Co-signing is a way to help a family member or a friend get approved for credit. When you co-sign on someone else’s mortgage you are effectively lending a portion of your credit and income to help someone else qualify. Here’s what co-signing means when it comes time to get a mortgage…
If you have a family member or a friend who has ever asked you to co-sign it’s because they don’t have enough income to support the payment obligation they are looking to apply for. Let’s say for example your brother is short in income $1,500 a month to qualify for his proposed $3,500 per month mortgage payment. You have the $1,500 a month of income that would help him qualify for the home purchase. Before you co-sign, know that you are as equally responsible for the mortgage payment as he is.
This means if the other party has agreed to make the mortgage payment and for whatever reason they fail to do, the responsibility of making that mortgage payment would fall on you and if a payment is missed it would hurt your credit as well. To get off a co-signed mortgage the property would have to be sold or the other party would have to refinance you off the obligation.
Following are some examples in situations to be aware of when you co-sign:
If you’re trying to buy a new house or refinance your mortgage and the other person makes the mortgage payment that you co-signed for they will need to provide 12 months of bank statements from an account that you are not on or 12 months of cancelled checks to show that they make the payment directly to the creditor and then that payment obligation can be omitted from your debt to income ratio. You heard that right, co-signing for someone else’s mortgage might impact your ability to buy your own house or refinance your own mortgage if it’s not done correctly.
To have the above scenario work and the other party is responsible for making the mortgage payment based on your agreement with them, they need to have a minimum of 12 months of mortgage payments with no lateness of any kind. If they have a delinquent payment in the last 12 months, no matter what the reason and it’s on your credit report, you will be hit with that payment obligation in your debt to income ratio and that will negatively affect your borrowing power for your home purchase or refinance project.
If you have enough income to support both the house payment that you are looking to apply for as well as the current one that you co-signed for then it becomes a non-issue; however, if you don’t have enough income to support both house payments that’s when the other party might have to refinance your name off their obligation or that loan would have to be paid off in full.
Co-signing can help a party purchase a house especially if it’s a short-term fix say one or two years and then the other party can refinance your name off the loan and off the title. Co-signing should be thought of as a temporary fix to help someone in a particularly challenging situation. Co-signing is permanent and can be used when necessary if the person that you are co-signing for is responsible enough to make that mortgage payment, so your credit and financial picture is never in jeopardy due to their own personal financial obligations.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.