We’ve all heard of the term co-signer, but what does it mean, and how can it serve you in purchasing a home? For the right situation, a co-signer can aid in securing a home loan for a purchaser so that he/she can move forward from renting and into home ownership. Here’s what you need to know.
What is a co-signer?
Let’s start with what a co-signer is not. A co-signer is not a good character reference. Usually, a co-signer is a family member or close friend who co-signs on a loan, agreeing to be equally legally responsible for repaying the loan. If the first borrower does not make the monthly mortgage payment, the co-signer is responsible for those payments. A co-signer is just another borrower on the loan. Their financials are factored into the loan determination for the ability to pay back the amount owed. A co-signer usually has a good credit score that reflects their good financial standing and may also have assets that can strengthen the application.
When is it appropriate to involve a co-signer?
A co-signer is typically needed when the primary borrower does not meet certain qualification requirements set by the lender. In most cases, the borrower’s debt-to-income ratio is higher than allowed, and a co-signer can help bring that in line. We also see where the co-signer helps strengthen the application by bringing more assets to the table.
What are the responsibilities of the co-signer?
The responsibilities of the co-signer are the same as any other borrower. By co-signing on a mortgage, the co-signer states that they acknowledge that they are equally responsible for making the monthly mortgage payments. The co-signer’s financials are required for the loan documentation to confirm they qualify for the loan with the other borrowers.
What are the rights of the co-signer?
The cosigner will have the same rights to the property as any other borrower. Their name will be added to all mortgage documents and to the title and deed to the property.
What are the effects of serving as a co-signer?
Serving as a co-signer can impact your credit score positively or negatively. If payments are not made timely on the loan, the co-signer’s credit will receive a negative strike. If timely payments are made, the co-signer’s credit may experience a positive perk, showing a positive payment history. Another item worth considering is that co-signing will affect your DTI (debt to income) ratio and could negatively impact the co-signer should they require a loan of their own. It’s also worth stating that once the borrower is in a sound financial place, they can refinance the loan so that the co-signer can be released from the obligation. This is something worth revisiting 3-5 years into the loan. It’s best to let the borrower gain traction and build their credit to good standing and then refinance to get the co-signer off the loan.
Co-signing has its place and can serve the purpose it’s meant for. Are you wondering if it’s something that could benefit your home purchasing goals? We invite you to have a discussion with one of your local BankSouth Mortgage Loan Officers.