the borrowers.
In the short term, youll see a temporary hit to your credit score, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling. The lenders hard pull on your credit before approving the loan will ding your score, he says, and so could the increase in your overall debt load.
Most important, though: Any missed payment by the borrower will negatively affect your credit score. Since payment history has the biggest influence on credit scores, a misstep here can wreck your credit.
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A Foreclosure On The Mortgage Will Be A Disaster For You
If the primary borrowers default on the loan and the property goes into foreclosure, the foreclosure will be reported on your credit report as your foreclosure.
If you think about it, this makes sense. The entire reason that a mortgage lender grants approval to the loan with you as a cosigner, is so that you will be there as an extra measure of security in the event the primary borrower defaults. In fact, your entire reason for being on the loan in the first place is for this very event.
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What Can And Cant A Cosigner Do For You
When applying for a mortgage loan, a cosigner can:
- Strengthen your loan application. Cosigners typically have a great credit score and a low Debt-to-Income percentage. By adding them, they can reassure the lender.
- Add security for making payments. By cosigning, they are responsible for the payment if you default.
Having a cosigner on your loan cant:
- Lower your down payment. You will still be responsible for the minimum down payment of the mortgage loan.
- Offset a high Debt-to-Income . Mortgage lenders will not allow the borrower to have higher than a 43 on their DTI.
- Erase a lousy credit score. Conventional loans require a minimum credit score of 620, and FHA loans require a minimum of 580.
Cosigning On A Mortgage
The simplest way you can help your parents is by cosigning the mortgage, or signing your name alongside your parents’ on the mortgage documents, especially if they have low income. This wasn’t always the case, though, as it used to be uncommon for borrowers to need a cosigner. But when the housing market crashed, lenders tightened their underwriting policies, making it harder for lower-income individuals to qualify or get favorable terms.
Bear in mind that most lenders review the of all borrowers before offering a loan. As such, a cosigner won’t make much of a difference if your parents have poor credit or recently filed bankruptcy. But lenders typically combine the income of all the borrowers when determining the loan-to-value ratio so having a cosigner can make it easier to qualify for a larger loan.
Cosigning may help if your parents are older. That’s because when the childs name is on the title and designated as a joint tenant with the right of survivorship, this means the property can be immediately transferred after death, which eliminates a lengthy and complex probate process.
But regardless of whether you live in the home or not, youre equally responsible for the mortgage payments. If your parents fall behind a few years down the line, it will likely end up on your . Having a large loaneven if it’s paid on timecan also bring down your score and make it harder for you to get any credit for yourself.
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