What to Know Before Cosigning a Mortgage

What Is a Cosigner?

A mortgage cosigner is a person who agrees to share the financial responsibility of a home loan alongside the primary borrower. If the primary borrower fails to make payments, the lender can ask the cosigner to step in. Both parties are legally liable for the debt even if the cosigner doesn't live in the home or have ownership of the property.

Mortgage cosigning is most common among family members. For example, a parent may want to help their child qualify for a home loan with an affordable mortgage rate if they're new in their career, self-employed or recently divorced.

Co-Borrower vs. Cosigner

Co-borrowers and cosigners are both financially responsible for a home loan, but legal ownership is the key distinction between the two.

A cosigner won't own any part of the home and won't be listed on the title. A co-borrower, also known as a co-applicant or joint applicant, shares ownership of the home with the primary borrower. This type of arrangement is common among spouses, partners or friends who want to buy and live in a home together, although non-occupant borrowers can also be on a mortgage.

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How Does Cosigning for a Mortgage Work?

If a homebuyer doesn't qualify for a mortgage on their own, they may decide to add a cosigner with a steady paycheck, good credit and low debt-to-income ratio (DTI). These factors may help the primary borrower qualify because they give the lender assurance that someone will be able to make the mortgage payments. As the cosigner, you typically won't live in the home or share ownership with the primary borrower.

You and the primary borrower apply for the loan together. During the underwriting process, the lender reviews both of your finances to ensure you have adequate credit, enough income to cover the loan payments, acceptable DTI ratios and cash reserves.

If approved, you and the primary borrower sign the loan documents and agree to be responsible for the debt. The lender may provide you with a document called the Notice to Cosigner, which explains what happens if the main borrower doesn't pay on time or defaults. The mortgage appears on your credit reports as well as those belonging to the primary borrower.

Cosigner Requirements

The requirement to cosign on a mortgage can vary depending on the lender and the type of mortgage.

• Credit scores: You'll generally need to meet the minimum credit score requirements for the loan program and for the specific lender.
• Income: Lenders may not set a specific minimum, but you generally need enough stable income to cover your own debts plus the new mortgage payment if it becomes necessary.
• Documents: The bank will ask for copies of identifying documents, such as a government-issued ID or Social Security card, and financial records like tax returns and bank statements.

The financial institution may have additional requirements for you. For example, some lenders require the cosigner to be a close friend or relative of the primary borrower, such as a parent or sibling. Lenders may forbid cosigners who have a financial interest in the sale of the home, such as the home seller or a real estate agent.

Does Cosigning Affect Your Credit?

Because you're taking on financial responsibility for the loan, cosigning a mortgage can impact your credit as if you were taking out a mortgage for yourself.

• The hard inquiries associated with credit checks may hurt your scores a little.
• A new, large outstanding balance can also lead to an initial credit score dip.
• On-time mortgage payments can help your credit.
• Late payments or a foreclosure can hurt your credit.
• The mortgage can impact your credit for the lifetime of the loan.

The mortgage can affect your finances in other ways too. Another creditor may include the mortgage payments in your DTI ratio, even if you aren't making the payments yourself. An increased DTI may hurt your chances of qualifying for other loans and lines of credit.

What Are the Pros and Cons of Cosigning a Mortgage?

How to Cosign a Mortgage

If you've decided to cosign a mortgage, here are the steps you'll take:

• Discuss expectations and risks. Talk with the borrower about repayment. They should have a plan for covering monthly payments and ideally will have cash reserves in case of a financial emergency.
• Find a lender. The borrower will need to find a lender that accepts cosigners and review their specific requirements.
• Apply for the mortgage together. The primary borrower submits the application and includes your personal and financial information. The lender will review both applicants' credit, income, debts and assets.
• Sign the loan documents. If approved, you'll sign the promissory note agreeing to repay the loan if the borrower can't. This makes you legally responsible for the mortgage debt alongside the primary borrower.

Alternatives to Cosigning a Mortgage

If cosigning a mortgage isn't the right move for you, consider these alternatives:

• Help with the down payment: Giving the borrower money for the down payment can help the borrower qualify, reduce monthly payments and avoid private mortgage insurance (PMI). Many mortgage programs allow financial gifts from family members.
• Become a co-borrower: Joining the loan as a co-borrower allows you to help the primary borrower qualify for the loan while also securing your legal right to the property. This works well when both parties intend to have an ownership stake.
• Offer a family loan: Depending on your financial situation, you may be able to lend the borrower money for part or all of the purchase. If you go this route, it's important to formalize the agreement with a promissory note and repayment schedule.
• Pay down other debts: Some primary borrowers can't qualify because of a high DTI ratio and weak credit. In these cases, you could help by paying down their outstanding debts without the expectation of repayment. You'll need to consider tax implications before offering.

Frequently Asked Questions

The Bottom Line

While cosigners primarily benefit mortgage applicants when they have a steady income and low DTI, your credit scores will still be important. You can check your FICO^® Score^Θ from Experian for free to get a sense of where you're at right now. If you have time to prepare, you may also want to focus on getting your finances ready. Paying off other outstanding debts, increasing your income and improving your credit scores may make you more valuable as a cosigner.