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Co-signing a loan or mortgage for a friend or family member could be a great way of helping that person buy a home, or a car, pay for college or consolidate debts. But, you could risk damaging your credit score and relationship with that person if they fall behind on payments.
In this article, we’re going to answer some of your most important questions, such as:
Let’s dive in.
When you co-sign a mortgage, you promise to pay the loan if the primary borrower cannot make the payments.
The primary borrower may have a high debt load or weak, bad or insufficient credit history to get approved for a mortgage on their own. For example, a recent graduate who hasn’t had time to build enough credit. Or someone who has defaulted on loan repayments in the past.
Co-signing can help someone secure a mortgage they wouldn’t be able to on their own and may also open them up to better interest rates since they will benefit from your better credit score.
Of course, co-signing comes with significant risk because you will have to step in and make the payments if the primary borrower becomes unable to do so. As a result, co-signing usually only happens between close family members or trusted friends.
In addition to considering whether you should co-sign a mortgage, you will need to consider whether you can co-sign.
As a co-signer, you must demonstrate that you can comfortably make the payments on the co-signed mortgage on your own, in addition to your other monthly payments. This means you’ll have excellent credit and a high enough income to make all your payments without stressing your financial resource.
You can typically have up to 4 co-signers on a mortgage, which can help increase the chances of the mortgage being approved and reduce the risk on each co-signer.
There is no requirement for the primary borrower and the co-signer to be related. Anyone can co-sign a mortgage. But because of the significant risk, the co-signer is taking, co-signing is most common among family members.
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The short answer is yes.
But how it will affect your credit score depends on your situation.
When you co-sign a mortgage, the lender will assess your creditworthiness by reviewing your credit report. This inquiry is recorded on your credit report, which may knock a few points off your score. While this is not a big problem, it’s best not to go through credit checks with multiple lenders or seek other new loans (e.g., auto loan, new credit card) simultaneously, as these inquiries can add up.
The loan will appear on your credit report, increasing your apparent debt load. This is important to consider because lenders decide whether or not to lend you money by examining your debt-to-income ratio. So, depending on how much other debt you have, adding a co-signed mortgage to your credit report may lead lenders to believe you have more debt than you can handle, and you may struggle to secure additional loans or mortgages in the future.
If the primary borrower always makes timely and full payments, it will positively impact your credit report. However, suppose the primary borrower is late on payments or defaults on the mortgage. In that case, it can severely impact your credit score and seriously restrict your ability to obtain credit in the future.
One of the most common uses of mortgage co-signing is parents helping their children buy their first home. It is increasingly common for adult children to co-sign a mortgage for their parents.
If you’re financially stable and your parents are retired or on a low income, co-signing on a mortgage for them might be the best way to help them financially in their later years.
Co-signing can also simplify the transfer of assets when your parents die, as the title will instantly transfer to you.
But you must consider your parents’ ability to meet the monthly payments carefully. If they are retired, they will likely be on a fixed income with limited opportunities to increase their earnings if money becomes tight.
Getting on the housing ladder is getting more difficult for many young people. As a result, many people turn to their parents for help and ask them to co-sign on a mortgage.
As a parent, it is your instinct to help your child in whatever way you can. Co-signing on a mortgage could be a rewarding way to help them take advantage of historically low-interest rates and set them up for a financially secure future. If they’re currently one of the 52% of millennials still living in the family home, co-signing on a mortgage might be your best shot at becoming an empty nester.
However, as with any financial decision, there are downsides and considerations to bear in mind. The future is more uncertain for young people starting their careers than ever, so you need to consider your child’s ability to earn enough to meet their monthly payments consistently.
If your child has been refused a mortgage on their own, you may want to investigate why carefully. It might be that the bank knows something about your child’s finances that they are reluctant to tell you themselves.
You should think carefully before agreeing to co-sign on a mortgage for your child. If they default on the loan, the financial stress could cause your relationship to suffer.
Co-signing on a mortgage for someone you care about can be one of the most impactful ways you can help them get out of debt or build wealth. If all goes well, it can also help improve your credit score.
However, there are downsides. The additional debt burden may harm your credit score and reduce your eligibility for other loans or mortgages in the future. If the primary borrower misses payments, you will have to step in to make the payments, even if your financial situation has deteriorated since you co-signed on the mortgage.
And finally, if the primary borrower gets into financial difficulties and is unable to meet the payments, the pressure on you to pick up the slack could cause irreparable damage to your relationship with them.
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Whether you should co-sign on a mortgage for someone is an important decision that you should carefully consider before rushing into. You need to weigh the emotional obligation you feel towards that person with the financial risks that co-signing opens up.
If you want to help the person but aren’t sure whether co-signing is the best option, you should also consider other routes, including:
Is there a cheaper home that the primary borrower could get approval for on their own without requiring a co-signer?
The primary borrower may be impatient to get on the housing ladder, but if they waited a little longer to improve their credit score, would they be able to get a mortgage on their own?
A larger downpayment may increase their chances of securing a mortgage on their own and would be less stressful and risky for you than co-signing. So could you gift or lend them the money to help with the downpayment?