Cosigning a Mortgage: What You Need to Know

Buying a home is the largest one-time purchase for most Americans. As a result, some first-time homebuyers might need a cosigner to qualify for a mortgage.

Mortgage lenders may require a cosigner if the primary borrower doesn’t have enough income to take on the home loan. But before you cosign a loan, it’s important you know what you’re getting yourself into.

What is a cosigner?

A mortgage cosigner is usually a close family member or friend who legally agrees to take on the home loan payments and late fees if the borrower doesn’t pay.

Because it's a significant financial responsibility, make sure you can afford the mortgage payments in case the borrower falls behind.

Lenders may require a cosigner if the borrower has bad credit, a limited employment history, or a high debt balance. As the cosigner, you’ll usually remain on the loan until it’s paid in full or until the borrower can refinance and qualify without a cosigner.

Cosigner vs. co-borrower: What’s the difference?

A cosigner and co-borrower can help a borrower qualify for a mortgage and both are legally responsible for loan repayment. But there are a few key differences between the two:

• Cosigners: A cosigner helps a borrower qualify for a mortgage by agreeing to pay back the loan if the borrower stops making payments. As a cosigner, you don’t have an ownership stake in the home and your name doesn’t appear on the property title. Cosigners typically have higher income and better credit than the borrower.
• Co-borrowers: A co-borrower’s name appears on the title and can legally claim homeownership. Co-borrowers are sometimes known as “co-applicants” — both you and your co-borrower are equally responsible for making payments.

Advantages of adding a cosigner to a mortgage

There are several benefits to adding a cosigner to a home loan:

• Qualify more easily: The most obvious benefit of cosigning a mortgage is that the primary borrower has a better shot at qualifying. Lenders may deny hopeful homebuyers who can afford the monthly payment but have insufficient credit, a high DTI, or changed careers. Cosigners with good credit, long-term employment, and a low debt balance can help secure mortgage approval.
• Can have self-employment income: It’s harder for self-employed borrowers to qualify for a mortgage. If you earn traditional income reporting on a W-2 tax form, cosigning the loan can help satisfy the lender’s income history requirements.
• Get a lower interest rate: In addition to qualifying for the loan itself, your high credit score or annual income may help the borrower qualify for the best mortgage rate.
• Parents can get more privacy: By cosigning your child’s mortgage, you as the parent can gain more privacy at home. Being an empty nester also gives you the ability to sell your house and downsize.

Risks of being a cosigner

Choosing to cosign a mortgage loan can help a loved one finally buy a home, but there are several risks to be aware of:

• Missed payments can lower your credit score: As the cosigner, your credit score can decrease if the borrower misses a payment. The loan can show as a foreclosure on both of your credit reports if neither of you makes the necessary payments.
• Legally required to make payments: If the borrower stops making payments, the lender will require you to continue making payments and pay late fees. Lenders also have the legal right to sue you if you fall behind on payments.
• Increases DTI: Cosigning a mortgage loan can help a borrower secure a mortgage. But doing so raises your DTI. As a result, it might be difficult for you to obtain your own mortgage (or any other loan) if your DTI gets too high.
• Potential relationship problems: Missing payments can damage or break close relationships between you and the borrower. This might be reason enough to not cosign a loan.

Mortgage cosigning alternatives

If you’re uncomfortable cosigning a mortgage, there are several alternatives to help the buyer find a home. These options can protect both the finances and the relationship between you and the borrower.

Get a mortgage loan with a cosigner release

Lenders may offer mortgages with a cosigner release. Be sure to compare lenders and look for this feature when shopping around for a loan.

Under a cosigner release, the lender will usually want to see the borrower make several consecutive payments and check the borrower’s credit to ensure they’re capable of paying back the loan themselves. If these conditions are met, the lender may release the cosigner from debt obligations.

Important: For most lenders, the only way to remove yourself as a cosigner is for the borrower to refinance their mortgage without a cosigner.

As part of the process, you may have to sign a cosigner release form and a quitclaim deed. These forms state you’re no longer responsible for mortgage payments and that you won’t file a legal claim to take ownership of the property.

Apply for a government-backed mortgage

Conventional loans have stricter qualifications, including higher credit scores and down payment requirements. Government-backed mortgages, on the other hand, have more lenient credit score requirements and are generally easier to qualify for.

Here are three options to consider if you’re working with a buyer struggling to secure a conventional mortgage:

• FHA loans: Most borrowers need a minimum 580 credit score, a down payment of at least 3.5%, and a DTI no higher than 50% to qualify for an FHA loan. Borrowers with a credit score as low as 500 can qualify if they meet several FHA requirements.
• VA loans: While VA-backed purchase loans are only available to qualifying service members, veterans, and spouses, these loans don’t require a down payment or private mortgage insurance. Mortgage rates can also be lower than those from private lenders.
• USDA loans: The U.S. Department of Agriculture backs loans for qualifying households living in eligible rural areas. No down payment is necessary and the mortgage insurance premiums can be lower than FHA loans.

Agree with the borrower before closing

Before agreeing to cosign a mortgage, ask the borrower if they would agree to a mortgage refinance once they have a qualifying credit score and income.

You can also negotiate with the borrower to refinance after a specific number of years. An application deadline gives the borrower sufficient time to improve their creditworthiness and set aside funds for the refinancing costs.

Drafting an official contract can prevent future confusion if either party has questions about the original agreement. This contract can also protect your relationship with the borrower.

Have the borrower apply for a bad credit loan

Lenders offer home loans for bad credit. While the rates and terms may not be as favorable as a conventional loan with a cosigner, the borrower has a better chance at qualifying with their current credit and income.

Before applying, the borrower can increase their approval odds with these credit practices:

• Have a credit score of at least 580
• Save for a larger down payment
• Maintain a debt-to-income ratio below 36%
• Avoid hard credit inquiries

First-time homebuyer programs can also provide down payment assistance and also minimize closing costs. State and local governments are more likely to offer these aid initiatives.

Consider a rent-to-own agreement

One of the most significant downsides of cosigning a mortgage is the inability to take ownership of the property if the borrower stops making payments.

Instead of using your credit to cosign the mortgage loan, you can buy the property and offer a rent-to-own lease to the borrower. Each payment helps them purchase the house from you.

If the borrower stops making payments or moves out, you are responsible for making payments. However, you get to keep the house instead of being stuck paying off another person’s mortgage.

The repayment period can be flexible depending on the borrower’s finances and how soon you want to sell the property if you borrow money to buy the home.

Keep Reading: Credit Score Needed to Get a Home Loan