If You Need a Co-signer: Things to Consider

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You may have the ability to make monthly mortgage payments, but lack the ability to prove it to a lender. If so, you might consider getting a co-signer to enable you to get a mortgage loan.

When you purchase a home to live in, you become an “occupying borrower.” In some cases a co-signer may be someone (such as a parent or child) who will live with you, but won’t be listed on the deed as an owner of the home. However, in most cases, a co-signer is a relative or friend who co-signs for the loan, but does not reside in the home.

Regardless of residency, both parties become co-credit applicants, and both take on the financial responsibility for making payments on the mortgage loan.

Co-signers and the debt-to-income ratios.

As you may know, your mortgage approval is determined in part by your debt-to-income ratio, or DTI. This is a comparison between the money you have coming in and the money you must spend each month to pay your debts, including car loans, student loans, credit card payments, child support payments, and your mortgage payment.

When you have a co-signer, the ratio will be applied to both of you, and the results will be blended. It will be no benefit to you to choose a co-signer with high debts relative to his or her income.

Co-signers and credit ratings.

Even if your co-signer has a large income and little debt, if his or her credit scores are low, it won’t be much help. Remember that when two or more people purchase a home, the bank typically looks most closely at the borrower with the lowest credit score.

The risk to the co-signer

This should be obvious…when you co-sign a loan, you take responsibility for the payments on that loan.

If something happens to the occupying borrower and he or she cannot or does not make the mortgage payments, the burden will fall on the co-signer. If you have a co-signer and fall behind on your loan, your credit score and your co-signer’s credit score will suffer equally.

The risks to you as the occupying borrower

Unfortunately, there are those who would co-sign your loan only to profit by your purchase. Think of the home seller or the builder/flipper/developer. Even more unfortunately, these are sometimes people who not only expect you to fail in making payments, but hope that you do, because they can pay off the loan, assume ownership, and sell the house yet again.

The best idea might be to wait just a bit…

Tighten your belt, pinch those pennies, pay every obligation on time, and get yourself in a position where you not only have a good down payment, but a credit score that will afford you the best interest rates available. Then choose a house with payments that fit comfortably within your monthly budget.

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