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Financial Wellness
The Two Sides of Co-Borrowing
When you need a cosigner… Or are asked to cosign.
You found the perfect house, only to have a lender inform you that you don’t qualify for a mortgage loan. Your adult children or a long-time friend found the perfect house but don’t qualify — even with a sizable down payment — due to income or credit.
Enter the cosigner.
Lenders will approve a mortgage by adding a co-borrower, a responsible party to guarantee that the money it lends a potentially risky borrower will be paid back.
When you apply for a mortgage, you become what is known as the “occupying borrower.” A cosigner — usually a relative or friend — is someone who typically doesn’t live at the property (a “non-occupying co-borrower”). This person physically cosigns the mortgage or deed of trust note with you, adding the security of their income and credit history to the loan.
Both parties become co-credit applicants, taking on the financial risk of the mortgage together. This means the co-borrower essentially owns the house too, whether they live in it or not.
A cosigner is not the same as a co-borrower.
A co-borrower applies for a loan with the primary applicant and both parties are responsible for paying back the loan. The cosigner does not intend to make any payments — that is the responsibility of the primary borrower. Still, they do promise to assume accountability if the primary borrower doesn’t make repayments as required.
What to Know Before Cosigning
Consider these important points in becoming a cosigner.
What is a cosigner’s liability?
A cosigner is a person who takes on the financial risk of buying a home right along with the borrower. If for any reason the occupying borrower is not able to pay back the loan, the cosigner is responsible for the payments.
Late mortgage payments are reported on both credit reports. Those late payments will affect credit scores and impact the ability of both parties to obtain new loans.
What are a cosigner’s rights?
Being a cosigner does not give you rights to the property. A cosigner has no title or ownership in the property secured for the loan. Additionally, a cosigner has no legal right to occupy a home as a primary or secondary residence, unlike the primary signer/borrower.
Cosigning for an auto loan?
Similar to a home loan, you can be a cosigner for an auto loan. However, being a cosigner doesn’t give you rights to the car that loan will purchase. A cosigner doesn’t have any legal rights to the vehicle, so they can’t take the car from its rightful owner, the primary borrower.
How is debt-to-income ratio calculated with a cosigner?
Mortgage approval hinges on debt-to-income ratio (DTI), which is based on how much money you have coming in (income) versus debt.
With a cosigner, DTI is usually calculated by combining both incomes. This boosts the overall DTI to a number the lender will approve. Keep in mind that lenders will also examine the cosigner’s debts and factor them into a blended debt-to-income ratio.
Whom you shouldn’t ask to cosign your loan?
Cosigners should be people rooting for the occupying borrower to pay off the loan without a hitch. Cosigners to avoid are those who could make a buck by facilitating this real estate transaction, such as the home seller or the builder/developer.
Identify if your borrowers (and you) are good candidates.
There are plenty of reasons why those near and dear to you may have trouble getting the loan on their own — they may be self-employed or have limited credit history. However, cosigners should consider their current situation to determine if they are good candidates.
Think short term and long term and ask yourself:
- Are you prepared to take on the financial commitment?
- Do you own your home free and clear?
- If you need credit, how will this new mortgage affect your debt-to-income ratio?
Before you commit, think like a lender and look at the borrower’s income, work history, and existing debt to determine if the borrower is worthy and not a potential liability to your good credit.
Get some cosigning protection.
As a cosigner, one way to mitigate your risk is to get your name on the title of the home. That way, if your borrower cannot pay the mortgage, you have the power to sell and pay off the loan.
Another safeguard to consider is applying for the loan as a non-occupying co-borrower. With the guidance of a tax advisor, the cosigner may be able to write the mortgage interest off their taxes.
And, finally, remember to keep the communication lines open. Make sure the mortgage payments are current and the house is properly maintained. Even a few late payments will cause a credit mess for both parties.
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Understanding your options is an important step toward any financial goal. Whatever your financial needs, we're here to help.
View our current Real Estate loan rates. Real estate loans are available for residential properties in the state of California. Certain exceptions may apply for jumbo loans or property types. Property insurance is required. Rate is locked upon a completed application or upon receipt of a fully executed purchase contract. All loans subject to credit approval. Rates and terms are subject to change without notice. CEFCU is an Equal Housing Lender. NMLS #626590
