As a co-signer, you've committed to another person's financial obligation to the loan.
You probably co-signed a car loan, student loan, or mortgage to help out a friend or relative who couldn't qualify independently. But now that you're looking for a mortgage, your good deed can make it more challenging to become a homeowner.
You can still get approved for a mortgage as a co-signer, but you may need to take extra steps to get there. Below, I break down the responsibilities you've taken as a co-signer, how it changes your mortgage application, and what you need to do to get approved.
If you're thinking about adding a co-signer to your mortgage application, check out my article:
What are my responsibilities as a co-signer on a loan?
As a co-signer, you are equally responsible for repaying the debt. In other words, you pay the debt if the borrower does not.
Specifically, when you co-sign a mortgage, you and the primary borrower who lives in the house are partners in owning the home. As such, you are both named on the property title and take on the debt. Because you're on the hook for the mortgage, you're also responsible for the monthly payments.
How does co-signing a loan affect my credit?
Co-signing a loan can have positive and negative effects on your credit.
For instance, timely payments on the co-signed loan can boost your credit score. But on the other hand, late payments, collections, and judgments lower your score, making it harder for you to get credit in the future.
Your credit score is crucial in determining what type of mortgage you can get. Typically you get a lower interest rate and monthly payment when you have a higher credit score.
How does co-signing a loan affect my debt-to-income ratio?
Co-signing for someone else can impact your ability to get approved for a mortgage because it expands your financial obligation.
The co-signed loan becomes part of your overall debt load, increasing your debt-to-income ratio (DTI). Your DTI tells the mortgage lender how much of a mortgage you can afford based on your income. And if your DTI is too high, the lender will turn down your mortgage application.
Generally, the maximum DTI is 50%, meaning lenders limit your monthly obligations to half your monthly income. So the payment for the house you want to buy, plus any other debt, including co-signed loans, can be at most 50% of your income.
Suppose your income is $10,000 monthly, and your future house payment is $4,000. Other than your car payment of $500, you don't have any additional debts. So in this example, you can afford the mortgage and buy the house because your DTI is 45%. $4,500 / $10,000 = 45%.
But you co-signed your brother's mortgage two years ago to help him buy a condo. The additional $2,500 debt increased your DTI to 70%. Unfortunately, you don't qualify for the mortgage since your DTI exceeds 50%. $4,500 + $2,500 = $7,000 / $10,000 = 70%.
How to get approved for a mortgage when you co-signed for someone else
You can get approved for a mortgage even if you're already a co-signer for someone else. Here are some steps you can take to improve your chances.
If you co-signed a non-mortgage debt
Suppose you co-signed a non-mortgage debt, like a credit card, car loan, or student loan. In that case, the lender might exclude the payment from your DTI if you verify that someone else has made the last 12 payments on time - none were 30 days or more past due.
Although lenders have different requirements, NewCastle Home Loans will accept bank statements, bank transaction history, or similar documents proving that some other person is repaying the debt. The other person does not have to be the borrower.
Our customer Alex bought a car for his brother. Alex's brother didn't apply for the car loan because his credit could be better. But he made the payments on time for the last 12 months and sent us proof. So, we excluded the car payment when calculating Alex's DTI and approved his loan.
If you co-signed a mortgage
Lenders typically exclude a co-signed mortgage from your DTI after verifying that the primary borrower has made the last 12 payments without being late by 30 days or more. The person making the payments must be the primary borrower who signed the loan agreement.
NewCastle Home Loans will accept bank statements, a transaction history, or similar documents as proof.
Amir co-signed his sister's mortgage last year to help her buy a house. Now he wants to purchase a home.
His sister, Nivia, was the primary borrower - she signed the promissory note, and her name is on the property's title.
Nivia sent us proof that she made the last 12 payments on time.
As a result, we excluded the co-signed mortgage debt Amir's debt-to-income ratio and approved his home loan.
Sell, refinance, or pay down the debt.
Co-signing makes you equally responsible for repaying the loan alongside the primary borrower. The primary borrower can release you from debt obligation by selling or refinancing the car, student loan, house, or whatever you helped him buy.
Refinance: Suppose the primary borrower's income increases, and he makes enough money to qualify independently. Refinancing would allow him to secure a new loan without your help as a co-signer. In this case, the new loan would repay the existing loan and release your obligation.
Sell: Selling a house would also pay off the loan, satisfy the lender, and release you from your debt responsibility.
Pay down the debt: If the primary borrower can't sell or refinance, consider paying down the co-signed loan to ten or fewer remaining monthly payments. This way, you can exclude the co-signed loan from your debt-to-income ratio.
Let's say the monthly payments for the co-signed car loan are $500, and the current balance of $10,000. First, pay the loan balance down to $5,000. Then exclude the payment when calculating the debt-to-income ratio for your mortgage because you have only ten payments left on the co-signed loan.
Schedule some time to talk with NewCastle Home Loans about your options. At NewCastle, we believe in simplifying the mortgage process and empowering our customers with the knowledge they need to buy a home confidently.