If you have a child just out of school looking to buy their first home, a retired parent hoping to buy with a fixed or low income, or a friend or other family member who can’t get approved for a mortgage on their own, you may be asked to be a co-signer for them.
What is a co-signer, exactly? When you co-sign a mortgage, you are promising to make the monthly mortgage payments if the primary borrower can’t. A co-signer is typically required if the person applying doesn’t have sufficient credit history, their income is too low, or they are not seen as a reliable borrower in the eyes of the lender.
Co-signing a mortgage is a significant financial decision and one that should be weighed carefully. Here are some things to keep in mind if you’re considering taking on this role.
1. You need to have trust and confidence in the primary borrower
Do you trust that the borrower is a responsible individual? Are you confident in their ability to make their mortgage payments? If you’re co-signing for someone who has strong money habits and a stable income – but just can’t quite get approved on their own because they haven’t been working long enough – you will probably feel comfortable taking on the responsibility. If you’re not sure of their reliability or resources, however, it may be best to decline a request to co-sign.
2. Co-signing a mortgage is a legally binding contract
Co-signing is more than just a character reference – you are legally on the hook to cover the mortgage payments should the borrower not be able to make them. With this in mind, you’ll want to reduce the financial risks that come with co-signing and protect yourself. You can do this in a few ways:
- Request copies of all the paperwork. Make sure you understand the terms laid out and exactly what your responsibility is.
- Get access to the mortgage account information. You want to make sure that the mortgage is paid every month, and with access to the mortgage account – for instance, through an online portal – you can stay on top of payments and spot any signs of trouble early.
- Insure the mortgage. It’s wise to speak with the primary borrower about getting Mortgage Life and Disability Insurance to cover the debt in case of the unexpected.
3. There’s a difference between a co-signer, co-borrower, and guarantor
While these terms are sometimes used interchangeably, it’s important to know the difference between them if you’re thinking of stepping into one of these roles.
The main difference between co-signer, co-borrower, and guarantor is the level of investment in the mortgage.
A co-signer agrees to take responsibility for paying the mortgage if the primary borrower can’t. If the borrower makes their payments as expected, the co-signer doesn’t need to pay.
A co-borrower, meanwhile, is jointly responsible for making mortgage payments from the beginning. While each co-borrower has equal ownership in the home, if one co-borrower fails to make a payment, it has an impact on both individuals.
A guarantor, on the other hand, vouches for the primary borrower and guarantees the loan in the event the primary borrower fails to make their payments. But, unlike a co-signer or co-borrower, a guarantor does not share in the title of the home. Guarantors are generally used when the primary borrower has a reasonable income and credit history but needs a bit of a boost to get approved.
4. Co-signing will affect your financial flexibility
Because a co-signer is legally responsible for the mortgage payments in event the primary borrower defaults on the loan, this responsibility is reflected on your credit score. If you’re considering taking out a loan in the near future for your own purposes, becoming a co-signer could have an impact on your ability to qualify for credit.
Before you decide to co-sign a mortgage, make sure it’s not interfering with your personal plans or goals. At the same time, be sure that if you are required to step in and make mortgage payments, that your finances can support the extra burden to your cash flow.
5. You need to qualify
Have you decided that you wish to help out a friend or family member and co-sign their mortgage? Before you deliver the good news, it’s a good idea to find out if you’re eligible to co-sign. Lenders will primarily look at your income and credit history to determine if you qualify. While a high net worth and/or high level of equity in your home helps, lenders are most interested in your track record as a borrower and whether your income can cover the mortgage payments. Speaking with a financial advisor in advance can give you a clear idea of whether you would qualify as a co-signer.
Co-signing a mortgage is a generous financial act that can help someone you care about achieve their goals of home ownership. Before you become a co-signer, make sure you know what’s involved so you can manage and mitigate the risks to your personal finances.
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