Buying a house can be challenging these days, even if you do it in the most affordable way possible. Even if you spend years saving up your down payment, time the market perfectly, and finally track down your dream home, you may not qualify for a mortgage. In that situation, you’ll need a mortgage co-signer.
A co-signer is someone who essentially vouches for you with the bank. They don’t just put in a good word about your character — they actually sign for your loan along with you, putting their own credit on the line. If you default on the loan, they’ll face consequences alongside you — or even before you, since co-signers can face collections before the primary borrower.
Co-signing a home loan or other type of credit product is fairly common. Over a fifth of U.S. adults (21%) have cosigned a loan to help out a loved one before. Typically, these are parents helping their adult children; 29% of co-signers fit this profile. However, the risk is legitimate — of that 21%, a fifth (20%) said their credit score was damaged as a result and 18% said they lost money.
Let’s look at the risks and rewards of co-signing a mortgage for both parties.
In most cases, if you didn’t co-sign the loan for the primary borrower, they wouldn’t be able to get the loan at all. That’s a massive favor you’re doing for your friend or family member, so it’s reasonable to assume they’ll be appropriately grateful.
Mortgage qualifying standards are fairly strict, as they should be. In some cases, they might appear overly strict. For example, the primary borrower may have a great, steady income, but a spotty employment record or a mediocre credit score. Either of those could prevent them from qualifying for a mortgage, even though they have the financial means to make the payments. In a situation like that, a co-signer with a great credit score or a steady employment record could help them get over the hump.
A co-signer can also help the primary borrower qualify for a larger loan. Since you’re both co-signing, the lender will use your combined income to determine how much you qualify for, significantly expanding the options that the primary borrower could purchase. Of course, this scenario also comes with some obvious risks.
In some cases, the co-signer may not be strictly necessary. The primary borrower could qualify for some kind of mortgage, but the terms may be less than favorable. For example, the loan comes with a high interest rate or a large required down payment. Adding a financially stable co-signer to the equation could secure the best mortgage possible, with much better terms.
If you’re co-signing a mortgage for someone you’re close to, consider helping them save money wherever possible— for example, by suggesting they use an affordable low-commission agent to find their home.
The co-signer and the primary borrower aren’t necessarily joined at the hip in perpetuity. If the primary borrower files a form called a co-signer release, and the lender approves it, the co-signer can be released from their obligations.
But lenders don’t just rubber-stamp co-signer releases. They’ll closely examine your credit score, payment history, and finances, to make sure you’ve stayed current on your payments and have the means to make the payments yourself. The release will be approved only if the primary borrower checks all the boxes.
The co-signer can also be freed from their obligations if the primary borrower refinances, sells the home, or finds a replacement co-signer.
If the primary borrower fails to make timely payments, the co-signer will be just as responsible for the balance of the loan as if they were the owner. There’s no escape clause, and it won’t matter if the co-signer never set foot in or laid eyes on the home. If the primary borrower doesn’t make their mortgage payments, the co-signer will have no choice but to step in.
That’s a big responsibility, which is why experts suggest only co-signing a mortgage for someone you know very well and trust completely. Co-signers should also do some basic due diligence before they commit their financial well-being to a co-signing situation. Determine if the primary borrower actually has the means to cover the cost of homeownership and that their employment situation is stable.
Note that we didn’t say “the mortgage payments” — we said “the cost of homeownership.” That includes mortgage payments, insurance, utilities, HOA fees, and annual maintenance costs. Sit down, make a realistic, comprehensive budget, and have a frank conversation about their ability to cover those costs — not just for a while, but in perpetuity.
Co-signers may also want to ask for access to online mortgage statements, so they can monitor the situation independently, and keep their own line of communication open to the lender, so they can be notified immediately if a mortgage payment is missed.
Many co-signers think that because they have the exact same obligations and responsibilities as the primary borrower, they also enjoy the same benefits — i.e., joint ownership. But this isn’t the case. As the co-signer, your name will not appear on the home’s title, so you’ll have absolutely no claims to ownership. Even if the primary borrower skips town, you won’t be able to escape from your mortgage obligations by quickly selling the home to a cash buyer. Instead, you’ll be stuck making payments on a home that you don’t own and can’t sell.
There is a way to get your name on the title, though. Signing on as a co-borrower instead of a co-signer will get you joint property ownership. But keep in mind that this also comes with risks as well as rewards. If your name is on the home’s title, you share liability if someone is injured in the home, for example.
The co-signer is taking on a very large debt when they co-sign a mortgage. And because a big aspect of a credit score is debt-to-income ratio, simply co-signing for a home loan can negatively impact a credit score, since your income is staying the same, but your debt is significantly increasing. That’s true even if the primary borrower makes every single payment on time and pays off the mortgage early.
The bottom line is that co-signing a mortgage comes with considerable financial risk. Make sure you understand the potential benefits and drawbacks before you sign the paperwork— or you could be dealing with adverse consequences months or even years down the line.