As a co-signer on a mortgage, you are committing to another person’s financial obligation on the loan. Although co-signing may help out a friend or family member, the good deed can make it more difficult for you to become a homeowner yourself. You can still get approved for a mortgage, but you may need to take extra steps.
In this blog, we’ll explain what responsibilities you take on as a co-signer, how it changes your mortgage application, and what you need to do to get approved for your own mortgage.
What responsibilities do I have as the co-signer on a mortgage?
When you co-sign a loan, you take on all the financial responsibilities as you would for your own mortgage.
With a mortgage, the term “co-signer” usually means a “non-occupying co-borrower.” A “non-occupying co-borrower” is a person who is jointly applying for a mortgage, but they will not be living in the home. Yet, the “non-occupying co-borrower” and the “primary borrower” (the person living in the home) are partners in owning the home and both take on the debt.
So, as the co-signer, you take on the same risks as the occupying or primary borrower. If the primary borrower defaults on the loan, you are responsible for the missed payments as well. Missed payments will hurt you when you apply for your mortgage.
How does co-signing affect my credit and debt?
Your credit score and DTI (debt-to-income ratio) are two important factors that play into what type of mortgage you can qualify for. The better your credit and DTI, the better loan terms you’ll receive. So, how does co-signing another person’s mortgage affect these?
Credit: Co-signing can change your credit in several ways. Since you’ve taken on the same responsibilities as the primary borrower, the additional debt tied to your name could lower your credit score. Also, if the primary borrower misses a payment, your credit takes a negative hit. On the opposite end, if they make all their payments on time, your credit improves.
DTI (debt-to-income ratio): Your DTI tells lenders how much of your income is needed to pay your current monthly debts and how much is available for a mortgage payment. So, even as a co-borrower, the existing mortgage payment counts towards your monthly debt. Generally speaking, you want your DTI at or below 43% of your monthly income. Over time, your DTI will lower as the borrower pays off the mortgage. But if you look to buy a home soon after co-signing, your DTI could potentially be over the ideal percentage.
How to be a co-signer and still buy your own home.
If you are a co-signer on another mortgage, this won’t necessarily stop you from getting approved for a mortgage yourself. Will it be a little harder? Yes, but there are three common solutions to help make your chances of approval more likely.
Wait at least 12 months: Not in a rush to buy? Then underwriting guidelines may be in your favor. If the primary borrower pays their mortgage on time for at least 12 months, the mortgage can be omitted from your monthly debt to improve your DTI. After 12 months, all you need to do is show the complete and successful payments on the existing mortgage are from the primary borrower’s funds or bank account.
The more income, the better: If you can comfortably afford the existing mortgage payment, your debts, and a new mortgage, you’re likely in the clear to be approved. To do this, you’ll need to show stable and significant proof of income.
Get removed from the mortgage: You can also be removed from the existing mortgage. How? The home must be sold or the mortgage must be refinanced without you on it. However, this assumes the co-borrower now has enough income and strong enough credit to take on the mortgage commitment themselves. You’ll need to speak with both the primary borrower and a loan officer to see if they qualify and a refinance makes sense.
Don’t co-sign blindly. Know what you’re getting into.
If you are in a situation where you are thinking about co-signing a mortgage for someone else, you want to make sure you’re aware of all the potential complications. If you plan to become a homeowner yourself in the near future, or if you want to refinance your current home, the co-signed mortgage can hinder your plans.
Although you may be helping out a friend or family member, you need to trust they can make the payments on time. Otherwise, you could end up in a tough situation with lingering negative effects. We always recommend consulting a mortgage professional first. If you have questions, feel free to schedule a time to talk with us.
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