Can you co-sign a loan?
As the cost of living continues to rise, many wonder if they will ever be able to afford to buy a home on their own. A mortgage co-signer could be a solution.
If you have bad credit but if you need a mortgage, asking a relative or friend to co-sign the loan may be the answer – but before you ask, make sure you know what you’re getting into.
Can you co-sign a loan?
Yes, you can co-sign a mortgage. But whether you’re the person being asked to co-sign or need someone else to take out a mortgage with you, it’s important to know what that entails.
Taking on the primary borrower’s debt when they can’t make payments can strain relationships with family members, friends, spouses and relatives – and put you at risk. potential financials.
The reality is that it’s a legally binding contract, and if the borrower doesn’t meet their payments, the lender can sue you, even if you don’t live there.
What does it mean to co-sign a loan?
The co-signers undertake to pay off the mortgage if the borrower defaults on the loan. They also devote their time and resources to getting them a loan by having their credit removed and signing documents.
Besides that, there aren’t many advantages to co-signing. Rather than owning the home, the co-signer simply provides financial assistance to the person who will live in the home full-time. The majority of co-signers are family members who are also known as “non-occupant borrowers,which simply means that they are also borrowers but do not reside in the house they are co-signing.
Co-signer vs co-borrower
Although both co-signers and co-borrowers participate in the obligation of taking out a loan, you may be wondering about the similarities and distinctions between the two. Simply put, a co-borrower will be included on the title deed while a co-signer will not.
Being on title comes with its own set of rights and obligations, which means you could be held liable in some cases. For example, if your name is on the title and someone is injured on the property, you could be sued for damages.
Advantages and disadvantages of co-signing a mortgage loan
Co-signing a mortgage can be a great financial tool for many borrowers with poor or limited credit, but it’s not without risk. Here are some of the pros and cons of co-signing a mortgage.
- Potentially eligible for a larger or cheaper loan. When a mortgage has a co-signer, the lender considers the income of both the co-signer and the borrower, which could mean a higher loan amount. Having a co-signer also reduces the risk for the lender, which results in a interest rate.
- You may qualify for a mortgage with limited or poor credit. If the co-signer has a better credit score, you might qualify for a mortgage even with bad credit.
- Get help with job requirements. If you are self-employed or do not have a stable income, it may be more difficult to qualify for a mortgage. Having a co-signer with solid work experience might help.
- You can build capital earlier. As rent continues to rise, you may qualify for a mortgage and start capital formation much faster than if you expected.
- The co-signer has legal ties to the loan. If the borrower stops making payments on the mortgage, the co-signer is legally responsible for repayment.
- This could affect the co-signer’s credit rating. Because a mortgage is a form of debt and the co-signers take responsibility for the loan, it will show up on their credit report. If the borrower makes late payments or defaults on the loan, it could have a significant impact on the co-signer’s credit rating. The lender could also sue the co-signer, garnish wages, or put a lien on the property to collect the debt.
- The co-signer will have less room to take on additional debt. The mortgage will appear on the co-signer’s credit report as if it were their own, which affects the debt-to-income ratio (DTI). If this increases your DTI, it could limit your borrowing power as a co-signer.
- This could damage the relationship between the borrower and the co-signer. The co-signer is responsible for repaying the mortgage if the borrower is unable to pay, which could hurt your relationship.
We have branches all over the country. find a Total Mortgage Expert near you and speak to one of our mortgage experts to discuss your options.
Co-sign a mortgage loan process
The first step to getting pre-approved is to contact the lender, who will assess the co-signer’s finances the same way they assess the applicant’s.
income, credit history, debt levels, and the credit available to applicants and co-signers will all be considered before a decision is made, just as they would in a conventional underwriting process. However, the co-signer will be legally responsible for the loan and can be sued by the lender if the main signatory is in default.
However, with FHA Loans, there are specific co-signer requirements and the co-signer will be listed on the title deed. The co-signer must be a family member or close friend of the borrower. Additionally, lenders only consider the following parents as co-signers on an FHA loan:
- Parents and grandparents
- Brothers and sisters
- aunts and uncles
- Spouses or domestic partners
Step, adoptive and foster parents are also eligible.
If the co-signer is a friend, a letter explaining the relationship between the friend and the borrower and why the friend wishes to help is required. The co-signer must also live in the United States for most of the year and have a DTI of 70% or less if the borrower makes a down payment of less than 20%.
Explore your options with Total Mortgage
So can you co-sign a mortgage? Yes, but it is essential to understand the obligations associated with this commitment. There are pros and cons to co-signing for both the primary borrower and the co-signer, which is why it helps to work with a lender who is familiar with the unique criteria for co-signers on various types of loans.
Ready for the next step?