Your lease is ending, you’re looking to move to a larger home, or maybe you want to live closer to work. Regardless of why you’re moving, you’ve found the perfect home. But there’s bad news: your lender has told you that you don’t qualify for a mortgage.
What can you do to make sure that you still get to buy your dream home? Consider getting a cosigner.
What is a cosigner?
A cosigner takes responsibility for your loan if you are unable to make your monthly payments. Enlisting a cosigner with good credit makes the loan less risky for the lender, allowing them to offer lower rates than you could otherwise qualify for.
If you make your payments on time, it will boost both your and your cosigner’s credit scores. If you are late, on the other hand, both your and your cosigner’s credit will suffer.
Why use a cosigner?
There are a few reasons that you might want a cosigner to buy a house.
If you have poor or no credit, enlisting a reputable cosigner can turn an application rejection into an approval. It’s hard to get a mortgage if you have bad credit. A cosigner with a reliable credit history drastically diminishes that risk and can sway the loan officer’s decision.
And even if you can qualify for a mortgage without a cosigner, getting a cosigner can still help. For example, if your credit score is good but not stellar, getting a cosigner with excellent credit can help you secure a lower interest rate. This will save you money every month. And considering how long you’ll spend paying your mortgage (typically, 30 years), lower monthly payments can make a huge difference.
You may also need a cosigner if you don’t have enough income to qualify for the home you want or you have a high debt-to-income ratio.
Who can cosign on your mortgage?
First, in order to secure a loan with good rates and terms, your chosen cosigner usually requires good to excellent credit and stable income.
Second, cosigners must be U.S. citizens or legal residents. Lenders may add additional conditions, such as requiring the cosigner to live in the same state as the borrower or requiring them to have a family relationship with the borrower.
Anyone who meets those requirements can be a cosigner, but not everyone who meets those requirements will be helpful as a cosigner. A retired person, for example, would have to prove that they have sufficient income (or savings) to cover the loan in the event of default. Likewise, someone with stellar credit who also has a mortgage would have to prove that they could afford to juggle two mortgages simultaneously.
Should you cosign on someone else’s mortgage?
Whether you should cosign on someone else’s mortgage depends on your relationship with (and trust in) the borrower.
When you cosign on a loan of any kind, you take full responsibility for that loan. That means that if the borrower fails to make their payments, it is your responsibility to cover them. And if you don’t, you’ll be treated as if you defaulted on the loan. That means collectors will come after you to demand payment. On top of that, your credit score will drop. And even if you do make all your payments, you will have paid for someone else’s house — without actually getting any of the benefits of homeownership.
There are also tax implications to consider. For example, if you take over payments on the loan, you may be able to deduct the mortgage interest that you pay. But you can’t take deductions for other things, like real estate taxes, unless you’re actually on the title of the loan.
There are some benefits to cosigning on a mortgage. If your borrower makes their payments responsibly, it will improve both your credit scores. And cosigning brings you the satisfaction of saving a friend money, or helping a family member to secure their new home. If you’re a parent, cosigning is a good way to help a child move out of the house.
However, if you have any concerns that the borrower may be unreliable, cosigning for them brings a lot of risk and little reward.
Cosigner vs. co-borrower: what’s the difference?
Both cosigners and co-borrowers accept responsibility for repaying a loan. But their reasons and expectations are completely different.
A co-borrower applies for the mortgage with the primary applicant and agrees to help toward the monthly payments. Typically, a co-borrower will have an ownership interest in the property.
A cosigner, on the other hand, acts like a guarantor of the loan. Ideally, the cosigner will never have to make a payment. It’s only if the borrower misses payments or defaults on the loan that the cosigner must ensure the mortgage is repaid.
Pros and cons of cosigning on a mortgage
Agreeing to cosign a mortgage is a serious decision you should not take lightly. Here is a summary of the advantages and disadvantages to consider.
Here is a list of the benefits and the drawbacks to consider.
- Satisfaction of helping a loved one buy a home.
- If a borrower makes regular payments both your credits will improve.
- Most lenders allow for a cosigner release once the borrower shows a pattern of regular payments.
- All the risk of a mortgage without the benefits of homeownership.
- It will increase your debt-to-income ratio, which could endanger future credit applications.
- Late payments could lower your credit score.
- Can create tension within the family.
- The lender could garnish your income or levy your assets if the borrower defaults on the mortgage payments.
Frequently asked questions about cosigning
Here are some of the most common questions people have about cosigning on a mortgage.
Does a mortgage cosigner have to be on the title?
No, mortgage cosigners do not have to be on the title. You can ask someone to cosign your mortgage without also making them an owner of the home.
Can I get a mortgage if my partner has bad credit?
Yes. If you have sufficient income and a good credit score, you can qualify for the mortgage on your own, even if your partner helps to pay it. This may mean that you have to settle for a smaller mortgage, but you can still qualify.
If you need a larger mortgage, you can bring on a cosigner who isn’t your partner. If they have sufficient income and good credit, it will increase your borrowing power.
What is the fastest way to raise your credit score to buy a house?
Struggling to qualify for a mortgage, but don’t want to bring in a cosigner? Improving your credit score is the best thing you can do to raise your chances of qualifying for a mortgage.
The best quick fix is to try to reduce how much you owe on your existing debts. Stop using your credit cards for a month or two and, if possible, make additional payments on your existing debts. The amount that you owe is the second largest factor in determining your credit score, so this can help boost your score by a few points.
If your credit is less than excellent, a cosigner is a great way to secure desirable rates and terms on your mortgage. It can even help you to qualify for a mortgage that previously denied your application. However, only use a cosigner if you’re certain that you’ll be able to make your payments, lest you strain your relationship with your cosigner. And if you’re considering cosigning on someone else’s loan, make sure that you can trust them to make their payments!
Ready to get started? The first step is to do your research! Click here to compare reviews and ratings of top mortgage lenders side by side, so you can find the lender that’s right for you.