Should You Co-Sign on a Mortgage Loan?
Taking out a mortgage is a big financial commitment whether going it alone or with a spouse or significant other. In some mortgage situations, the topic of co-signing may come up.
Should you co-sign or not? This article will go over the pros and cons of both sides in order to help a buyer (applicant or co-signer) make the right decision.
What is a co-signer?
According to loans.com, ”A co-signer is a person who signs for a loan or other debt on behalf of another. When a co-signer agrees to this action, he or she takes on the legal obligation for the debt, should a default occur.”
Why Co-Sign?
Co-signing on a mortgage can be a solution for a variety of reasons. The three most common reasons are:
Poor Credit
The home buying process is not one-size-fits-all. Some home buyers find themselves in a bad predicament with their credit. Either they have poor credit due to bad financial decisions in the past, or they have little credit to begin with.
These two types of home buyers will often need a co-signer to get approved for a mortgage. Parents, siblings or even friends with good credit are people often requested to co-sign on a loan.
Financial Problems
When applying for a mortgage, income is one of the top things looked at in terms of whether the applicant can repay the loan back responsibly. If the applicant has a lower income, a co-signer may be needed for the mortgage to get approved.
Buying a Home As a Couple
A married or unmarried couple who desires to purchase a home together will also be in a co-signing situation. They may make the decision specifically so that they can make the investment together or they may do it for financial or credit reasons like the ones listed above.
The Good
Co-signing Helps The Applicant
In most situations, if a person is co-signing on a loan, they are helping the applicant in some way. The co-signer’s good credit is giving the applicant a bigger opportunity to get a mortgage approved.
Builds Credit
As long as the primary applicant pays the mortgage on time every month, not only will their credit build but so will the co-signers.
The Bad
Financially Responsible
Even if the primary applicant and co-signer have a good relationship and are both responsible, the future cannot be predicted. Financial hardships and loss of a job are just two reasons why an applicant would default on their mortgage, which leads to the co-signer being responsible for the missed payments.
As mentioned above, a co-signer is legally responsible for the mortgage. No one goes into a mortgage application expecting to default but, unfortunately, life happens. If a person is debating becoming a co-signer, they have to ask themselves if they are prepared to handle that situation if it occurs.
Relationship Changes
What happens if the relationship between the primary applicant and co-signer changes for the worse? Parting ways is not so easy when you are locked into a financial agreement like a mortgage, especially if the loan is in default. Handling not only the loan but all of the relationship effects that go along with it during a split can be a very stressful situation.
Credit Effects
Taking out a mortgage in and of itself affects a co-signer's credit as it is another form of debt, but what if the mortgage is in default? The good credit that made a person the perfect co-signer may become tarnished. Credit is something we all need, and risking it for the mortgage of another is not to be taken lightly.
Final Thoughts
To be a co-signer or not is a difficult decision that should be taken with very careful consideration and is very dependent on each person’s situation. Consulting with an attorney and financial advisor in situations like this is always good practice. Though it may seem that the cons outweigh the pros, each mortgage situation is unique, and co-signing may be the best option for some!
More Articles for Home Buyers
- How to Boost Your Credit Score Prior to Applying for a Mortgage – Paul Sian
- 16 Experts Share What Not to do When Buying a House – Ryan Fitzgerald
- How to Qualify for a Mortgage – Total Mortgage
- Top 10 Mortgage Mistakes to Avoid – Bill Gassett
