Co-signing for a mortgage: What borrowers and co-signers need to know

Quick insights

• Co-signing can be a powerful way to help achieve homeownership, foster financial independence and strengthen a relationship through shared goals.
• Co-signing a mortgage means you are legally responsible for the loan, potentially impacting your financial situation if the borrower defaults.
• Before co-signing, ensure you meet the lender’s requirements, including credit score, income and possibly proof of relationship to the borrower.

Co-signing a mortgage loan can seem like a normal part of homebuying. For example, a parent may eagerly co-sign a child’s mortgage, wanting to help them buy their first home. If the child falls behind on payments, however, the parent would be financially responsible. This is just one scenario that demonstrates the importance of both parties knowing what’s involved in co-signing a mortgage.

What is a co-signer on a mortgage?

A mortgage co-signer is a person who agrees to take responsibility for repaying a mortgage loan alongside the primary borrower. Due to the co-signer’s credit history and income being considered in the application process, this could help the borrower qualify for the loan or secure better terms. If the primary borrower defaults, the co-signer is legally obligated to cover the payments.

Why would someone need a co-signer on a mortgage loan?

There are several reasons why someone might need a co-signer on a mortgage loan:

• High debt-to-income ratio: A high debt-to-income ratio can make it difficult to qualify for a mortgage. A co-signer can improve the overall financial picture.
• Limited income: If the primary borrower’s income is too low to meet lender requirements, a co-signer with a stable income can strengthen the application.
• Lack of down payment: Some lenders may require a larger down payment. A co-signer can provide additional financial security, making the loan more attractive to loan providers.
• Family or relationship support: Sometimes, a family member or close friend co-signs to help a loved one achieve homeownership, providing both financial backing and emotional support.

In each of these scenarios, a co-signer can enhance the chances of mortgage preapproval. However, it’s important for both parties to fully understand the responsibilities involved.

Mortgage co-signer vs. co-borrower

A co-signer agrees to take responsibility for the loan without having ownership rights to the property, primarily providing a financial safety net for the primary borrower. In contrast, a co-borrower shares both the responsibility for the loan and ownership of the property, making them both equally liable for payments and benefits. Here are the key differences between co-signer and co-borrower:

Ownership

• Co-signer: Has no ownership interest in the property.
• Co-borrower: Shares ownership of the property.

Financial responsibility

• Co-signer: Legally responsible for the debt if the primary borrower defaults, but not involved in the property management.
• Co-borrower: Jointly responsible for the mortgage payments and loan obligations.

Credit impact

• Co-signer: Missing loan payments can impact their credit score.
• Co-borrower: Missing loan payments can impact their credit score.

Income consideration

• Co-signer: May not have to demonstrate income to qualify for the loan.
• Co-borrower: Their income is considered in the mortgage application, potentially improving approval chances.

Mortgage co-signer responsibilities and rights

Here are some responsibilities that come with co-signing a mortgage loan:

• Loan repayment: If the primary borrower defaults on payments, you are responsible for repaying the loan.
• Credit impact: Your credit score will be affected by the mortgage. Missed payments can negatively impact it.
• Financial oversight: It might be a good idea to monitor the primary borrower’s payment habits to prevent defaults.
• Communication: Open communication regarding the mortgage may help avoid misunderstandings and greater issues that affect repayment.

Co-signer requirements for mortgage

There are specific requirements that must be met before you can co-sign a mortgage such as credit score, debt-to-income ratio, income and citizenship. By meeting the necessary criteria, cosigners can effectively support primary borrowers in achieving their homeownership goals while protecting their financial interests.

General requirements

• Credit score: Usually, the minimum credit score to co-sign on a mortgage is around 620, though some loan providers may allow lower scores for certain loan types.
• Debt-to-income ratio: Loan providers typically prefer a debt-to-income ratio below 43%. This ratio considers both the co-signer’s and primary borrower’s debts relative to their income.
• Income: Co-signers must demonstrate a stable income, which may be evaluated through pay stubs, tax returns or bank statements.
• Citizenship: Most lenders require co-signers to be U.S. citizens or permanent residents.
• Credit history: A strong credit history generally helps with loan qualification. Lenders typically look for a track record of timely payments and responsible credit use.

Specific loan type requirements

• Co-signer requirements for conventional loans: The requirements have similar credit score and income criteria as general requirements. Co-signers can be family members or friends, and their income can help meet the loan’s debt-to-income ratio.
• Co-signer requirements for FHA loans: Co-signers may qualify with lower credit scores. However, they still need to provide proof of income and meet any debt-to-income ratio limits.
• Co-signer requirements for VA loans: While the VA doesn’t require a co-signer, if one is used, they must meet credit score and income standards. Co-signers are often required to be veterans or active-duty servicemembers.

Benefits of co-signing a mortgage

Co-signing a mortgage can be a major financial decision, but it also comes with several potential advantages for both parties involved. Here are some potential benefits to think about:

• Improved loan approval chances: A co-signer with a strong credit history can help the primary borrower qualify for a mortgage that they might not secure on their own.
• Better interest rates: Co-signers can enhance the overall creditworthiness of the loan application, potentially leading to lower interest rates.
• Increased loan amount: With a co-signer’s income considered, borrowers may qualify for a larger loan amount, allowing them to purchase a more suitable home.
• Building credit: Co-signers can help the primary borrower build or improve their credit score by ensuring timely mortgage payments, which will positively affect the co-signer's credit if payments are made consistently.
• Support for family or friends: Co-signing can be a way to help support loved ones, helping them achieve homeownership and hopefully financial independence in the long run.
• Shared responsibility: While the chief borrower is primarily responsible for the loan, having a co-signer can alleviate some pressure, knowing there’s additional support in case of financial difficulties.

Risks of co-signing on a mortgage

Co-signing a mortgage can seem like a helpful gesture to someone you care about, but it carries significant risks. Here are some potential pitfalls:

• Financial responsibility: The co-signer is legally responsible for the loan. If the borrower defaults, the co-signer must make the payments, which could strain their finances.
• Credit score: Any missed payments or defaults will negatively impact the co-signer’s credit score, making it harder for them to secure their own loans in the future.
• Relationship strain: Financial obligations can lead to tension or conflict between the co-signer and the borrower, especially if payment issues arise.
• Limited control: The co-signer typically has no say in how the mortgage is managed or decisions made regarding the property, despite being financially liable.
• Tax implications: Co-signers may face tax implications related to the mortgage, as they are responsible for any interest payments that could potentially impact their tax situation. It may be helpful to seek advice from a tax professional.

Can a co-signer be removed from a mortgage?

Yes, a co-signer can be removed from a mortgage, potentially through any of the following:

• Refinancing: The borrower can refinance the loan in their name only, paying off the original mortgage.
• Loan modification: Some lenders may allow a modification that removes the co-signer, provided the borrower can demonstrate financial stability.
• Selling the property: Selling the home pays off the mortgage and eliminates the co-signer’s liability.

Consult with a lender to understand their specific policies and requirements for removing a co-signer.

Alternatives to co-signing a mortgage

Yes, many borrowers with a lower income can take advantage of affordable homebuyer programs. These may require you to put a certain amount down on the property, take a class on homebuying or purchase mortgage insurance. Often, more resources exist for first-time homebuyers, though you may qualify if you haven’t owned a home or held a mortgage for several years.

Government programs such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans may help some borrowers buy a home. Some of these allow borrowers to accept gift funds that can increase or be used for their down payment. Some states also have housing assistance programs which may help individuals and families qualify for a loan on a primary residence.

To learn more about your options for a home loan, speak to a Home Lending Advisor. You can also suggest to the borrower that they apply for a mortgage and determine if they’re eligible for more traditional options before you decide whether co-signing is the right step for you to take.

FAQs about co-signing for a mortgage

If you’re considering co-signing a mortgage, here are some frequently asked questions that can help clarify your role:

FAQs for borrowers

Can you have a co-signer on a mortgage?

Yes, you can typically have a co-signer to help qualify for a mortgage, but it also depends on the mortgage product.

How long does a co-signer stay on a mortgage?

A co-signer stays on the mortgage until it is paid off, refinanced or removed through a loan modification.

How to remove a co-signer from a mortgage?

You can remove a co-signer through loan modification, refinancing the mortgage or selling the property.

How does co-signing a mortgage work?

A co-signer agrees to take responsibility for the loan, helping the borrower qualify for better terms.

Can you have more than one co-signer on a mortgage?

Yes, you can have multiple co-signers if the lender allows it.

Does having a co-signer help with mortgage?

Yes, a co-signer can improve your chances of approval and potentially secure better interest rates.

FAQs for co-signers

Can I co-sign a mortgage if I already have one?

Yes, you can co-sign a mortgage even if you already have one, as long as you meet the lender’s requirements.

Can anyone co-sign on a mortgage?

Usually, a co-signer must have good credit and sufficient income. They often need to be a family member or close friend.

Does co-signing a mortgage affect my credit?

Yes, co-signing affects your credit score since you’re legally responsible for the loan.

What do you need to co-sign a mortgage?

You need a good credit score, stable income and possibly proof of your relationship with the borrower.

Can someone with bad credit co-sign a mortgage?

It’s challenging, as lenders prefer co-signers with strong credit profiles.

Is it a good idea to co-sign a mortgage?

It could be beneficial, but it comes with risks. Weigh the financial implications carefully.

Can I remove myself as a co-signer?

Yes, but it usually requires loan modification, refinancing the mortgage or selling the property.

Will I have ownership of the property if I co-sign?

No, you will not take on ownership if you’re only a mortgage co-signer and not an actual co-borrower.