APM BLOG

Sometimes we get by with a little help from our friends…or family. 

There are many reasons someone may need help to qualify for a mortgage to buy a home. They may just be starting out and haven’t established a good credit history yet. Or perhaps they’re just getting out of a tough financial situation that they’re turning around.

When it comes to cosigning for a mortgage, the cosigner boosts the financial profile of the mortgage application while signing up to share responsibility for the loan should the primary borrower stop making their monthly mortgage payments. 

Questions About Cosigning

Cosigning can be an amazing thing to do for someone, especially your children or other loved ones, but it comes with a lot of financial responsibility on your part. Before cosigning for a mortgage, you need to understand all the advantages, risks, and potential consequences. 

Does cosigning for a mortgage affect my credit?

Just like cosigning for a credit card, cosigning for a mortgage loan impacts your credit. The loan will show up on your credit report, meaning that it will impact your debt-to-income (DTI) ratio and overall credit utilization. Additionally, any missed or late payments by the primary borrower will impact everyone’s credit score—the primary borrower’s and the cosigner’s. 

Now for the good news: If the primary borrower consistently makes their monthly mortgage payments on time, it can improve everyone’s credit score. It all comes down to the primary borrower and their ability and willingness to pay on time.

With this in mind, it is always a good idea to maintain an open and honest line of communication with the primary borrower. This ensures that they make their mortgage payments on time and creates good credit for everyone.

Does cosigning for a mortgage count as debt? 

A home loan is a form of debt. Cosigning for a mortgage means assuming responsibility for the debt alongside the primary borrower.

As mentioned, the monthly payment will factor into your debt-to-income ratio, which lenders analyze to determine your ability to manage additional credit. It’s important to consider the impact of this debt when applying for other loans or credit lines in the future.

What are the risks of cosigning a loan? 

It’s a cold, hard reality that if the primary borrower fails to make timely monthly mortgage payments or defaults on the loan, the responsibility for this debt will fall on the cosigner. This could lead to financial strain, credit score damage, and even potential legal action as the lender attempts to collect the outstanding debt.

Remember, too, that since your debt-to-income ratio will be affected by cosigning for a mortgage, your ability to obtain credit may be impacted. This is why you should think long and hard, not just about whether you feel that the primary borrower can consistently pay their home loan, but also about any large purchases or credit lines you may need in the future. 

Reduced borrowing capacity could hurt you if you’re looking to finance a new car, help out a child with a student loan, refinance your own home, or invest in a second property. 

Can a cosigner be removed from a mortgage? 

The option to remove a cosigner from a mortgage loan depends on several factors. In some cases, mortgage lenders may consider removing a cosigner if the primary borrower has made consistent monthly mortgage payments.

However, it’s not as easy as removing the cosigner’s name from the loan. The primary borrower typically has to refinance the home loan, putting it in their name alone. This means the primary borrower will have to take into account interest rates, credit score requirements, debt-to-income ratio, and their current financial circumstances. In essence, they would have to ensure that they’ve cleared up the reason they needed a cosigner in the first place.

Trusted mortgage lenders can help you understand the specific requirements and conditions for removing a cosigner from a home loan.

What happens if a cosigner doesn’t pay?

We know what happens if the primary borrower doesn’t pay: The mortgage lender will come looking for the cosigner. But what happens if the cosigner also doesn’t pay? 

When a cosigner fails to make the mortgage payments, the lender will typically pursue both the primary borrower and the cosigner for payment. If neither party fulfills the financial obligation, they can both be subject to legal action and collection efforts.

What’s the difference between a co-borrower and a cosigner? 

A cosigner is someone who agrees to assume responsibility for the loan if the primary borrower cannot meet their obligations. On the other hand, a co-borrower (or co-applicant) is equally responsible for repaying the loan and shares ownership of the property.

While a cosigner’s name may appear on the loan documents, a co-borrower has equal rights and responsibilities, along with a stake in the house. 

What else do I need to know before cosigning?

You need to give cosigning for a mortgage loan a lot of thought. Assess the primary borrower’s financial stability, including their income, employment history, and credit history.

If you’re willing to consider cosigning a mortgage loan for them, you probably know the potential primary borrower pretty well. Use this relationship to your advantage as you consider how responsible they are:

• Do they always do what they say they’re going to do?
• Are they quick to shirk blame?
• Do they go out of their way to rectify problems, or do they avoid them like the plague? 

You want to be confident that your credit score, borrowing ability, and—most of all—good name will not be ruined by cosigning for a mortgage.

Next, ensure that you can comfortably handle the financial responsibility of the mortgage payment in case the primary borrower is unable to fulfill their obligations.

Finally, consult with a knowledgeable Loan Advisor at APM to gain a comprehensive understanding of the specific loan terms, interest rates, and any mortgage insurance requirements associated with the home loan. 

Pros and Cons of Cosigning for a Mortgage

You’ve now got a lot of information about what it takes to cosign for a mortgage. But let’s weigh out the benefits and risks so you can really hone in on whether this is the right move for you. 

Pros

• Cosigning can help a loved one achieve their dream of homeownership.
• It allows the primary borrower to qualify for a mortgage they might not otherwise have been eligible for.
• On-time payments can, over time, help improve both the primary borrower’s and the cosigner’s credit score and credit history.

Cons

• Cosigning for a mortgage comes with financial risks, including to your credit score and being held responsible for the other party’s missed payments or default.
• It can limit your borrowing capacity, as the cosigned mortgage becomes part of your debt-to-income ratio.
• The relationship between the cosigner and the primary borrower may become strained if payment issues arise.

Taking the First Steps

Cosigning for a mortgage is a big decision and a long-term commitment. You have to weigh the risks and benefits carefully, considering both your financial situation and the primary borrower’s ability to fulfill their obligations. Sit down and have an honest conversation with the primary borrower. Make sure you lay the foundation for a healthy, open, and communicative relationship going forward.

Once you’re ready to apply for a loan, explore the loan application process, or learn more about the types of loans that allow cosigners, make sure you seek out an APM Loan Advisor. We know the ins and outs of home loans and can help guide you through the cosigning requirements tied to conventional loans, FHA loans, and VA loans. Click here to connect with an APM Loan Advisor near you.