There may be negative repercussions for the cosigner even when everything with a cosigned student loan goes well.
Cosigned student loans can be a significant barrier when applying for a mortgage. It may occasionally be the basis for a denial. A cosigned student loan may result in a smaller home for other applicants.
There may be some paperwork necessary to reduce the effects of a cosigned student loan. In many instances, the cosigner can mitigate the drawbacks of assisting someone in obtaining a student loan.
Why cosigning student loans is a problem: The Debt-to-Income Ratio (DTI)
Cosigned student loans appear on credit reports.
Unfortunately for consumers, the credit report doesn’t always make it clear whether someone is a primary borrower or a cosigner. Additionally, most lenders don’t particularly care. The default assumption is that the borrower will be liable for repaying the debt if they could be held accountable for doing so.
The issue is that so much of the underwriting process is carried out by a computer, even though there are ways to alter the initial assumption (more on those in a moment).
There is a method for choosing whether to accept an application or not. For calculating how much someone can borrow for a mortgage, there is a formula. A cosigned loan will impact these formulas.
The loan will indicate that the borrower must make monthly payments of X dollars on their credit report. This monthly obligation will affect the applicant’s Debt-to-Income ratio (DTI). One will need more income to afford the requested monthly mortgage payment the more debt they have on their application.
Removing cosigned loans from mortgage application calculations
The good news is that the cosigned student loan can be disregarded when applying for a mortgage if you have a cosigner. The procedure can be a little tiresome, which is a drawback.
It is not sufficient to merely state that the student loan listed on the credit report has cosigners. Lenders frequently request that applicants send documentation demonstrating that the primary borrower is making loan payments. They might demand proof of timely payments made for the previous year or more.
The primary borrower might also need to provide evidence that the cosigner is not the one making payments.
Every lender has a different underwriting process, so it can be different. The primary borrower has been able to make payments on their own and will be able to continue making payments, so mortgage applicants should be prepared to provide plenty of documentation supporting this.
Removing a cosigner from the student loan
A more successful strategy might be to have the cosigner of the student loan removed rather than persuading a mortgage company to disregard a student loan on the credit report.
There are several ways to release a cosigner from student loan obligations:
Cosigner Release – A lot of lenders for student loans have cosigner release guidelines. The cosigner may be dropped if the borrower maintains timely payments for a predetermined amount of time (typically between 12 and 36 months, depending on the lender) and passes a credit check. Unfortunately, student loan companies lack sufficient motivation to actually comply with these requests. Lenders prefer that two individuals be held legally liable for the debt rather than just one.
Loan Refinancing: Primary borrowers who have a job and a good credit score may be able to refinance their student loans. The old cosigned loan is fully repaid through the refinance process, and a new student loan is made, ideally without a cosigner. By refinancing, the primary borrower might be able to get a lower interest rate or monthly payments. Once the refinance is complete, the cosigner will no longer be responsible for the debt, and it will disappear from their credit report.
Refinancing with a New Cosigner – It’s not necessary for the cosigner to remain the same when refinancing a loan. If the primary borrower is unemployed or has a poor credit history, a cosigner will likely be required on the loan.
Regardless of the method used to drop the cosigner, those applying for a mortgage should prepare ahead of time. It may take weeks or even months to receive approval for a refinance or cosigner release. Additionally, it will take some time for the lender to update the credit bureaus regarding the cosigner’s status change.
Dealing with students still in school
The options are more constrained for cosigners whose primary borrowers are still in school.
For in-school students, refinancing typically isn’t an option, and cosigner releases are uncommon. The mortgage applicant won’t be able to demonstrate that the primary borrower can manage the loan on their own because repayment on the loan hasn’t started yet.
Frequently, the credit report will not even indicate a monthly student loan payment. In these circumstances, some mortgage lenders substitute 1% of the loan value for the monthly payment. In order to determine the potential maximum monthly loan payment, other mortgage companies have been known to arrange a three-way call between the applicant, the mortgage company, and the student loan company. The mortgage company then uses the highest payment amount to determine DTI and make underwriting decisions.
One of the reasons to avoid cosigning student loans if the cosigner might be looking for a new home before the borrower graduates is because of this circumstance.
Most DTI calculations don’t really take into account the total amount of debt. Instead, it is the monthly payment that is used.
This presents a chance to adjust monthly payments to lessen the effect of cosigned debt on mortgage applications.
There are two primary ways to lower payments:
Change the borrower’s repayment plan – There are a variety of repayment options available for many student loans. Because the repayment is spread out over a longer period of time when choosing a longer repayment plan, the monthly payment will be lower. The cosigner’s mortgage application might benefit from the lower monthly payment.
Refinance the debt with the cosigner – Ideally, the cosigner wouldn’t be involved in the refinanced loan, resulting in a total debt forgiveness. A refinance can still be helpful if the borrower is unable to obtain approval on their own and there are no other cosigners available. The cosigner can strengthen their mortgage application by refinancing with a lender offering a lower interest rate or longer repayment period.
While there are numerous approaches to dealing with cosigned student debt on mortgage applications, there is one problem that arises frequently: time.
No option will immediately resolve the problem, and many of them could take several months.
Cosigners for student loans should speak with the primary borrower as soon as possible to discuss a strategy. Those who have already begun the mortgage application process should cooperate with their mortgage provider to make sure everything goes as planned.
FAQ
Do cosigned student loans show up in credit report?
If you cosign a student loan, the loan will be recorded on your credit report and you will be held accountable if the borrower is unable to make payments. As a cosigner, any late payments would harm your credit, and you would be responsible if the borrower is unable to pay back the loan.
Do mortgage lenders look at student loans?
Your ability to obtain a mortgage may be hampered, but not impossible, by student loan debt. Student loan debt is taken into account by lenders when calculating your total debt to income (DTI) ratio, which is a crucial determinant of your ability to make future mortgage payments.
Will Cosigning affect my ability to buy a house?
You’re more likely to be accepted even as a cosigner on another loan if you can afford the new mortgage payment, your debts, and the existing mortgage payment comfortably. Your lender will approve you for a mortgage as long as you can provide evidence of consistent and sufficient income.
Does cosigning a student loan affect debt-to-income ratio?
Your debt-to-income ratio will be impacted because your cosigned loan will appear on your credit report. Your chances of being approved for other loans, such as personal loans or mortgages, may suffer as a result. It might result in you receiving an interest rate that is less favorable, at the very least.