With housing prices having increased so much in the past couple of years, many first-time home buyers find themselves needing a co-signer to qualify for a mortgage. A co-signer, often a parent or sibling, is a third party that helps a borrower qualify for a mortgage when they don't qualify on their own. This reduces the risk for the lender.
What is involved in co-signing a mortgage?
If you are considering co-signing, be aware that you'll go through the full application process, just like the primary borrower. You'll need to provide income information, debt information, and your credit report will be pulled and evaluated. For anyone who hasn't been through the mortgage process in several years, it often surprises them how much documentation is required these days. Yes, you will have to provide documents. At the end of the day the lender needs to feel that you can cover the mortgage payments should the primary borrower not be able to.
As a co-signer, your name will be on the mortgage and the title of the home.
Things to consider before co-signing
Legally obligated to pay
If you co-sign you are legally obligated to make the mortgage payments if the primary borrower does not. Are you prepared to take on that obligation?
Your credit will be pulled during the application process. The mortgage then shows on your credit bureau (in most cases), adding that debt to your existing debt, which could impact your credit score. As well, if payments are missed it will negatively impact your score.
It may decrease your ability to borrow
This mortgage will count as your debt, even if you aren't the one making the payments. If you are trying to qualify for a loan of your own, this debt will be factored into your current debt load. Many people find this is a big problem if they are looking to qualify for their own mortgage later on. The mortgage payment they co-signed for has to be factored into their Total Debt Service ratio (TDS), and it could be the difference between qualifying for your own loan or not. This also applies to things like car loans. If you co-sign on someone's car loan, even if you aren't making the payments, it is considered your debt.
Will you want insurance?
Will you want the primary borrower to have mortgage life insurance or a term life insurance policy in place to ensure the debt is paid out in case something happens? It's a good conversation to have before you get too far along in the process.
Understand the details
Keep a copy of all the paperwork for yourself, and talk to a professional, such as a real estate lawyer, beforehand to see how co-signing may impact your taxes and estate.
What it the plan to get you off the loan?
Unless you are okay to remain on the mortgage for the entire amortization, there should be a plan involved for getting you off the loan. Are you on the loan until the primary borrower's credit score increases enough for them to carry it on their own? Or until their employment situation has improved? Discuss this plan ahead of time.
Everyone has to make the decision for themselves when it comes to whether or not to co-sign. I can't tell you if it's the right decision for you. You are always allowed to say "no" to co-signing. It is a big commitment and no one should pressure you into it.
However, in general, I suggest that anyone who doesn't currently own a home and may be looking to purchase for themselves in the next few years think twice about co-signing.
If you have your own home, a good income, and a safety net in place, being able to co-sign can be an amazing gift that you can provide to someone special in your life.