Without mortgage loans, most people wouldn't be able to buy a home. Banks and mortgage lenders fund these loans to qualified applicants. In certain situations, someone might fall short on a few qualification requirements. Using a cosigner with a better credit score or a higher income increases the chance of being approved and/or brings down the interest rate. Once a home loan is finalized, a cosigner cannot be removed, nor can a name be added without refinancing the loan.
To qualify for a mortgage loan, borrowers must meet certain requirements determined by the lender. Generally these requirements include good credit scores and stable income. The lender runs a credit check on the borrowers and then usually asks the borrowers to submit some financial documents to verify their income. The lender wants to ensure the borrowers earn enough to afford the monthly loan payments. If you don't meet these requirements, the lender might suggest using a cosigner.
Essentially, your cosigner should be in a better financial situation than you. The lender will review the cosigners' credentials and then make a final decision. The cosigner holds a financial responsibility to repay the loan, but won't be on the deed to the property. The cosigner retains this responsibility until the loan is paid in full. If the borrowers default on loan payments, the lender can try to collect the past-due amount from the cosigner. The home loan will also appear on the cosigner's credit report for the total loan amount.
In order to add or remove a cosigner or borrower to your home loan, you must refinance. The refinancing process consists of applying for a new loan. The new loan is used to pay off the original home loan. It's common for borrowers to refinance their mortgages to obtain better interest rates, extend the loan's term or reduce monthly payments. Because a refinanced loan is a completely new loan, a cosigner can be removed and a new cosigner or borrower can be added. Once the refinance is complete, any financial responsibility towards the old loan is considered fulfilled or satisfied.
Cosigning for a home loan is a serious obligation. Regardless of how well you know the borrowers or how much you trust them, you might end up paying for their default down the road. Cosigners should take a pro-active approach to ensure that the loan is being paid on time each month. Missed payments will negatively affect the cosigner's credit score as well as the borrower's. The lender might be willing to work with the cosigner by providing notification of any missed payments. However, there are cases where people simply need a few years to build up their credit score. After that, they can refinance the loan and remove the cosigner.