When buying a home, most of the questions you will receive from the lender will be about your income, credit, and debt. Your credit history and credit score will determine whether or not you can get a loan, but bad credit does not necessarily exclude you from mortgage approval. The main reason you need someone to sign the mortgage with you is if your credit score is low and you would want to take out a loan that the banks may not let you.
When you have someone cosign, the bank will let them give you a mortgage because they have a guarantee on the loan in case something happens to you. Most lenders will consider you for a mortgage even if your credit score is below 600, provided you have reasonable debt to income ratio and sufficient income to cover your payments.
Cosigning: Will It Help Me Build My Credit?
A co-signer is someone who agrees to pay back a loan if you default. When agreeing to a co-signer loan, you are lending them some of your good credit, and in return, they are helping you build your credit. As long as you can pay your part of the loan, then your credit report will reflect your positive payment history. Cosigning a loan can potentially be a beneficial relationship for both you and your co-signer, as long as you know what you are doing and commit to following the terms.
Building your credit can be tough, and it might not happen overnight. If you’re thinking about taking on a loan, such as a mortgage, a car, a student loan, or even a credit card, and need to build credit, then cosigning might be something you might want to consider. Cosigning a loan means signing on the dotted line to a loan on behalf of someone else, and if you default on that loan, then the lender can pursue you for the amount owed. That said, cosigning can help you build your credit over time, so it’s worth looking into.
What Are the Benefits of Cosigning for A Mortgage?
Cosigning can put the safety of your home at risk should you default on your loan. A co-signer means someone willing to take on liability for your debt as well as take on the responsibility of paying it back if you miss payments. The benefits of cosigning a home loan go beyond just the satisfaction of helping out a friend or family member. These same benefits may, in fact, help you qualify for a student loan, credit card, auto loan, or mortgage in the future if you help someone else out. The keyword here is “qualify”—if someone has bad credit, cosigning for them won’t necessarily help them qualify for a loan.
While you may know already that cosigning a mortgage isn’t actually the same as being responsible for paying it off in its entirety, if you’re helping a financially struggling family member or friend buy their first home, then it’s good to be aware of all the reasons why it might make sense for them to cosign.
What Are the Risks That Will Happen If You Cosign A Loan?
A mortgage is a long-term commitment, so naturally, you want a low-risk / high-reward option. Because of this, many people consider cosigning a loan or a mortgage for a family member or friend—especially with a child—to make sure their valuable assets are protected and that they can borrow money when needed. But, being a responsible co-signer comes with certain risks, especially if you decide to cosign a mortgage.
Here are some of the possible risks for cosigning a mortgage:
- It might affect your accessing your credit. While cosigning a mortgage isn’t likely to cause severe financial consequences, it will make it harder for you to qualify for other loans, such as car loans or credit cards. This is why it’s so important to weigh your immediate and long-term needs before cosigning on a mortgage.
- Your credit score is on the line here. Just as you check your credit score before you apply for a credit card or mortgage, you should do the same before you share a home with someone else. Asking someone to be a co-signer on your mortgage increases their risk because it’s essentially a loan to that person, so their credit score is used as a factor in calculating whether they should qualify for a mortgage or not.
- You became responsible for the entire loan amount even if you just cosign for it. One of the risks when cosigning for a mortgage is the added responsibility. When you cosign for someone, you’re essentially promising that the person will make payments on that loan, for further clarification discuss with a mortgage brokerage in your area. If this person doesn’t make these payments, you’re responsible for making them. This means you’ll need to come up with the money to pay off the loan or refinance it. However, if you’re the person cosigning, you made a promise to the person to cosign for them. Therefore, you’re responsible for making them pay up, or the bank will come after you.
- You can’t easily remove your name from being a co-signer. If you have a friend or relative who has gotten into trouble with debt, you may be able to help them get their finances back on track by cosigning for their mortgage. As a co-signer, you agree to pay the mortgage in its entirety if the borrower cannot. This can put a great deal of pressure on you since your mortgage is tied to the other person’s debt. And the risk isn’t worth it. Most lenders won’t accept co-signers who are unemployed or have low incomes since they may not be able to afford the repayments.
- A broken relationship and emotional damage. If you cosign a loan for a friend, family member, or colleague, it is critical that you understand the risks of doing so. While the chances of this happening are slim, understanding the risks can help you protect your credit. If you cosign a loan for a friend, family member, or colleague, it is critical that you understand the risks of doing so. While the chances of this happening are slim, understanding the risks can help you protect your credit.
- You can get sued. Cosigning for a mortgage can be a money-saving strategy for a new homebuyer, but it comes with risks. If a friend or a family member has bad credit or is otherwise unable to make the payments, you could be held responsible for the full mortgage debt. Plus, if the other person defaults on the loan, you could be sued.
- Not many people are aware that they can be held responsible for debts incurred by someone whom they have cosigned for a loan or mortgage. If you’re looking at your options, discuss them with a reputable mortgage broker like Highline Mortgage in the Kelowna area. This is particularly an issue if people cosign for a relative’s mortgage since lenders take cosigning as a sign that the co-signer will support payments and take responsibility for the debt when the primary borrower defaults. This is why it is important for people to consider all of the possible consequences of cosigning, including the risk of serious criminal history.
Deciding to cosign a loan with someone else is a big decision. Not only are you taking on the responsibility of paying off the debt if you don’t make payments, but you are also putting your name on loan. If this is something you are considering, make sure to follow a co-signer’s guidelines closely, and don’t be afraid to ask questions.