If you have good credit, family members might view you as a prime candidate to be a mortgage loan co-signer. Before you agree to share your creditworthiness, consider what signing on the line for another person's mortgage does to your own credit. You may want to help out a family member or friend, but that means you might dilute your credit enough that you can't qualify for your own mortgage -- or any other form of credit.
You make your loan and credit card payments on time every month, but your income and current debts combine to define your creditworthiness. Income-to-debt ratio is the term lenders use to describe your ability to qualify for credit from all lending sources. A mortgage is just one type of loan factored into your ability to obtain credit. Any credit cards and car and student loans also factor into the score. Open lines of credit, even when you don't use the credit, also add into your ability to attract lenders for new credit. Lenders view open credit lines as potential debt.
Signing a mortgage legally commits you to meeting the terms of the loan. Co-signing makes you equally responsible for meeting the loan terms. Lenders require co-signers when the original mortgage borrower cannot qualify for the loan on the merits of the prospective borrower's creditworthiness. That means the co-signer is taking on the risks for the original borrower -- the person the lender deemed a poor risk for the loan. Co-signing must be taken seriously. If the original borrower fails to make the mortgage payments, you're on the hook for the mortgage loan.
Reducing Credit Capacity
Co-signing adds the new mortgage loan to your credit report, and the monthly payment on that house also impacts your income-to-debt ratio. Mortgage lenders use a range, typically in the 30 percent range of your monthly income, to qualify you for your new mortgage. This means no more than that percentage is put toward the mortgage each month. When you co-sign for a loan for another person, a portion of that monthly payment is also added to your qualifying percentage limit. The lender won't risk giving you a new house when the lender for your co-signed mortgage loan might come back to you for money. Your new lender makes you qualify by asking to see more income to qualify for your own mortgage. This limits your shopping options by reducing the home sales price for your own mortgage -- or it may mean you don't qualify for your new home loan at all.
Credit dings on your co-signed mortgage attach to your credit. You need to monitor the loan payments for your co-signed loan to make sure the money arrives each month and on time. As a co-signer, you also have the responsibility for making sure the homeowner has insurance and is up to date on property tax payments. Forget thinking about your own mortgage if the co-signed loan has a history of late payments. This is a flag for your new lender that both you and the co-signer are poor credit risks.
- Federal Trade Commission: Facts for Consumers -- Co-signing a Loan
- Bankrate.com: Co-signing Loan for In-Law A Bad Idea
- Experian National Score Index: What Would Cosigning Mean for You?
- Indiana Legal Services, Inc.: Co-Signing A Loan
- MSN Money: 3 Reasons Not to Co-Sign a Loan
- The Atlantic: Why You Should Never, Ever Cosign a Loan for Anyone
- New York Times: Co-Signing on the Dotted Line
- FHA.com: FHA Requirements -- Debt Ratios
- Wells Fargo: What Lenders Consider
- FHA.com: Prequalify of an FHA Loan
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