The Risks and Benefits Of Co-Signing a Mortgage

A big risk to co-signing a mortgage (or any loan) is that it will affect your own ability to borrow as long as that loan exists.

Yes, the next time you buy or refinance a home, finance a car, or get a home equity loan, the co-signed loan could limit how much you can borrow or make you ineligible for new financing.

Here’s what to think about before you sign on the dotted line.

Dangers of Co-Signing a Loan or Mortgage

Legally, you are 100% responsible for a co-signed loan.

If the primary borrower doesn’t make the payment, your credit could be ruined.

You also risk not meeting debt-to-income ratio requirements for future loans, especially mortgages.

Except when you meet certain criteria described below, a mortgage lender has to include the payment in your debts. Large payments can derail your approval.

Here’s an example of someone applying for a mortgage with maximum debt-to-income ratio of 45%.

Only in certain cases can a lender disregard your co-signed loan payment.

See if you are eligible to buy or refinance a home.

Can Lenders Disregard the Payment After I Co-Sign?

Co-signing on a mortgage or loan can affect your ability to get an auto loan, mortgage, or any other type of financing. For the purposes of this article, we’ll discuss how co-signing affects buying or refinancing a home.

First, lenders probably can’t disregard the payment at all within the first 12 months. So if you plan to apply for a mortgage in the next year, don’t co-sign.

For conventional mortgages, lenders can disregard the co-signed payment in the following situations:

Excluding Non-Mortgage Payments

The mortgage lender can exclude non-mortgage co-signed debt such as auto loans and student loans in these cases:

• Another party has made the full payment for the past 12 months

• All payments have been on time

• You can provide 12 months of canceled checks or bank statements proving payment

Excluding Mortgage Payments

How to exclude a co-signed mortgage from your debt-to-income ratio:

• The person making the payments must be on the co-signed loan

• Proof of most recent 12 months of on-time payments via canceled checks or bank statements

• No rental income from the property is being used to qualify for the new loan

Mortgage Programs That Allow Co-Signers

In the mortgage world, being a “non-occupant co-borrower” is more common than co-signing the loan.

This simply means you are obligating yourself for the loan but don’t plan to live in the home.

Non-occupant co-borrowers are allowed on conventional and FHA loans.

Conventional Loans and Non-Occupant Co-Borrowers

Non-occupant co-borrowers are allowed on a conventional loan under these circumstances:

• Minimum 5% down payment

• The co-borrower has a credit score of 620+

• The co-borrower signs the note

• Co-borrower must not be a party to the transaction like the real estate agent or builder

• Meets all other conventional loan criteria

FHA Loan Guidelines for Non-Occupant Co-Borrowers

• U.S. citizen or have a primary residence in the U.S.

• 580 credit score for 3.5% down

• Non-occupant co-borrower must be a family member such as a parent, child, sibling, or extended family. Otherwise, a 25% down payment is required.

Advantages of Co-Signing

There are clear benefits of co-signing, but most of them are for the primary borrower.

• Helps build their credit when all payments are made on time

• Helps them qualify for a loan when they couldn’t on their own

• Build equity in a home, which can be shared by the co-signer if later sold

Make sure the benefits outweigh the risks if you are considering co-signing for someone. Just make sure your generosity doesn't derail your own future plans.

If you’d like personalized help, contact a reputable lender.