Everything You Need to Know About Getting a Co-Signer for a Home Loan

Purchasing a home is a major financial milestone But what if your credit or income make getting approved for a mortgage difficult? Adding a co-signer to your home loan application can provide a workaround – but it’s not a decision to make lightly

In this comprehensive guide, we’ll break down how co-signers work, the pros and cons, what happens if the primary borrower defaults, alternatives to consider, and tips for both co-signers and borrowers.

What is a Co-Signer on a Home Loan?

A co-signer, also known as a co-applicant or guarantor, is someone who agrees to take legal responsibility for repaying the mortgage if the primary borrower cannot make the payments. They provide an additional layer of financial security for the lender.

The co-signer’s income, assets, debts, and credit history get taken into consideration alongside the primary borrower’s during the application process Their signature on the mortgage contract makes them equally liable for the debt

Adding a co-signer with stronger finances can help borrowers with poor credit, high debt or insufficient income get approved and secure better loan terms. A co-signer does not obtain an ownership interest in the property itself unless they are also a co-borrower on the mortgage title.

How Does Getting a Co-Signer Help Your Home Loan Application?

Bringing a co-signer on board can strengthen your loan application in several key ways if you struggle to qualify on your own:

• Compensates for low credit scores – The co-signer’s good credit can offset the primary applicant’s poor credit history.

• Increases combined income – A co-signer’s income gets added to the total household income, allowing the borrower to qualify for a larger loan amount and lower debt-to-income ratio.

• Offsets insufficient work history – Applicants without sufficient employment history can benefit from a co-signer with longer, stable work experience.

• Provides alternative credit profile – Self-employed or gig workers with harder-to-document income get help meeting income verification requirements.

• Makes up for low savings – The co-signer’s assets help compensate for the primary applicant’s small down payment savings.

Pros of Getting a Co-Signer on a Home Loan

• Increase your chances of getting approved for a mortgage
• Qualify for better interest rates by improving your credit profile
• Meet minimum income and employment history requirements
• Buy a more expensive home through higher mortgage amount approval
• Provides an alternative if you don’t qualify for homebuyer assistance programs
• Get a mortgage with a low down payment or minimal funds for closing costs

Cons of Getting a Co-Signer for a Home Loan

• Co-signer is legally obligated to make payments if primary borrower defaults
• Both parties’ credit scores may drop if payments are missed
• Strained relationships if borrower is unable to repay and co-signer must cover payments
• Refinancing or removing co-signer from loan is extremely difficult
• Co-signers take on debt obligation that impacts their own borrowing ability

What Happens if the Primary Borrower Stops Making Payments?

Should the primary borrower miss mortgage payments, the co-signer bears responsibility for making the payments. If the mortgage becomes delinquent, it can:

• Negatively impact both parties’ credit scores
• Lead to late fees and increased interest rates
• Result in foreclosure proceedings on the home
• Allow the lender to pursue legal action and collections against the co-signer

Unless the primary borrower can resume payments or refinance the loan, the co-signer must be prepared to cover missed installments to avoid these damaging outcomes.

Who Makes a Good Co-Signer for a Home Loan?

Ideal co-signers have:

• Excellent credit – 720 score or higher
• Low debt-to-income ratio – 35% or under
• Sufficient income to carry mortgage payments
• Stable employment and income
• Healthy savings and assets
• Close relationship and trust with primary borrower

Common co-signers include parents, grandparents, spouses, siblings, or close friends. The co-signer should fully grasp the risk and responsibility they are taking on before agreeing to the arrangement.

Tips for Managing Risk as a Co-Signer

If you decide to co-sign your child, relative, or friend’s mortgage, protect yourself with these tips:

• Review monthly statements to ensure payments are on time
• Set up automatic alerts for any missed payments
• Maintain regular contact with the primary borrower about their finances
• Create savings for a potential contingency fund if issues arise
• Make sure the borrower has home insurance coverage
• Seek legal advice about liability and options if defaulted

Going in with full understanding of the risks and an exit strategy is essential. Only co-sign as a very last resort.

Alternatives to Getting a Co-Signer for a Home Loan

Before pursuing a co-signer, borrowers have several other options to improve their ability to get approved including:

• Enrolling in credit counseling to improve your credit score
• Building up your down payment savings
• Reducing existing debts to lower your DTI
• Getting a cosigner for a credit card to build payment history
• Looking into first-time homebuyer assistance programs
• Exploring government-backed FHA, VA, or USDA loans
• Waiting to improve your financial profile and re-apply later

Talk to a loan officer about the pros, cons, and alternatives to determine the best path forward to homeownership.

Key Takeaways about Co-Signing for a Home Mortgage

• A co-signer takes equal legal responsibility for repaying the mortgage debt. Their finances help compensate for areas where the primary borrower falls short.

• Adding a co-signer can help borrowers with poor credit, high debt, or low savings get approved and secure better loan terms.

• Co-signers are obligated to cover payments if the primary borrower defaults. This impacts their finances and credit score.

• Thoroughly examine the risks and alternatives before agreeing to co-sign someone’s home loan. Explore options to improve your own borrowing viability first.

• Maintaining open communication and prevention plans can help minimize risks for co-signers and borrowers entering this type of arrangement.

Is Being a Co-Signer on a Home Loan Right for You?

Co-signing a mortgage is a major commitment and risk. But for certain borrowers and co-signers, it can be the right option. Make sure you fully understand the legal obligations. Seek professional advice around liability. And openly communicate with each other along the way.