Problems With a Co-Signer on a Mortgage
- When you default on your mortgage, your lender can foreclose on your home, so the risk of losing your home should deter you from defaulting on the debt. However, a co-signer has no ownership stake in your home and therefore does not have to worry about finding somewhere else to live in the event that the loan goes into default. With the exception of government-backed loans, few lenders allow people to co-sign on a loan unless they actually own the property. Therefore, while you may have a willing co-signer, finding a lender willing to accept a co-signer may prove more difficult.
- A lender can decline your loan application on the basis of your low credit score or because you do not have enough income to qualify for the loan. Adding a co-signer may resolve one of these issues, but a co-signer with good credit but a high debt level may actually hurt your application. Likewise, a co-signer with lots of income and minimal debts can only help your application if that cosigner also has good credit. Remember that your lender considers the co-signer's other debts as well as your mortgage when assessing your application, so finding a qualified co-signer often proves difficult.
- If you co-sign on someone else's mortgage, that mortgage payment shows up on your credit report. The next time you apply for credit, prospective lenders must take that payment into account as part of your debt-to-income ratio. Even if the principal borrower makes the monthly payments, if a debt appears on your credit report, the lender works on the basis that you are responsible for making that payment. Unless you are a very high earner, that mortgage could prevent you from qualifying for car loans, mortgages or even credit cards in the future.
- According to the terms of a mortgage document, the signer and co-signer are both responsible for making monthly mortgage payments. Some people co-sign on loans for family members on the basis that the family member will eventually take sole responsibility for the payments. However, such agreements have no legal basis and if your relative never gets a job or never gets that anticipated pay raise, you may find yourself having to keep making those mortgage payments for the entire 30-year mortgage term. If you choose not to, while you do not stand to lose your home, the foreclosure could damage your credit score and make it hard for you to borrow in the future.