Bad credit. Insufficient income. Inadequate down payment. These reasons – and many more – can stand in the way of getting approved for a conventional home loan.
Many would-be homeowners often turn to others as co-signers in order to get approved for the mortgage they so desire.
Whether you’re just starting your career and are moving out of your parents’ home for the first time, are self-employed and don’t have tax returns to fully reflect your actual income, or are in some other type of financial predicament that is affecting your ability to get approved for a mortgage on your own, having a willing co-signer may be just what you need to be qualified for a home loan.
But before you add a co-signer to your mortgage, there are a few things that you both should know first before making such a huge commitment.
Two Types of Co-Signers
There are two types of co-signers who can get in on the mortgage:
1. Occupant co-signer – These are co-signers who physically live in the home, such as parents or other extended family members. Lenders will want to closely analyze the location and cost of the current property, and will also make post-closing occupancy checks to make sure they’ve actually moved into the house.
2. Non-occupant co-signer – These are co-signers who do not and will not live in the home, and are more common than occupant co-signers.
Co-Signers Versus Co-Borrowers
It’s common to confuse “co-signer” with “co-borrower,” but in the eyes of the lender, they’re two different things.
Co-signers take on the financial liability of the mortgage if primary borrowers aren’t able to fulfill their obligation. Despite the fact that co-signers might have to pay for the mortgage, they don’t actually have any security interest in the property. Depending on how the contract is worded, co-signers may not be able to take over the home securing the mortgage if they end up having to pay the loan.
Co-borrowers, on the other hand, have ownership in the property securing a loan. They must sign the mortgage papers and assume liability for repaying the loan if the primary co-borrower doesn’t.
Co-Signers and Title
Generally, co-signers are not on the title of a property, which makes this decision a potentially risky one. Co-signing comes with all of the responsibility of having to pay the loan, but with none of the benefits of ownership.
As stated above, co-borrowing works somewhat differently. If the borrowers take title as joint tenants, both occupant and non-occupant co-borrowers will retain equal ownership to the home. On the other hand, if the borrowers take title as tenants in common, both occupant and non-occupant co-borrowers are free to define their ownership share of the property.
Credit Risks For Co-Signers
It’s no secret that homeowners who are not able to make good on their mortgage payments should expect their credit scores to be hit hard. Even one missed payment can slash huge points off of their scores.
But the credit scores of co-signers who are on title will also be negatively affected, even though they never intended on having to contribute to mortgage payments. Since they are considered co-signers, they are technically responsible for any missed mortgage payments.
The responsibility to make payments on time as per the mortgage contract is still 50/50 between both parties. So if the occupant co-borrower misses a payment, the co-signer can expect a ding to their credit as well.
Co-Signers’ Borrowing Power Can Be Affected
If there are any missed payments on the mortgage, they’ll not only be documented in the occupant co-borrower’s financial history, but also on the co-signer’s. That means the co-signed home loan can count against co-signers when they try to qualify for any type of personal loan in the future.
Ownership Interests of Co-Signers
A mortgage is a legal and binding contract, so any person who enters it – including the co-signer – is personally obligated to honor its terms if the primary borrower misses the monthly payments. Despite this legal obligation, co-signers often have no ownership interests in the property purchased by the primary borrowers. The house basically acts as security for the mortgage, and co-signers remain liable for its payments even if occupant co-borrowers don’t keep up their end of the bargain.
At the end of the day, co-signers are basically agreeing to make the mortgage payments if the occupant co-borrowers don’t. If you need a co-signer to qualify for a mortgage, make sure that all of the legal responsibilities are fully communicated and understood.