When it comes time for your kids, your siblings, or your significant other (or whomever!), you might be asked to be their co-signer to purchase a home. Being a co-signer for someone’s home loan should not be taken lightly, and you should understand what you’re getting yourself into!
What does co-signing mean?
Co-signing for someone else’s mortgage also makes you financially responsible for that loan. This debt will absolutely show up on your credit report.
Hard Facts to Know:
- Your credit will be pulled & used to help them obtain a home loan
- This can raise your total debt on your credit report
- It could potentially reduce your credit score
- You may not be approved for another loan if a lender feels you’re overextended
What if the family member/friend stops paying the loan?
You need to take over payments, so it doesn’t negatively impact your credit score.
Before You Agree
Before agreeing to be a co-signer, you should sit down with the person asking you for this favor and discuss all it entails. Make sure the borrower has the funds to make the payments ahead of time. Ask them why they need you to help with this loan? If they aren’t paying their other bills, you shouldn’t help them take on new debt!
Why would I help co-sign a mortgage?
Maybe this person doesn’t have a credit score that will help them get the best interest rate. Or possibly this person works off the books and doesn’t claim enough income. And sometimes, someone is just starting out and has no credit score. There are many reasons, but you should be comfortable with whatever it is.
Will I own a portion of the home?
It depends! It can be done in a variety of ways. For the homeowner to claim a homestead exemption on the property (this is when you’re an owner occupant of a home and get a reduced property tax), then every person listed as an owner must live there.
The new homeowner would still be able to file a homestead exemption if you’re listed as the other owner, but they would only get 50% of it instead of the full amount.
Another option is that you are a co-signer but get ZERO ownership rights to the property. In some cases, we have seen co-signers only take a 1% stake in the property, so they have SOMETHING.
If you keep some property rights to the house, the other owner needs you to sign off and your permission to sell, take out a home equity line of credit, etc., for the property.
If you keep no rights to the property, you are only responsible for the debt on the house but have no ownership shares.
Typically a co-signer does not get right to the property; only a co-borrower does. (However, many people use co-signer and co-borrower as the same term. They are not, though.)
What’s the right move? Whatever makes more sense to you!
Draft a contract
Have a contract drafted between you and the other person that outlines the details:
- Note that you are only the co-signer and not making the payments
- When the payments and due and who they must pay them to
- Who has to pay legal costs should you have to take legal action against the other person
- What happens if the person stops paying and you have to take over the payments
- Whether or not the loan must be refinanced at some specified to take you off of the loan
Last thoughts
Go over all the paperwork for the loan. Know the interest rate and understand all terms of the loan. Don’t be afraid of hard conversations. This is your credit score, and you’re making yourself financially liable for someone else!
Fun fact: if you need another loan, this debt could not be counted against you as long as the other person has made 12 consecutive on-time payments.
Ready to talk home buying? Schedule a time!
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