When you co-sign a mortgage, you accept full responsibility for the loan and all associated obligations. For established homeowners, this may not be a problem. For prospective homebuyers, co-signing a loan may prevent you from obtaining your own mortgage. Because of your co-signed mortgage, you might encounter rejections or unfavorable terms when applying for your own mortgage.
You might be able to persuade the lender to only hold you accountable for the principal loan while exempting you from late fees, filing fees, and other possible foreclosure-related costs.
Co-Signer Takes on Responsibility for the Loan
Cosigners assume risks that the bank will not take. If a bank deems a mortgage application unworkable, it will either reject the application or suggest a co-signer. If the primary borrower defaults, you, as the co-signer, are liable for paying the entire mortgage balance. According to the Federal Trade Commission, default frequently happens. Because the primary borrower defaulted, three out of four co-signers are being asked to pay back the remaining loan balance.
Your Credit Score May Take a Hit
The mortgage account is listed on your credit report because, as a co-signer, you accept responsibility for the loan. If the primary borrower keeps up with his payments on a monthly basis, positive credit history will show up on your credit report. Negative entries start to appear if the primary borrower defaults, including marks for late payments, possibly entries from collection agencies, and eventually judgments and foreclosures. Negative entries lower your credit score, making it challenging for you to independently get a mortgage loan.
Beware Your Debt-to-Income Ratio
Your debt-to-income ratio could make it more difficult for you to get a mortgage, even if the primary borrower pays their bills on time. Mortgage lenders want to know that you will be able to repay the loan. By dividing your debt by your income, you can determine your debt to income ratio. If the primary borrower defaults on the mortgage, even though you only co-signed it, you are still responsible for paying it back. Therefore, the majority of mortgage lenders will include the primary borrower’s monthly payment when calculating your debt to income ratio. A DTI typically needs to be between 31 and 43 percent to meet the requirements for a mortgage loan.
If you satisfy the underwriting requirements, you might be eligible for another mortgage. Mortgage lenders want to see that you make enough money each month to cover all of your obligations plus some extra. You have a good chance of getting your own mortgage if you can afford to pay for it, your current debts, and the co-signed loan.
You can ask the primary borrower of the co-signed loan to drop you from his mortgage if you consistently get denied or have bad terms. Refinancing the existing mortgage loan without the co-signer is required and is a difficult process when removing a co-signer. You might be stuck with the co-signed mortgage if the primary borrower lacks the income or credit to complete a refinance.
Writing since 2007, Leigh Thompson focuses on producing content for websites. She has been published online in various capacities. Thompson is pursuing a bachelor’s degree in business and personal finance in addition to having an associate’s degree in information technology from the University of Kansas.
FAQ
Can I cosign 2 mortgages?
Yes, you can cosign on a new mortgage even if you currently hold one of your own, as long as your income is sufficient to cover both mortgages in the event of default.
Can someone cosign if they already have a loan?
If you already have a car loan, you can still cosign for someone. In fact, if the primary borrower is making all of their payments on time, cosigning the loan can help you raise your own credit score.
How many times can you cosign for a house?
The number of borrowers who can apply jointly for a mortgage has no legal limit, but the actual cap on most U S. loans is four or five borrowers.
Does cosigning a mortgage affect getting a mortgage?
Lenders will also take into account the debt-to-income (DTI) ratio for both you and your co-signer when evaluating your application. Each lender has their own requirements for what constitutes an acceptable DTI. It can be simpler to obtain a loan if you are aware of your own and your co-signer’s debt-to-income ratios.