My Answers for 5 Common Objections to Co-Signing a Mortgage

It can be challenging these days for young people to buy a home. A lot of young people are doing many of the right things, like managing their finances, and keeping their credit scores in the higher range. But student loan debt, and not yet being in their high-income earning years can hurt their chances. If they can’t show enough income, many young people won’t qualify for a home purchase.

That’s why co-signing is a key option to consider, especially for young home buyers. It can give them the boost they need to get them into a home they can grow into, and eventually have a family in.

Using a co-signer can take a buyer from denied to approved. It’s a creative strategy to use if you think you’re out of options, and I’ve helped many buyers go this route over the years. Still, like any major financial decision, it’s important that you know what you’re getting into and you don’t move forward with getting a co-signer blindly.

My Answers to the 5 Most Common Objections About Co-Signing on a Mortgage

Not everyone starts out planning to bring in a co-signer, but this option is one of the many creative solutions I offer in my toolbelt to help buyers get approved. It gives them a solution when they might not have otherwise qualified for a home purchase.

Here are a few concerns I often encounter when it comes to co-signing a mortgage:

1. “My credit score will affect my parents’ credit.” A lot of people who are thinking about adding their parents as co-signers are worried their lower credit scores could hurt their parents’ credit profiles. That’s just not true. The only thing that blends on the credit report is the one account for the home purchase. All other financial accounts are totally separate, and therefore, not affected.

2. “It will affect my parents’ debt-to-income ratio forever.” Another big concern people have about including their parents as co-signers is how it might impact their debt-to-income (DTI) ratio if they want to go buy a future home. The good news is co-signing is looked at as a contingent liability. This means that as long as the primary borrowers make their on-time payments (no more than 30 days late, for the most recent 12 months), that housing obligation can be omitted from the co-signer’s DTI.

One important caveat: The co-signers must not also be named on the bank account from which the mortgage payment is being made. If that’s the case, and it looks like there is blended money there, then it could be included in their DTI.

3. “I might miss a payment, putting my parents at risk.” If something happens where the adult kids run into hard times and can’t make a mortgage payment, of course that puts a burden on the parents. From my experience, this situation is rare when there’s clear communication and boundaries are set between the kids and their parents' ahead of time, before co-signing happens. One suggestion to prevent this: Make it part of the agreement that you’ll have at least 3 months of mortgage payments set aside in a savings account that’s difficult to access, and you agree not to touch those funds, except when your income takes a sudden dip. (And, you promise to refill the savings account within 3 months, anytime you’ve used funds from it.)

4. “My parents will co-own the home.” People get confused about ownership a lot with co-signing. The person (or people) who own the home are the ones who are on the property title, not the names on the mortgage. If the co-signer is added to the title, though—then yes, they have ownership in the home. If they aren’t on the title, they don’t own the home.

5. “I’m not sure how this works.” Adding a co-signer to the loan is simple, though it’s a big decision. It means you’ve made a financial agreement with someone based on a mutual relationship of trust. That person will be added to the application and underwriting process. The co-signer will be required to prove they have a documented relationship with the homebuyer. In most cases where buyers have included co-signers, it’s usually a parent. That said, grandparents, aunts, uncles, and even godparents can co-sign home loans. We're basically blending everybody's numbers together.

Co-Signer vs Co-Borrower—What’s the Difference?

A co-borrower shares property ownership (like two spouses on the same mortgage), and are jointly responsible to make payments. A co-signer is making a financial and legal commitment to take on the mortgage if the primary borrowers are unable to pay. Either way, if payments are missed, it impacts the credit of all involved.

When and Why Would a Buyer Need a Co-Signer?

So, who needs a mortgage co-signer? While there are many types of home loan programs aimed at first-time homebuyers, sometimes people just need that little boost to get them over the approval line because they can’t meet one of the key lender requirements.

The most common reason buyers use a co-signer is when they need help with their debt-to-income ratio (DTI). Some first-time homebuyers may be early in their careers, and they could be carrying other types of debt like an auto loan or student loan. So even if they’ve saved up a nice chunk for a down payment, have steady jobs, and have never made a late payment in their life, they could still be turned down for not meeting the DTI requirement. I know, it’s crazy, but that’s the reality.

By adding on a co-signer’s income as a backup plan, it takes the risk away from the lender and moves it onto the co-signer.

One thing to be aware of—getting a co-signer with a lower credit score won’t help. That’s because mortgage lenders base their decision on the lowest credit score among the people borrowing.

As a Buyer, Here’s What You Should Do Before Asking Someone to Co-Sign

Co-signing isn’t risk-free. So, make sure you’re comfortable with all the details before moving forward. The main risks I see are: putting your co-signer’s finances and credit on the line, and the potential to negatively impact your family and close relationships if things go wrong.

In an ideal scenario, which is what I’ve overwhelmingly seen, buyers appreciate their family members helping them out and clear boundaries are set before anyone moves forward on the loan. That’s why I always go through the process with the buyer and co-signer so they know what to expect.

3 steps we go over before the buyer and co-signer move forward:

1. Make the mortgage payment top priority. Buyers should make sure that they have the means to make their monthly payments, and set up autopay so they don’t accidentally miss a payment. Also, it’s worth repeating that I recommend a savings account with at least 3 months of mortgage payments is put in place before an agreement is made.

2. Be transparent. Some of my co-signers are a bit more regimented about their financial picture and their credit, and so they insist on setting up some kind of notification process for when the payments are made. It could be as simple as the homeowner sharing a screenshot by text message. Or, the buyer can share their loan app or login credentials so the co-signer can log in and make sure payments are up to date.

3. Make an agreement that the buyer will let the co-signer know immediately if any challenges arise. This gives the co-signer the chance to step in before their credit is harmed.

What Are the Co-Signer’s Responsibilities and Risks?

On the co-signer’s side, it’s important to understand the main risks you’re taking on.

Risk #1: If the homebuyer starts missing payments. Divorces and job layoffs happen, and if they happen to the family member you co-signed for, then what? Delinquent payments on their end can quickly tank your credit score and may force you into a situation where you have to assume the payments. Is that something you can live with? What is your contingency plan if something like that should happen?

Risk #2: Your future ability to borrow. As mentioned before, the easy way to remove this risk is to keep your name off the bank account used to pay the loan. This will keep that home loan out of any DTI calculation assuming the homeowner makes their payments on time.

Note: If you have plans to buy a home or property within the first 12 months of co-signing, it's probably best to say no.

Aside from the points mentioned above, the co-signer’s responsibilities mostly exist in the background on paper as long as the buyer follows through with their loan obligation.

So, You’ve Made Up Your Mind to Get a Co-Signer for Your Mortgage?

Here are the first steps to get started:

Dig into the details. If you want to be fully prepared when you co-sign a mortgage, start by asking the right questions. Sometimes, people will say they don’t care about the fine print because they’re on board with helping their loved one no matter what. But I still encourage them to get all the information they can because they won’t want any surprises. They should feel clear and confident in their decision.

Get some outside perspective. As a mortgage broker for over 22 years, and as someone who’s helped many buyers with co-signers on their loans, I’m here to answer all your questions and help in every way I can. I also recommend you consult with your accountant, financial planner, or attorney if you have concerns about what co-signing entails as the buyer or the person co-signing.

Discuss an exit plan. Co-signing doesn’t have to mean a 30-year commitment. In most cases, removing a co-signer will require a refinance. There’s also the possibility that some servicing companies are willing to basically re-underwrite and rework the loan to remove the co-borrower after a time period. It's not something that's ever written into a promissory note, so there's no way to guarantee this is possible, but it’s something you could explore.

What Should You Do if You Think You Can Go it Alone? Go for It!

The bottom line is that using a co-signer can be an excellent tool for borrowers who need some help on the DTI side of their application. When all other options have been reviewed, and a buyer just can’t get approved otherwise, bringing in a co-signer might be an option worth considering.

Not everyone wants to bring in Mom and Dad to help. They want to buy a home on their own, and I get that.

If you’re not sure whether you should get a co-signer, and want to see where you stand when it comes to buying a home, I’m happy to answer any questions you have. Get it touch at TomPessemier.com.