What you need to know before cosigning a mortgage loan

A mortgage cosigner takes on the responsibility of ensuring a mortgage loan is paid. Some borrowers need help from a more financially secure cosigner in order to qualify for a mortgage, and those who help out should understand exactly what they're getting into.

A cosigner can be anyone who promises to take on the responsibilities of paying the loan if the other signers default. When mortgage qualifications are analyzed, the lowest credit score from all the applicants may be used. For that reason, a cosigner isn't usually valuable for their credit. Much of the reason for having a cosigner is because the borrower doesn't have enough income, or has a debt-to-income ratio that’s too high to qualify for a mortgage on their own.

Mortgage cosigners may be parents who want to see their adult children living comfortably in a house. In some cases, they're occupant co-signers who will also live in the house.

Cosigners are slightly different from co-borrowers because they don't have an ownership interest in the property. Not all lenders allow co-signers. 

What are my responsibilities as a cosigner?

Your signature as a co-signer on a mortgage note means you agree to pay off the loan or take over the payments if the borrower stops paying. This can be a big responsibility if you don't have the financial flexibility to take on the full payment.

If the mortgage amount is not paid on time each month, a few things can happen:

• Your credit report could reflect delinquent payments.
• You’d have to pay for late fees that result from the late payments.
• If the mortgage goes into foreclosure, your credit record will show a foreclosure, which could impact your ability to obtain  loans in the future.
• Your credit score may drop which could affect the interest rates on your future loans.

You’re also taking on a significant debt, which could lower your credit score and impact your own debt-to-income ratio. You may decide not to cosign if you’re planning to borrow money yourself in the near future, as the added obligation could impact your ability to obtain a loan.

What information do I need to provide in order to cosign?

Depending on your lender's requirements you’ll be treated the same as any other loan applicant and, you may need to provide several types of documentation, including:

1. Identification

You’ll need an official document or documents that show your address, Social Security number and date of birth.

2. Financial records

To qualify as a cosigner, you’ll need to provide financial documentation with the same information needed when you apply for a loan. This may include:

• Income verification. You may need to provide income tax returns, pay stubs, W2 forms or other documentation.
• Debts and assets. Your lender may request bank statements, information about your investments and retirement account balances.
• Credit verification. The lender will check your credit report and credit score. This hard pull could impact your score.

Your lender may require other paperwork to confirm your income and ability to pay the loan amount.

3. Proof of relationship

It may also be necessary to prove your relationship to the borrower. Some lenders and lending programs require the cosigner to be a close family member, like a parent, grandparent or sibling. This helps prevent anyone with an interest in selling the property, like a builder or a real estate agent, from having control over the deed and title.

How will cosigning a mortgage affect my finances?

If the borrower on the loan makes payments on time, you may never notice that you have an additional financial obligation.

However, if they make late payments or skip them, you’ll see that reflected on your own credit report. A single late mortgage payment could lower your credit score, so it's nothing to ignore. That can move you down to a lower credit tier, such as from excellent to good, and make it harder to get the best interest rates on credit cards, auto loans and other money you borrow. You may even see rates on your existing accounts edge upward if your credit score takes a turn for worse.

In the short term, your additional financial obligation could alter your debt-to-income ratio. This will be a concern primarily if you plan to borrow money for your own real estate or vehicle purchase.

Should the borrower stop paying, and you’re unwilling or unable to make payments, the default may eventually show up as a foreclosure. This significant black mark on your credit may dramatically impact your credit and reduce your ability to get a loan in the future.

The advantages of cosigning a mortgage

When you cosign on a mortgage loan, you're putting your financial resources behind the loan. This can help the borrower get much better interest rates and loan terms than they could achieve on their own. Your support and attention to ensuring payments are made on time can also help your family member build a good credit rating.

Another important advantage is the pleasure you get from helping a close family member and providing a home for your loved ones to live in. There's an intangible benefit to helping children and other close family members achieve their dreams.

The disadvantages of cosigning a mortgage

Cosigning for a mortgage loan carries a significant financial risk. No matter how much you trust the borrower, issues can come up that may keep them from paying, like losing a job or going through a divorce. If that happens, you must take over payments, or you may be impacted by negative information appearing on your credit report, a foreclosure and possibly even a lawsuit brought by the lender.

It's also important to consider the impact that cosigning could have on your relationship with the borrower if anything were to go wrong.

Will I have ownership of the property if I cosign?

No, you will not take on ownership if you’re only a mortgage cosigner and not an actual co-borrower. As a cosigner, you’re only guaranteeing the loan payment. Your name will not be on the title to the property.

Can I stop being a cosigner in the future?

It's not easy to end your obligation as a cosigner. If you want to end your financial responsibility as cosigner, you’ll probably have to persuade the borrower to refinance the loan without your income. This might make sense if the borrower now makes more money and has a lower debt-to-income ratio, making them able to qualify for a mortgage alone. It can also be a good option if your personal circumstances have changed and you’re no longer in a financial position to be a cosigner.

Are there alternatives to asking me to cosign?

Yes, many borrowers with lower income can take advantage of affordable homebuyer programs. These may require you to put a certain amount down on the property, take a class on homebuying or purchase mortgage insurance. Often, more resources exist for first-time homebuyers, though you may qualify if you haven’t owned a home or held a mortgage for several years.

Government programs such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans may help some borrowers buy a home. Some of these allow borrowers to accept gift funds that can increase or be used for their down payment. For many parents, making a gift toward the down payment can be more financially desirable than assuming the responsibilities of a cosigner.

Some states also have housing assistance programs which may help individuals and families qualify for a loan on a primary residence.

To learn more about your options for a home loan, speak to a Home Lending Advisor. You can also suggest to the borrower that they apply for a mortgage and determine if they’re eligible for more traditional options before you decide whether cosigning is the right step for you to take.