Cosigning on a mortgage loan is a way to ensure that a borrower can qualify for a home purchase. However, it’s extremely risky and will push financial responsibility onto the cosigner if the primary borrower can’t make payments.
Most loans may have a cosigner, and you may have even experienced the process. But a mortgage? The stakes are way higher. There are pros and cons to consigning a mortgage, and it’s often something that many people balk at by default.
Cosigning a mortgage comes with the responsibility of paying a mortgage loan if the main buyer doesn’t. However, it can be a smart move in some situations. Is it the right move for you?
Is cosigning a mortgage helpful?
What does it mean to cosign a mortgage?
Cosigning a mortgage means that you won’t live in the house, nor are you considered an owner of the home once it’s paid off. Rather, you are there to act as a party responsible for monthly payments if the original borrower can’t afford them.
A cosigner is there to help a borrower qualify for a mortgage loan they otherwise wouldn’t qualify for. It’s a way of getting better credit on the record and also having a person who can guarantee payments on their behalf. (This practice is called being a “guarantor” in the UK.)
Co-borrower vs. Cosigner: What’s the difference?
Both co-borrowing and consigning can help a person qualify for a mortgage loan that wouldn’t work otherwise. However, there are several key differences:
They may sound similar, but these are different actions.
- Often a spouse or long-term business partner who will hold partial ownership
- Can build equity in the home
- Avoid bankruptcy
- Do not hold any right over the home
- Can’t build equity in the home
- Considered an emergency backup for the home
Why is cosigning on a mortgage a red flag?
A lender might require a cosigner to afford the mortgage in many cases. Asking for a cosigner means that your primary borrower may not be able to afford the home. Or, more worryingly, they may be at a high risk of defaulting on the mortgage.
How does cosigning work?
Cosigning a mortgage is not something that you should take lightly, because you will be held liable for mortgage payments if the original borrower fails to pay. Here’s what you need to know about the process:
- You have to agree to be a cosigner on a mortgage that allows it. We suggest doing this only if it’s a family member in need who you trust to make the mortgage payments on time.
- The mortgage loan officer will then pull up your credit report, pay stubs, and debt-to-income ratio. These stats are then added to the application. The officer will then review and judge your credit history to decide whether you have a high enough credit score to qualify. On a similar note, it will be your income they add to the mortgage applications. Your combined income will be what lenders use to determine if the borrower can afford loan payments.
- You sign off, agreeing to pay the monthly payment if the primary borrower does not. This should, ideally, never be a problem.
- The primary borrower pays the mortgage. If he or she doesn’t, then you will be expected to cover the monthly mortgage payment.
What loan programs allow a co-signer on a mortgage?
Most home loans can be done with a cosigner’s credit on board if you allow them to. The most important step is to speak with a smart lender who can help pair you with the most beneficial cosigner package possible.
If you want to use a cosigner and have an available participant, you can get any of the following loans types:
- Conventional mortgage loans
- VA loans
- FHA loans
- USDA loans
Is it possible to not qualify as a cosigner?
It’s more common than you think. If this is the case, the loan officer believed your debt-to-income ratio or low income would prohibit you from acting as a reliable co-signer. However, there are other reasons why this might happen. If your credit score is poor, chances are that you may be banned from cosigning a mortgage.
How do I compare lenders?
Your financial situation is unique to you, which makes finding the right lender even more important. Though it may take considerable time on your own, SuperMoney provides you with all the resources you need in one convenient location. Check below to compare mortgage home loans to find one that suits your needs in every way.
We’ve done the hard work for you. Use this comparison chart to get five lender estimates for the best comparison possible. If for some reason none of these options fit your situation, we recommend reaching out to a mortgage broker.
Most people benefit from speaking with a mortgage broker to get a better idea of what’s out there. Brokers specialize in considering your financial situation, both past and present, to find the right deal, so we highly recommend reaching out to one of the brokers above.
Pros and Cons of Cosigning on a Mortgage
Now that you know which loan types allow cosigners, it’s time to take a look at the perks and pitfalls of acting as a cosigner.
Here is a list of the benefits and drawbacks to consider.
- Help a family member with a home loan they otherwise couldn’t afford
- Possible auto loans or any other loan type that allows co-signing
- Your credit score could increase
- As the primary borrower, you can build credit, qualify for a loan, and build equity
- If the primary borrower bails, you’ll probably have to pay the rest of the FHA loan
- If you can’t pay afterward, you may end up with damaged credit and a foreclosed house
- You are liable for the payments if the main borrower dies
- You do not carry equity in the home
- Likely to result in credit score problems or problems qualifying for a mortgage in the future
- Want a second house? Avoid consigning any mortgages. due to the monthly liability
- May also wreck your ties to your friend or family member
Alternatives to cosigning on a mortgage
Cosigning a mortgage is risky, to say the least. If you’re leery of consigning a mortgage, you’re not alone. However, there are a couple of alternatives you can suggest to your relative in need:
- Co-borrowing may give them the home they need, but with added stakes for you. In most cases, people prefer co-borrowing instead of cosigning because it offers more equity and also offers both borrowers better credit long term. This could be good if you want to put two mortgages in one as a blanket mortgage.
- In some cases, they may also work well with subprime mortgages. These are not mortgages that have the best rates, but they are available if you don’t have a good credit score. You can read about it here.
- At times, your relative may need to delay homeownership until they get prequalified for a loan on their own. You can learn how to shop for a mortgage without damaging credit here, or you can learn more about building credit throughout their site. Don’t worry! Renting isn’t bad.
- If it’s a matter of affordability, a balloon mortgage may be smart. These offer smaller monthly mortgage payments but require a large lump sum at the end. Your borrower may need a higher credit score, but at least you won’t be a mortgage cosigner left on the hook!
- Finally, there are also special government-funded programs that may make it easier for your loved one to get a loan. Free credit counseling, special funding programs for multi-family units, and down payment assistance can all make a home more affordable. A good loan officer or mortgage consultant can help point you to explore these programs if need be.
Is it a bad idea to cosign a mortgage?
Unfortunately, the truth is it’s a bad idea to cosign on most mortgages. When you do this, you’re needlessly opening yourself up to debt obligations that belong to another person. All those missed payments the borrower has will end up harming both your credit scores. It’s a risk you shouldn’t take lightly.
Can a cosigner be removed from a mortgage?
This isn’t possible for most loans because the mortgage was calculated with both peoples’ information. In most cases, a cosigner will be a permanent fixture on a mortgage. The only way mortgage lenders will remove the cosigner is if you refinance your home.
What are the requirements for a co-signer on a mortgage?
These can vary from mortgage lender to mortgage lender, but you can rely on some requirements. A typical cosigner has to reside in the U.S., have a debt-to-income ratio of 70% or lower, and cannot have bad credit. Generally speaking, the better the credit score, the better you’ll look.
What credit score does a cosigner need to qualify?
This can vary greatly depending on who’s lending the money, but you generally need to have better credit than the loan applicant. Most lenders require a clean-ish credit report with a high score of at least 670.
How long is a co-signer responsible for a mortgage?
The cosigner is responsible for the mortgage for the lifetime of the mortgage. With that said, some clauses might allow you to shake financial responsibility after a certain number of mortgage payments. These agreements, though, are fairly rare.
- Being a cosigner means that you will use your credit score to bolster the borrower’s credit on a loan application.
- Cosigning a loan means that you are financially responsible for a borrower’s mortgage payments if the primary borrower doesn’t pay for them.
- While you may have a responsibility for a mortgage you cosign on, you won’t build equity in the real estate.
- This is a highly risky activity that should only be done with people you trust.
The Bottom Line
Cosigning on a mortgage loan is a risky endeavor because you guarantee monthly payments without actually getting any equity in the mortgage. If things go well, your friend or family member will be able to qualify for a new home.
Unfortunately, if things go south, your credit score could decrease. Moreover, the only way to remove a cosigner from a loan is to refinance the mortgage. Needless to say, if you are considering cosigning on a loan, you might want to think twice.