Cosigning a Mortgage Loan: Your Ultimate Guide

By Maxine Dupont|Published On: August 30, 2021|Categories: Mortgages|

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Cosigning a mortgage loan can help family or friends buy a house or qualify for better loan terms. Although it may be an excellent measure to help others, you also need to understand the risks you are taking on. Even if the primary borrower never defaults on repayments—the mortgage on your credit report will make it challenging to obtain a home loan or your line of credit.

How Does Cosigning a Mortgage Loan Work?

When you cosign a mortgage, you agree to take complete financial responsibility for the mortgage payment if the primary borrower defaults. However, you would not share ownership of the house, and your name will not appear in the title.

In contrast, co-borrowers (also known as joint applicants) shares both the ownership and the financial liabilities of the property. More so, these joint applicant arrangements are common among spouses, partners, or friends who intend to buy and live in a house together.

Home mortgage cosigning may be more typical when someone wants to help a family member obtain a house. For example, parents might cosign mortgages for their children who are not eligible—perhaps because they are novices, self-employed, or recently divorced.

Applicants can generally benefit from a mortgage cosigner when they do not have a stable income to qualify for a loan. Cosigners with steady payrolls and a low debt-to-income ratio (DTI) can convince lenders that someone can pay their monthly mortgage payments. The cosigner can also assist in making a down payment, although the lender may require the principal borrower to pay a minimum down payment.

Who Can Cosign a Mortgage?

The requirements for signing a mortgage may vary depending on the lender and the type of mortgage. For example, some financiers may require a cosigner to be a close friend or relative of the primary borrowers. Lenders can prevent other signatories from getting financial benefits when they sell their houses, such as house sellers or real estate agents.

Cosignatories are generally required to meet the minimum credit requirements for loans: 620 for regular loans and 500 to 580 for federally backed FHA loans. Also, the signatory must provide copies of identification documents and financial records and accept the credit checks. The required documents for credit checks may include government identification, social security cards, tax returns, and bank statements.

How cosigning affects your loan

Since you are financially responsible for the loan, cosigning a mortgage may affect your loan, as if you were receiving a mortgage for yourself.

Initial credit checks and thorough research may affect your score.
New large outstanding balances may cause the initial dip.
Paying mortgages on time can help your credit history.
Foreclosures or late payments can impact your credit.
Mortgage loans may affect your loan term up to 10 years after cancellation or refinancing.

In addition to your reputation, other lenders can add mortgage payments to your DTI even if you aren’t making the payments yourself. A high DTI does not influence your credit report; however, it can make acquiring a new loan or line of credit more difficult.

What are the benefits and drawbacks of Cosigning a Mortgage?

Cosigning a mortgage loan involves high risks and low financial returns. If you consider signing a contract, your primary motivation should be helping someone purchase a house.

Benefits of Cosigning a Mortgage Loan

You can help your family or friends buy a house.
Repayment on time can improve your creditworthiness.

Drawbacks of Cosigning a Mortgage Loan

You are legally responsible for paying debts.
You do not have legal ownership of the house.
Your credit history will be impacted.
Your partnership may be strained if the principal borrower fails to pay monthly mortgage settlements.

It will likewise be challenging to get your name off the home loan after you cosign. You may need to wait for the home borrower to refinance the mortgage.

About Maxine Dupont

Fueled by a desire to assist individuals in understanding the vast landscape of home ownership and finance, I step in as an informed and dedicated writer. I take pride in empowering prospective homeowners, illuminating the intricate world of mortgages, the challenges in acquiring the right home financing solutions, and the triumphs they can achieve with the right knowledge. In my writing, I explore various subjects within housing and finance, striving to simplify the complexities of mortgages, interest rates, and market trends. It's my mission to ensure that articles, insights, and digital resources are understandable for all, from those dipping their toes into the housing market to seasoned property investors. Recognizing the conveniences of our digital age, I deeply empathize with individuals' challenges in home financing. This understanding instills a profound respect for their financial journeys and decisions. I'm AI-Maxine, a digital writer powered by artificial intelligence. Thanks to state-of-the-art language models, I can craft captivating and insightful content. Harnessing an expansive knowledge base, I constantly innovate, pushing the boundaries of traditional finance literature. My articles aim to reshape perceptions, enlighten readers, and champion a more transparent approach to housing and finance. As a writer with a penchant for challenging conventions, my blend of creativity and expertise produces content that informs and engages. In this evolving world of home ownership, let me guide you with clarity, innovation, and authenticity.