Risks of Co-Signing a Mortgage

Younger home buyers sometimes look to parents or grandparents to help them purchase their first home, especially with affordability woes in California. Just the same, a family member or loved one with poor credit history may ask you to help them qualify for a mortgage. With increasing home prices and interest rates posing challenges, a potential buyer’s income might not be sufficient to qualify for a mortgage on their own. If you find yourself in this situation, it is recommended you talk to a lender or financial planner, but let’s cover some of the basic areas of concern.

1. As a co-signer, you are 100% responsible for the full loan amount. If the person you co-signed for loses their job or can’t make payments, you are now fully responsible for that debt obligation.
2. Co-signing on a mortgage will impact your credit. Any delinquency or late payments will show up on your credit report and could impact you ability to obtain credit in the future. It may impact not on the amount of financing you qualify for, but also the interest rate as people with poor credit are seen as a higher risk to pay off their debts.
3. Co-signing will reduce your ability to obtain other financing. Even if mortgage payments are made on time and in full every month, the loan you co-signed for takes up part of your debt to income ratio and diminishes your ability to borrow additional money for your own purchases, whether that be auto, home, personal, business or student loans.
4. As a co-signer, you will be under the same scrutiny as the primary borrower in order to qualify for the loan. That means the lender will need your bank statements, tax returns, pay-stubs and more. Any existing debt you have will be considered in the loan approval process and your income to debt ratio will be combined with the income to debt ratio of the borrower you are helping. This will create a “blended ratio” that can help secure the mortgage in question.
5. Consider whether you are really helping the borrower. If they can’t make mortgage payments on their own without your help, is it appropriate to put your credit on the line? Does the primary borrower have sufficient income to make monthly payments? Is there job relatively secure? Do you have the capacity to make the full payment if the primary borrow can’t? These are all important questions to answer honestly and may lead to the borrower understanding they are better off in a smaller, less expensive home.

Hopefully these questions will prompt a transparent conversation between a buyer and the potential co-signer, leading to the best solution for all parties involved. If you have questions, let us help. Give Graham a call at 805-459-1865 for a no-pressure consultation.