August 14th, 2018 7:29 PM by Jackie A. Graves, President
a mortgage co-signer? This may indeed be the case if you've found that
perfect house, only to have lenders inform you that you don't qualify for a
having a co-signer mean for you as a home buyer, and what are the benefits and risks? Read on!
Why a buyer might
need a mortgage co-signer
you're eyeing may be just out of your price range, or perhaps
you have either a poor or no credit history. Even if you know how
to scrimp and save to make your monthly mortgage payments, the bank doesn't know how well you
pinch pennies. And being a financial institution, it needs a guarantee
that the money it lends a potentially risky borrower will be paid back. And
that's where a co-signer comes in.
What is co-signing
When you apply for a
mortgage, you become what's known as the "occupying
borrower." A co-signer—usually a relative or friend—is someone who
typically doesn't live at the property (aka a "nonoccupant
co-borrower." This person physically co-signs the mortgage or deed of
trust note with you, adding the security of their income and credit
history against the loan.
parties then become co-credit applicants, taking on the financial risk of
the mortgage together. That also means the co-signer essentially owns the
home right along with you, whether they live in it or not.
approval (and how large a mortgage you can get) hinges on your debt-to-income
(DTI) ratio, which is essentially how much money you have coming in
(income) compared with going out (aka your debts, including college loans, car
loans, and otherwise).
So how is the
DTI ratio calculated with a co-signer? In this case, it is usually
calculated by combining your income with that of your co-signer, which
should hopefully boost your overall DTI to a number the bank will approve.
Just keep in
mind that lenders will also examine your co-signer's debts, and factor that
into the picture as well to create what's called a "blended debt-to-income
ratio." So make sure you choose a mortgage co-signer with high income
and little debt to help offset your own numbers.
is a person who is taking on the financial risk of buying a home
right along with you. If something unforeseen happens and you're no longer
able to make mortgage payments, the co-signer will be contacted to pay up.
co-signing a loan, the risk falls on the co-signer," says Ray Rodriguez, regional
sales manager at TD Bank. If anything happens to the occupying borrower
that affects their financial health—think loss of job or severe medical
problems—"the co-signer is responsible for the payments."
And if you
fall behind on your loan, the full amount of the mortgage payments are reported
on both of
your credit reports, according to Rodriguez. Those late payments also
"get reported on the co-signer's credit report and could drop their credit
score, impacting their ability to obtain new loans for an auto or mortgage
of their own."
should be people rooting for you to pay off the loan without a hitch, not
someone with an interest in owning the house—a possibility if they take
over paying off the property. The co-signers to avoid are those who could make
a buck by facilitating this real estate transaction—think the home seller
or the builder/developer.
co-signer's income can offset certain weaknesses in the occupant
borrower’s loan application. But no co-signer can
wipe away significant hiccups in your credit history. And before
you put a co-signer at risk, make sure you as the occupant borrower
truly have the ability and willingness to make the mortgage payments and
maintain homeownership. In other words, don't take your co-signer for granted,
and lean on them only in the worst-case scenario.
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