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Having trouble qualifying for a mortgage loan or worried you’ll be turned down for home financing because your credit is lacking? Consider adding a cosigner to your loan application, which can boost your eligibility chances.
A cosigner will share the responsibility of repaying your mortgage debt without having rights to the property.
This article will help you better understand what a cosigner is, their rights, advantages and disadvantages of having and being a cosigner, worthy cosigner prospects, and more.
What cosigning is and how it works
When you apply for a mortgage loan, the lender will carefully review your financial status and creditworthiness. But if your credit is poor or not well established, you’ll likely get turned down for financing.
Fortunately, there’s a way to improve your odds of getting a mortgage loan under these circumstances: Add a cosigner to the mortgage.
A cosigner is simply someone who agrees to share the responsibility of loan repayment with you, the primary borrower.
“When you cosign a mortgage, you are essentially vouching for the borrower’s ability to make payments, and you commit to making mortgage payments on their behalf if they fail to do so,” explains Carl Holman, communications manager for A&D Mortgage.
Signing on a mortgage loan as a cosigner, in other words, means you agree to repay the loan or take over payments if the borrower fails to pay.
Differences between a cosigner and a co-borrower
A cosigner has limited rights and privileges. This person is responsible for repaying your loan if you cannot, but they don’t own any portion of the home. You are not required to permit them to cohabitate within your home.
“They have no claim to the property’s equity or ownership,” notes financial expert Joseph Melara, owner of Residential Brokers.
This role differs from a co-borrower. The latter shares ownership of the property and is equally responsible for repaying the mortgage.
A co-borrower has the right to live within the home and is legally entitled to half (or their agreed-upon portion) of the proceeds if you sell the home.
» MORE: See today’s refinance rates
Pros and cons of getting and being a cosigner
Getting someone to cosign your mortgage loan offers several plusses.
“It can boost your chances of getting approved, securing better terms, and qualifying for lower interest rates – especially if the cosigner has strong credit,” Holman says.
On the other hand, if you don’t fulfill your responsibility as the primary borrower and stop paying your mortgage, that obligation will fall to the cosigner. This scenario will likely strain your relationship with the person and their finances.
The main benefit of agreeing to cosign a loan is that you can aid a relative or friend.
“Being a cosigner on someone else’s mortgage can be a noble act, helping a loved one realize homeownership and potentially benefiting your own credit if payments are made on time,” adds Holman.
But the downsides are significant. There’s always the risk the borrower may lose their job, mismanage their finances, and ultimately prove unable to repay their mortgage punctually or fully.
If that happens, it will fall on the cosigner to make regular mortgage payments, potentially draining their financial assets and causing relationship resentment.
The borrower’s tardy payments or non-payments can trigger late fees, significantly hurt the cosigner’s credit score, and harm their chances of getting approved for future credit accounts.
Keep in mind that being a cosigner can affect your credit for the lifetime of the borrower’s mortgage loan and for up to a decade after the loan is paid off or refinanced. If the borrower’s mortgage goes into foreclosure, that foreclosure will show up on the cosigner’s credit reports and impair their ability to secure future credit.
Good cosigner candidates
Think you need a cosigner? Give careful thought to whom you will ask for this task.
“Good candidates for cosigning on a mortgage are typically individuals with strong credit and financial stability. Lenders prefer cosigners who can comfortably take over the mortgage payments if needed. That’s why family members, such as parents or close relatives, are often considered because they have a vested interest in helping the borrower,” Melara points out.
Maria Zalessky, an attorney with Zalessky Law Group, echoes those suggestions.
“Parents, grandparents, and partners you are not married to but whom you also don’t want to be co-borrowers with are worth asking,” she recommends.
Effective cosigners often possess a robust credit history and strong credit score (typically at least 500 to 580 for FHA loans and a minimum of 620 for conventional loans), maintain steady income and employment, exhibit confidence in the primary borrower’s repayment capabilities, and are prepared and willing to assume financial responsibility for the mortgage if necessary, per Holman.
Be aware that many mortgage lenders and loan programs require the cosigner to be a close relative. Some lenders will not allow a cosigner at all.
The cosigning process
The cosigning process involves several key steps:
- The primary borrower applies for a mortgage loan and awaits the lender’s decision.
- The borrower seeks a cosigner if the lender requests one or the financing application is rejected.
- The borrower gets permission from an appropriate candidate to be a loan cosigner.
- The cosigner undergoes a credit check and submits requested financial documents, including proof of address, Social Security number, government-issued ID card, income tax returns, pay stubs, W-2 forms, bank statements, investment and retirement account statements, and more.
- The lender will review both parties’ information and weigh them collectively to make a lending decision.
- If approved, the mortgage loan is issued and both parties must sign the loan documents.
“It’s important to note that the cosigner’s role primarily provides assurance and typically does not involve contributing to the down payment or closing costs,” says Holman.
How to stop being a cosigner
There are two possible ways to have a cosigner removed from the mortgage loan.
“You can either request that your lender remove the cosigner from the mortgage, which usually requires demonstrating your ability to manage the loan independently. Or, you can attempt to refinance the entire mortgage, essentially starting a new loan without the cosigner’s signature,” says Melara.
Asking the lender to remove the cosigner is advised if that person is no longer financially stable enough to fulfill their cosigner responsibilities.
Refinancing can be a smart move if you can secure better financing terms—including a lower interest rate—and you are now earning more while enjoying an improved debt-to-income ratio.
The bottom line
If you need a cosigner, think long and hard about whom to ask and what you’ll need to do to ensure a good relationship with this person without impairing their finances.
“I recommend a thoughtful deliberation on its implications, transparent communication with the cosigner regarding financial responsibilities, mutual understanding of the risks and rewards, and seeking guidance from a financial advisor or attorney when necessary,” Holman suggests.