An important aspect of a mortgage is being able to ensure the lender that they are not taking a risk in losing money on the loan. In many cases, the guaranteed income or the credit history of the applicants is enough to ensure minimal risk. In some circumstances, however, lending institutions reject the original applicants. This can occur if:
- The applicant has bad credit. Credit ratings are the very first thing that any lending company looks at when determining whether or not to extend potential borrowers a loan. A bad credit score will mean an outright rejection, no ifs, ands, or buts. Bad credit occurs when an individual has failed to pay off his or her bills, including utilities, car payments, and payments on other loans (including credit cards).
- The applicant has no credit history. It might seem hard to believe, but there are people in society who have no credit score at all. If you are lucky enough to be one of those people, it probably means that your purchases have always been within your means and that you are careful about your budgeting. Unfortunately, this will not always be to your advantage when it comes to getting a mortgage. Credit history means that the bank has some evidence that even when an individual overspends from time to time, they are good to pay it off. A large amount of money lent such as a mortgage will mean that the bank needs some evidence not that you stay out of debt, but that you can make payments when you accrue debt.
- The applicant needs more money than the bank will lend, based on income. This case is becoming more and more common among home buyers. The real estate market has been hot over the last few years, and as a result house prices are higher than ever before. A lot of couples just getting into the housing market are finding that homes are priced beyond their reach, especially for the kind of house they would like to live in. As a result, they can’t receive the money they need to make a purchase.
- The applicant has too much outstanding debt. Lending institutions are wary of people who have too many loans out already. Car loans, student loans, medical bills, and legal fees can all prove detrimental when it comes time to apply for a mortgage.
Potential home buyers who fall into any of the above categories will need to try and secure the help of a co-signer. Co-signers are common in many lending situations as a means of guaranteeing that one way or the other, the lending institution will receive payments on the money that is borrowed.
Can you get a co-signer, and what kind of co-singer is there?
Most people will turn to relatives when they need a co-signer. Young people, especially, will often ask their parents for surety when they are seeking to secure a mortgage. Obviously, a co-signer will have to trust the person seeking the loan a great deal in order to put their name down as a guarantee that the payments will be made to the lending company. In the case of a default, the co-signer is the place where the lending institution turns in order to make sure that the money is paid back.
Typically, a co-singer can only be used in order to increase the amount of money that a potential buyer can receive in the mortgage. That is to say, a co-singer will not help to overcome situations in which credit is the issue (lending agencies always look at the lower of the two credit scores to determine credit history, so a co-signer with a good score will not cancel out bad credit).
The situation is a little different when it comes to a person with no credit history, as the issue becomes one not of ability to pay but funds. In this case, a co-signer will help to establish that credit is available. Keep in mind, though, that many institutions will not allow a co-signer on a mortgage who is not also an occupant of the premises that is being purchased.
There are companies that can act as co-signers, but really these companies are loan companies that help to secure loans from other places. If you are desperate enough to use one, then be prepared for very high interest payments and the total liquidation of your assets should you fail to make payments on the mortgage.
Duties to your co-signer
It should go without saying, but unfortunately doesn’t, that the home buyer has an obligation to the person who co-singed the mortgage. The first duty is to ensure that the co-singer knows what he or she is getting into. This includes the responsibilities assumed as well as the time that the co-signer has committed to. Remember that your co-signer is assuming some of the debt for you in case you do not make payments; a default will result in the co-singer having to pay or in a knock on his or her credit score.
You should also remember that a co-signer will have the mortgage they signed included in their own credit history. This could mean that when it comes time for them to apply for a loan, they are rejected due to outstanding debts. Make sure that they know this; as long as you continue to make your payments any companies they are applying to will take into account that the debt is not their own and thus improve their probability to receive a loan.
Co-signing is a risky business that involves a certain level of trust. It is imperative that if you need to involve a co-signer in order to secure a mortgage that you take this trust seriously and commit to making the payments. A default could ruin not only your life but theirs as well, not to mention damaging the relationship; perhaps beyond repair.