After the wedding bells ring, many young couples dream of buying a home. But limited or bad credit can create an obstacle to achieving this dream. Your mortgage lender may recommend asking a parent or family member to co-sign the loan for you.
FHA and traditional mortgage lenders allow co-signers to use their income and credit to secure the loan on your behalf. Co-signing the loan gets the keys in your hands sooner, but comes with many disadvantages.
While a parent can co-sign your mortgage loan to increase your chances of approval, you should be aware of the downsides that come this decision.
Understanding Co-Signer Responsibilities
Co-signing a mortgage loan puts your parent on the hook for your financial obligations. As soon as he signs on the dotted line, your parent's credit history and financial security are affected by your ability to make your monthly mortgage payment. As a co-signer, your mom or dad pledged to pick up the mortgage payment if you cannot afford it. In exchange for this promise, the lender issued the mortgage loan to you.
Exploring Co-Signer Requirements
Traditional lenders each have their own requirements for co-signers. Some lenders require a blood relationship, such as a parent or a relative, while other lenders allow any person to co-sign as long as it is a personal relationship. For an FHA loan, your parent must have a principal residence in the U.S. unless he is in the military serving abroad or a U.S. citizen living abroad. Your parent must meet the underwriter's loan requirements for credit score, income, liabilities and assets.
The Co-Signing Process
Like the primary borrower, the co-signer provides certified copies of tax returns, W-2 forms or pay stubs, bank statements and a credit report. All this information goes to the mortgage lender's underwriter for approval or denial. After approval, you go to closing on the mortgage loan, where you both sign the documents.
For FHA loans, the co-signer's name does not go on the title to the property. Traditional lenders may put the co-signers on the title depending on whether they are listed as a co-signer or a co-borrower. Read the mortgage documents carefully before you sign them to clarify the co-signer's status with your traditional loan lender.
Disadvantages of Co-Signing
Co-signing is not the ideal mortgage situation. As the primary borrower, there are disadvantages to using a co-signer for your mortgage loan. Missing a monthly mortgage payment not only dings your credit score but your parent's credit, as well. You are placed under extra pressure to make your mortgage payment so as not to ruin your parent's credit.
In addition, your monthly mortgage payment habits are reported on your parent's credit report. You may prefer to keep your financial matters private. But as long as your parent is listed as a co-signer, he has access to your mortgage payment history.