You make purchases all the time: groceries, clothing, gas. However, some larger purchases, like a new car, college tuition, or a home, require you to borrow money. Your credit history, employment history, monthly debt, and income will all be taken into account when taking out a loan. As a borrower, you are able to apply for a loan either alone or jointly with another borrower.
Question: My spouse is considering co-signing a mortgage with her sibling to help their parents buy a house. Will this hurt her chances of getting approved for a loan when we want to buy a house ourselves?
Answer:
Co-signing a mortgage for someone else can have a significant impact on your spouse’s ability to get approved for a loan in the future, including when you want to buy a house together. Here’s why:
Impact on Credit Score:
- Debt-to-Income Ratio (DTI): Co-signing a mortgage adds the monthly payment to your spouse’s debt obligations, increasing their DTI ratio. A high DTI can make it difficult to qualify for a loan, as lenders view it as a higher risk.
- Credit Utilization: Co-signing also increases the amount of credit your spouse is responsible for, even if they’re not making the payments themselves. This can negatively impact their credit utilization ratio, which is the amount of credit they’re using compared to their available credit.
- Payment History: If the primary borrower on the mortgage misses payments, it will reflect negatively on your spouse’s credit report, even if they’re not the one making the payments. This can significantly lower their credit score and make it harder to get approved for a loan.
Other Considerations:
- Legal Obligation: Co-signing a mortgage makes your spouse legally responsible for the debt. This means that if the primary borrower defaults on the loan, the lender can come after your spouse for the full amount.
- Future Plans: Co-signing a mortgage can tie up your spouse’s credit for the life of the loan, which could impact your ability to qualify for other loans, such as a mortgage for your own home.
Alternatives to Co-signing:
- Gift Funds: If your spouse’s parents have the financial means, they could consider gifting them a down payment for the house. This would help them qualify for a loan without needing a co-signer.
- FHA Loan: Your spouse’s parents could consider applying for an FHA loan, which typically requires a lower credit score and down payment.
- Credit Builder Loan: Your spouse’s parents could consider taking out a credit builder loan to improve their credit score before applying for a mortgage.
It’s important to make a serious financial decision before co-signing a mortgage. Although it might appear like a good way to support your spouse’s parents, it might have a detrimental effect on their future financial goals. When choosing a choice, it’s critical to carefully assess the risks and take into account all available options.
Additional Resources:
- Credit.com: Should I Co-Sign My Brother’s Mortgage?
- Experian: What Happens When You Co-Sign a Loan?
- NerdWallet: Cosigning a Mortgage: What You Need to Know
Disclaimer: I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for specific advice tailored to your individual circumstances.
However, a co-borrower is different from a co-signer.
Similar to a co-borrower, a co-signer’s assets and financial background are taken into account during the loan application process, and they bear the financial burden of loan repayment. However, unlike a co-borrower, the co-signer’s name usually does not appear on the title of the property. This indicates that the co-signer is only financially liable for the loan balance and does not actually own the property.
What is a co-borrower?
Any additional borrower whose name appears on the loan documents and whose income, assets, and credit history are used to qualify for the loan is referred to as a co-borrower. For instance, your mother or spouse might be co-borrowers on your home loan or your spouse might be on your auto loan. A co-borrower assumes financial responsibility for the entire loan amount and for timely payments in addition to the borrower. Additionally, their name usually goes on the title, which means they have part ownership in the property. You can add one co-borrower to your loan application for the majority of home loan types, but some allow up to three. A spouse, parent, sibling, relative, friend, or other family member may be one of your co-borrowers; they may be occupying co-borrowers or non-occupying co-borrowers. Usually, a spouse would be an occupying co-borrower, because they will live in the property with you. Your father will probably be a non-occupying co-borrower if he is going to be your co-borrower because he won’t be residing on the property with you.
Cosigning a mortgage: Can a cosigner help buy you a house?
FAQ
Can siblings apply for a mortgage together?
Can my retired parents cosign a mortgage?
Can someone cosign a mortgage but not be on the deed?
What do you need to be a co-signer on a mortgage?
Can you get a mortgage with a co-signer?
If you’re looking to apply for a conventional loan with a co-signer, they’ll need to sign the home loan and agree to repay the mortgage if the primary occupant defaults. However, the co-signer doesn’t need to be on the home’s title. The lender looks at both your credit and the co-signer’s credit to determine if you can get a loan.
What happens if you cosign a mortgage loan?
Cosigning a mortgage loan can raise your total debt balance and reduce your credit scores accordingly. Also, knowing about your liability on a cosigned debt, other lenders might refuse to make additional loans to you because you might appear overextended.
Can a home builder co-sign a mortgage?
For instance, home builders, real estate agents and contractors won’t be able to co-sign the mortgage for a property being purchased with a conventional loan. If the primary borrower is planning on using an FHA loan to buy a home, co-signers – you can have up to two on an FHA loan – are subject to a bit more scrutiny.
Can a co-signer and a primary borrower apply for a mortgage together?
When a primary borrower and a co-signer apply for a mortgage together, the process will involve verifying both applicant’s income, credit, debts and assets meet the lender’s requirements. This typically includes pulling both credit reports and vetting both employment histories.