Is It Smart (Or Stupid) To Co-Sign On A Mortgage?

Is It Smart (Or Stupid) To Co-Sign On A Mortgage?

Should you cosign a mortgage loan for family or friends?

WHAT IS "CO-SIGNING" A MORTGAGE?

To co-sign a mortgage is to put your name on a mortgage as a guarantee against a loan's primary borrower failing to keep up with payments.

As a co-signer on a mortgage, you're committing to another person's financial obligation.

However, in today's mortgage environment, the need to co-sign is practically nil. There are an abundance of low- and no-down payment mortgage options in today's market for buyers of all credit types; and, current mortgage rates are so low that the hurdles to homeownership have dropped.

Plus, with mortgage lenders loosening loan guidelines nationwide, more mortgage loans are getting approved than during any period this decade.

It's not that co-signing is a bad idea, per se -- it's just that co-signing on a loan may be unnecessary for your particular mortgage situation.

The number one reason to add a co-signer to your mortgage is to qualify for a loan that you might otherwise not get.

This might mean getting access to lower mortgage rates, a higher loan amount, a special loan program such as the Home Ready™ mortgage, or all of the above.

In a best-case co-signing scenario, the primary mortgage borrower gets approved for their "best loan possible" with the co-signer's name attached.

Then, at some point in the future, the loan is refinanced into the primary borrower's name solely, which frees the co-signer of their financial obligation to the mortgage.

During this co-signed period, the primary borrower makes their mortgage payments on-time; and, because a co-signed mortgage shows up on the credit reports of both parties, the co-signer doesn't have a need to apply for its own mortgage.

A co-signed mortgage can be refinanced as few as 90 days after closing.

CO-SIGNING A MORTGAGE: YOUR WORST-CASE SCENARIO

The worst-case scenario on co-signed loans is the reason why co-signed mortgages get a bad rap.

Because both parties are equally obligated to the loan and the lender, a missed mortgage payment damages two people's credit -- not just one. Your credit score can drop more than 100 points for an event like that.

Missing a second mortgage payment would be even worse. And, as a co-signer, you likely wouldn't know there's a problem:

You're not the one writing monthly checks to the lender

You're not the one the lender calls when there's a missed payment

You're not the one who gets the notice when the loan goes into default

As a co-signer, the primary borrower's default becomes your default, too, and that foreclosure remains on your credit report for up to 7 years.

Now, there are circumstances in which the lender will waive the foreclosure waiting period, but a "co-signed mortgage" isn't one such circumstance.

THE "NON-OCCUPANT CO-BORROWER" OPTION

If you're thinking of doing a mortgage co-sign but are nervous about it, consider the "non-occupant co-borrower" option.

A non-occupant co-borrower is a person who is co-borrowing on a home, but not living in it. Non-occupant co-borrowers are a step above co-signers -- they're "partners" in the home's ownership.

Mortgage rates for loans with a non-occupant co-borrower are typically higher than rates for a co-signed mortgage, but to the secondary party, being a non-occupant co-borrower can feel a lot safer.

As a non-occupant co-borrower, you get the same notices as the borrower so you know if they're not paying on time; and, you put yourself in position to force a home sale if the primary borrower is not fulfilling their duties to your arrangement.

When you apply for your mortgage, just tell the lender that you'll be using a non-occupant co-borrower on the loan. Your lender will know what to do.

ALTERNATIVES TO CO-SIGNING A MORTGAGE

For some, the idea of co-signing or joining a loan application as a non-occupant co-borrower will seem frightening.

That's okay because, in today's mortgage market, you may not need to co-sign on a mortgage at all.

In addition to an abundance of low- and no-down payment loans available for today's buyers of homes, there are down payment and closing cost assistance programs to help first-time home buyers and other home buyers get access to mortgage credit.

Any of the following could be a viable substitute for a borrower in search of a mortgage co-signer

Zero-down government loans

Down payment assistance from a family member

Low down payment mortgage loans

The Home Ready™ mortgage loan

A "family mortgage"

The above programs address a wide-range of home buyer needs including help for those with little or no money for a down payment; with low-to-moderate income levels; with a "thin" credit file; and, with a few blemishes against their credit report.