On the road to buying a new home? Is your lender requiring you to have a co-signer in order to get your loan? We break down the requirements of a co-signer to give you a better understanding as to why you may need one in the first place.
A co-signer is someone (like a parent, family member or close friend) who pledges to pay back the loan if the borrower does not. It is basically a fall back for the lender, just in case you, the borrower, are unable to pay back the loan. The co-signer shares the legal responsibilities with the borrower, without any of the benefits of ownership. They help the borrower obtain financing and can potentially increase the loan amount requested. There is also a chance that having a co-signer could result in a better interest rate.
Why would your lender ask you to have a co-signer?
Typically, when a lender requires a co-signer, it is because he or she will not approve a loan for the borrower based on the borrower’s income or credit record. An example of this is someone out of college, who just started their first full time job and is a first time borrower. They are wanting to invest in property, so they buy a condo, townhome or home. Their parents or guardian may have to co-sign on the loan because the new graduate might not make enough money or have an established credit record and won’t be able to receive the loan alone.
Considerations for the co-signer
- A co-signer will have to sign paperwork requested by the lender in order to get approved for the loan
- The co-signer will have to repay the debt if the borrower is unable to
- Being a co-signer could potentially hurt your ability to qualify for other loans and financing because a lender may count the mortgage payment against you
- You can get out of being a co-signer on a loan if the borrower refinances and can get a new loan without a co-signer
- As a co-signer, you can ask to receive the monthly payments so you can stay on top of the borrower and make sure they are making their payments on time (in most cases, the co-signer is notified when it is too late and the borrower has already missed multiple payments)
Risks of Co-signing
Being a co-signer is no reward and all risk. Co-signing a loan will show up on your credit report. The co-signer becomes liable for the payments and if the borrower is late on the payments, it can hurt both the borrower and the co-signer’s credit. Make sure that if you are saying yes to co-signing, you can trust the borrower will pay on time. Becoming a co-signer for a friend sometimes sours the friendship quickly, especially when the borrower cannot pay off the loan. If the borrower becomes ill, loses their job, or even dies, the co-signer will be in charge of maintaining the loan payments.
Difference between a co-signer and a co-borrower
While both co-signers and co-borrowers can assume responsibility for debt and help the borrower qualify for a loan, there is a difference between the two roles. A co-signer, like mentioned above, is someone who co-signers on the loan and is a safety net for the lender in case the borrower does not follow through with their monthly payments. A co-borrower is someone who has joint ownership in the home and can apply for the loan together, like spouses.
We want to make the home buying process as easy as possible for you. Ken Venick has over 35 years of experience in the real estate business and we are your one-stop-shop to handle all of your mortgage needs. Contact us today!