Should You Co-Sign a Mortgage?

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If someone in your family is struggling to own a house in the present market, it could be tough to see all the obstacles that come across. Home prices are sky-high, and the cash required to buy is increasing, which could lead to a lot of stress and anxiety. Everyone may not have the assets, income, or even the credit score that is required to qualify for a mortgage and in such situations, it helps to have a co-signer on a mortgage to give the application a big boost. However, co-signing is a very big deal, and it is a very risky decision. Before you proceed, let’s see what it is to co-sign and whether you should take the risk.

The co-signer is someone who will vouch for the borrower in front of the lender. He will agree to make the payments in case the primary borrower is unable to. This act proves to the lender that the cosigner will not make such a huge commitment until and unless they have faith that a borrower will repay the mortgage. But a co-signer must do much more than vouch for the loved one. Besides that, they are also responsible for loan repayment if the borrower defaults.

What does it mean to be a co-signer?

If you co-sign the mortgage, you agree to take on the legal and monetary responsibility for the loan in case the borrower cannot make the monthly payments. When you co-sign, you will be evaluated just like you were the co-buyer of that home. But you will not have access to the property. The lenders who are not willing to take the risk for primary borrowers often like to take another look once they have a co-signer on their application.

What are the types of loans you can co-sign?

Each type of mortgage loan will have its own rules. So, when you apply for a mortgage, you will have to check whether it allows a co-signer or not. A co-borrower is commonly seen in FHA loans and conventional loans. The co-signer is usually a parent, friend, spouse, or a part of the family. However, no specified restrictions exist on who is eligible to co-sign on the mortgage. If you qualify financially, you will not have restrictions on whether you can sign on a conventional loan. Many lenders like to know your relationship with the primary borrower, and in many cases, they may not allow anybody with an interest in the house to be a co-signer for the mortgage.

Now, if the borrower wants to use the FHA loan to purchase a home, there can be a maximum of two co-signers, but they will have to undergo a little more scrutiny. Before you sign up for the mortgage, understand the different aspects of the loan, and if you intend to make the most of the reverse mortgage option, consider using a reverse mortgage calculator to get a better understanding. If you want an FHA loan and wish to have a co-signer, you must understand that there are more restrictions. For one, they should not have any financial interest in the house.

Their only responsibility for repayment will come after the papers are signed. Once the mortgage is closed, they will have to sign the loan documents. Like any other mortgage, the FHA will look at a co-signers relationship with the borrower and prefer a family relationship.

Things a co-signer should keep in mind

Co-signing will help a loved one, but it brings a lot of responsibility. If you want to co-sign, you will put your credit and name as a security for this mortgage. You need to ensure that you have complete confidence and faith in the borrower, and you must be aware of the terms of the mortgage. You must also think about the ways you can stay safe in case the borrower starts to default.

Ways to protect yourself: 

  • Remember to look out for any notices related to the loan so that you are aware of what is going on.
  • Do ask the borrower to give you complete online access to the mortgage statements.
  • Keep money aside in case you have to make a payment.
  • Stay in touch with the borrower at all times.
  • Ask the lender to inform you in case the borrower misses a payment.

Co-signing the mortgage is a lot of risks, and you need to discuss it with a financial advisor or a professional attorney before you make such a huge commitment. Helping a family member is indeed a good step and can help them financially and emotionally, but you need to know what you are getting into to be well-prepared.

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