Getting a Cosigner for a Mortgage

An important aspect of a mortgage is assuring the lender that they are not at risk of losing money on the loan. In many cases, the guaranteed income or the credit history of the applicants is sufficient to ensure minimal risk. However, in some circumstances, lending institutions may reject the original applicants. This can occur if:

• The applicant has bad credit. Credit ratings are the first thing any lending company looks at when determining whether to extend a loan. A bad credit score will lead to an outright rejection, no ifs, ands, or buts. Bad credit occurs when an individual fails to pay off bills, including utilities, car payments, and payments on other loans (including credit cards).
• The applicant has no credit history. While it may seem hard to believe, there are people who have no credit score at all. If you are fortunate enough to be one of those people, it likely means that you have always lived within your means and been careful with your budgeting. Unfortunately, this may not be an advantage when it comes to securing a mortgage. Credit history is important because it shows that even if an individual overspends at times, they can still make payments. Since a mortgage involves a large sum of money, the bank needs evidence that you can manage debt and make payments, not just stay out of debt.
• The applicant needs more money than the bank is willing to lend, based on income. This scenario is becoming increasingly common among homebuyers. The real estate market has been hot in recent years, and as a result, house prices are higher than ever before. Many couples just entering the housing market are finding that homes are priced beyond their reach, especially for the kind of property they desire. As a result, they may not be able to secure the necessary funds to make a purchase.
• The applicant has too much outstanding debt. Lending institutions are wary of individuals who already have numerous loans. Car loans, student loans, medical bills, and legal fees can all be detrimental when applying for a mortgage.

Potential homebuyers who fall into any of the above categories may need to secure the help of a co-signer. Co-signers are common in many lending situations, as they guarantee that the lending institution will receive payments on the borrowed money.

Can You Get a Co-signer, and What Kind of Co-signer Is There?

Most people turn to relatives when they need a co-signer. Young people, in particular, often ask their parents to act as surety when seeking a mortgage. Naturally, a co-signer must trust the person seeking the loan, as they are guaranteeing that payments will be made to the lending company. In the event of a default, the lending institution will turn to the co-signer to ensure that the money is repaid.

Typically, a co-signer can only help increase the amount of money a potential buyer can receive for the mortgage. In other words, a co-signer cannot help overcome credit issues. Lending agencies always use 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 different for individuals with no credit history, as the issue is not the ability to pay but the availability of funds. In this case, a co-signer can help establish that credit is available. Keep in mind, however, that many institutions will not allow a co-signer on a mortgage unless they are also an occupant of the property being purchased.

Some companies act as co-signers, but these are typically loan companies that help secure loans from other sources. If you are desperate enough to use one, be prepared for very high interest payments and the potential liquidation of your assets if you fail to make mortgage payments.

Duties to Your Co-signer

It should go without saying, but unfortunately, it doesn’t, that the homebuyer has an obligation to the person who co-signed the mortgage. The first duty is to ensure that the co-signer understands what they are getting into. This includes the responsibilities they are assuming and the amount of time they are committing. Remember that your co-signer is assuming part of the debt for you in case you fail to make payments; a default will result in the co-signer being responsible for the debt or having their credit score affected.

You should also remember that the co-signer’s credit history will include the mortgage they signed. This could result in the co-signer being rejected for a loan in the future due to outstanding debts. Make sure they are aware of this. As long as you continue to make your payments, any company the co-signer applies to will consider that the debt is not their own, which will improve their chances of securing a loan.

Co-signing is a risky business that involves a significant level of trust. It is crucial that if you need a co-signer to secure a mortgage, you take this trust seriously and commit to making the payments. A default could ruin not only your life but also the co-signer’s, potentially damaging the relationship beyond repair.