The actual act of cosigning on a mortgage doesn’t have much of an impact on your credit score. The payment history that comes later, though, can affect your credit. If the person who is mainly responsible for the mortgage defaults on payments, your score may be affected. Are you thinking about cosigning a mortgage? Let’s investigate how the relationship between cosigning a mortgage and credit score may impact you.
What is a cosigner?
A cosigner can be defined as the responsible party for the mortgage if the primary account holder neglects to make their payments on the loan. This functions similarly to being a cosigner on different types of loans or accounts. That’s what you may be signing up for if you cosign a mortgage. Cosigning a mortgage can help a close friend or family member with a low credit score secure a mortgage. It’s a way to make a difference in a loved one’s life and give them a better chance at achieving a major life milestone.
How does cosigning a home loan work?
The process of cosigning works much like a loan application for yourself. That means you’ll need to provide identifying information like your government ID and proof of address, such as a utility bill. The lender will also need verification of your relationship with the primary party taking out the mortgage. Many mortgage lenders may require a familial relationship for a cosigner. They also often require the cosigner to have a minimum income or proof of available funds.
You can expect to also show financial records in order to become a mortgage cosigner. These records often consist of:
- Verified income: You may have to provide pay stubs, W2 forms or other documentation to prove your income. Cosigners may be required to have a minimum income.
- Assets and debt: Lenders often request bank statements, investment account information and retirement account balances.
- Credit check. The lender will typically perform a hard credit check, which may impact your credit score.
Mortgage lenders usually check credit scores as part of assessing loan eligibility, including the credit score of a cosigner. Your credit score is a numerical representation of your credit eligibility. The credit scoring companies FICO® and VantageScore® calculate this three-digit number based on your credit history, which is your past credit behavior like paying bills and taking out new credit cards. Cosigners may be required to have a minimum credit score.
How cosigning affects your credit
Your repayment habits after cosigning a loan may affect your credit. Here are two instances in which your credit may be at risk as a cosigner:
- Late payments may appear on your credit report and negatively affect your score.
- Foreclosure on the cosigned account can show up on your credit history and impact your credit score.
Cosigning a mortgage: risks and benefits
There may be risks and benefits involved in cosigning for a mortgage. These pros and cons are parallel to those you may encounter when opening a credit line for yourself. Let’s summarize and review these for ease of comparison. The risks may include the following:
- Your credit score might be affected if the mortgage holder misses payments.
- Removing your name from a loan you cosigned could present a challenge.
- You have no ownership rights to the property even if you pay the entire mortgage.
The benefits of being a cosigner may involve:
- It can add to your payment history and credit mix, which may help boost your credit score.
- You can help someone in a fundamental way and possibly help improve their credit as well.
- It might assist someone in reaching a major life milestone: homeownership.
When you’re thinking about cosigning a mortgage and credit score consequences, there are both risks and benefits to think about. Keep in mind that your credit score can serve as a measure of your creditworthiness. So, anything that may impact it is worth some thoughtful consideration at the very least. A credit check can be a good place to start when making decisions about your credit. Chase Credit Journey® offers a free credit score check to look at where you stand without impacting your score.