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If a poor credit score or other roadblock is keeping someone from buying a house, they can add a co-signer to increase their chances of qualifying for a mortgage loan. While this can help the primary borrower qualify for a loan or get more favorable terms, it can be a major commitment for the co-signer, who accepts full responsibility if the primary borrower defaults on their monthly payments.
Whether you’re a primary borrower or potential co-signer, it’s crucial to understand how co-signing works before taking the plunge.
Read more: How to buy a house in 13 steps
In this article:
What is a co-signer for a mortgage?
A loan co-signer is someone who guarantees the debt of a primary borrower. The co-signer effectively takes responsibility for paying the home loan if the primary borrower doesn’t make payments or defaults.
However, being a co-signer does not mean gaining partial ownership of the property. This person is taking on all of the financial responsibility of the loan without receiving any rights to the home.
Who might need a co-signer for a home loan?
Lenders need to know that a borrower is capable of repaying a loan to approve the mortgage application. Specifically, lenders will look at the following criteria to determine if the borrower can qualify for the home loan:
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Credit score: Conventional loans require a FICO credit score of 620 or higher. You may need a different credit score depending on the type of mortgage — for example, most people can qualify for FHA loans with a 580 score.
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Proof of income: Lenders need to verify that the borrower earns a stable income sufficient to cover the monthly mortgage payments.
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Debt-to-income ratio (DTI): This is the percentage of the borrower’s gross monthly income that goes toward repaying debts. Mortgage lenders use DTI to determine whether a borrower can afford monthly payments.
A primary borrower may need a co-signer to qualify for a mortgage if any of these three criteria are less-than-favorable. A borrower with a low credit score or no credit history may need a co-signer with a good credit score to be approved for a mortgage. A home buyer with an irregular income may turn to a co-signer with a steady paycheck for help qualifying. And a borrower who is carrying a lot of debt might need a co-signer with a low DTI to get a home loan.
Dig deeper: How to buy a house with no credit score
The risks of co-signing for a mortgage
Co-signing on a home loan can be a generous way to support a family member or loved one. But anyone thinking about becoming a co-signer should understand the potential consequences. Consider the following risks:
Responsibility for the loan
Even though a mortgage co-signer does not own the property, they must accept responsibility for repaying the loan.
In particular, the co-signer is responsible for paying back the loan if the primary borrower fails to make payments or defaults. Depending on which state you live in, the creditor may even try to collect payment from the co-signer before attempting to collect from the primary borrower.
Impact on your credit
The mortgage will be part of the co-signer’s credit history until the loan is paid off. This could affect your ability to qualify for new loans or lines of credit because lenders will consider the mortgage your obligation, even if the primary borrower makes consistent, on-time payments.
If the primary borrower misses a payment or defaults on the loan, it will hurt your credit score in addition to putting you on the hook for repaying the loan.
Potential relationship costs
A primary borrower who struggles to make payments might unintentionally put the co-signer in a difficult financial situation, which could strain the relationship. You’ll definitely want to decide if co-signing is worth this risk, especially as a family member or close friend. Before entering into this financial situation together, communicate and clearly express your expectations with each other.
Alternatives to co-signing
Primary borrowers who cannot qualify for a mortgage on their own do not necessarily have to rely on a co-signer. Consider these alternatives to getting co-signing:
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Co-borrowing: Like a co-signer, a co-borrower’s credit history and income can help a primary borrower qualify for a loan. The difference is that a co-borrower has partial ownership of the property and shares repayment responsibility from the start, unlike a co-signer who only makes payments if the primary borrower cannot.
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Helping with the down payment: A larger down payment can help some borrowers qualify for more favorable mortgage terms. Rather than co-signing a loan to help a family member, consider offering a cash gift that could bulk up their down payment.
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Improving credit history: The primary borrower may not need a co-signer if they spend time making consistent, on-time payments to all their creditors and working to pay down their debts. Over time, this will improve their credit score and lower their DTI.
Learn more: What to know about using gift money for a down payment
Co-signing for a mortgage: FAQs
Can a co-signer be removed from a mortgage?
Most mortgage lenders do not offer a simple way for co-signers to be removed from a home loan. Primary borrowers usually must refinance the loan to remove a co-signer.
What are my rights as a co-signer?
The co-signer has no legal right to the property the loan is funding. Instead, they only serve as a guarantor of payment and are legally responsible for making payments if the primary borrower cannot.
Does co-signing hurt your credit score?
Co-signing a mortgage could potentially hurt your credit score. First of all, the mortgage preapproval process involves a hard credit check, which can cause a slight dip in your score. The initial loan balance will also be reported to the credit bureaus, which could lower your score slightly. The mortgage will also remain on your credit report for the life of the loan. If the primary borrower makes consistent, on-time payments, there will likely be no further negative impact on your credit score. But if the primary borrower regularly misses payments, defaults, or faces foreclosure, it will seriously hurt your credit score.
This article was edited by Laura Grace Tarpley.
