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If you’re in a relationship with someone with less than ideal credit who wants to purchase a home, they may ask you for help getting a mortgage. If you have good credit, being a co-signer will help improve their approval chances. However, you need to weigh your options and decide if being a co-signer will be the best choice.
What is a Co-Signer?
When you co-sign a loan for someone else, you add your name, credit profile and financial information to their loan application. This will allow the lender to consider both individuals, not just your partner when making a lending decision. Co-signers are generally needed when someone is applying for a loan and they have poor or no credit. Adding a co-signer increases the chances of approval.
There is one big difference between being a co-signer for a loan and a joint signer. As a co-signer, you will not receive any money, you’re simply helping someone else gain access to a mortgage.
Benefits of Being a Co-Signer
The benefits of co-signing a mortgage for your partner are pretty simple. Without your help, they may not be able to purchase a home. By co-signing on their loan, you are helping them reach their dreams of home ownership.
Risks of Being a Co-Signer
If you choose to help out by co-signing a mortgage, there are risks you need to consider.
Your Credit is at Risk
When you become a co-signer, the loan and payment history will appear on your credit report. That means if there is a late payment during the life of the loan, it will show up on your partner’s credit report and be on yours. This can significantly impact your credit score. It’s also important to consider that when applying for the loan as a co-signer, the hard inquiry will also temporarily lower your credit score by several points.
You’re Responsible For the Loan Balance
If, for some reason, the person you’re co-signing for cannot continue making payments on the loan, you will be responsible going forward. Before you decide to co-sign for your partner, it’s important to understand their financial situation and if you could make payments on the loan if needed.
You May Have Issues Get Loans in the Future
When lenders assess potential borrowers, they look closely at your debt-to-income ratio. This is the percentage of your monthly income used to cover your debt payments. Even though the loan you’re co-signing will not be for yourself, it will still be considered your debt. If you want to purchase a home yourself or even a new car in the future, your debt-to-income ratio could make it more difficult.
It Can Put Strain on Your Relationship
Your partner might have a great track record regarding their financials. However, things can happen quickly. Maybe they suffer a job loss or have other issues that cause them to be unable to make payments. If you cannot cover the cost of payments yourself, your credit score will be impacted. All of this can lead to a strained relationship.
You Could Face a Lawsuit
If your partner stops making payments on their mortgage, you could face a lawsuit from the lender. Though there isn’t a set timeframe, typically, this would happen if payments haven’t been made on the account for six months or more.
It’s Difficult to Remove Yourself as a Co-Signer
Once you co-sign on a loan, removing yourself can be difficult. If you decide to remove yourself from the loan, the lender will first pull the credit report for the main borrower. They will need to assess their ability to make payments on their own. If the lender feels their creditworthiness is good, you could be removed from the loan. However, if the lender feels there is too much risk, they may require you to stay on the loan.
How to Protect Yourself When Co-Signing a Mortgage
When choosing to co-sign a mortgage for your partner, laying out the ground rules to ensure you’re as protected as possible is important. Having clear lines of communication is going to be needed.
It might be a good idea to put together a written agreement detailing your expectations and what will happen if they fail to pay the loan. The agreement should include the following details:
- Who will be making the monthly payments?
- What is the payment amount, and when is it due each month?
- What will happen if the borrower doesn’t make payments?
- Who will be responsible for legal costs if one of the borrowers needs to file a lawsuit?
- What must happen if the co-signer wants to be removed from the loan?
The Bottom Line
Co-signing a mortgage for your partner can help them purchase a home they might not be able to do alone. However, it’s important to consider all the potential risks before deciding to move forward.
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