Co-signing a home for a friend or relative can win you points with your loved one, but it won't win you points with lenders when trying to get a mortgage for yourself. Co-signing is similar to guaranteeing a loan, as it involves the use of your income and credit figures to qualify for financing and indicates your promise to repay the debt. Because you may be called upon to pay the mortgage if the main borrower fails to do so, prospective mortgage lenders for your own home loan often count the co-signed debt against you when deciding how much to loan you.
TL;DR (Too Long; Didn't Read)
Although you can still get a mortgage if you co-sign for someone else, you may have a harder time qualifying. That's due to the increased risk you present to a lender if you become responsible for payments on the co-signed loan.
Consider Co-Signing Effects Beforehand
One of the main questions you may want to ask before you ever co-sign mortgage documents for a friend or relative is, "Will co-signing affect me buying a house?" This helps you determine whether using your income and credit qualifications to help a struggling mortgage applicant is a good idea. If you plan to become a homeowner yourself in the near future, or if you may want to refinance your current home, the co-signed mortgage can hinder your plans. Homeowners who co-sign can also have a harder time taking out a second mortgage on their own home, such as a home equity line of credit or home equity loan. Additionally, co-signing a mortgage is different from co-borrowing. Unlike a co-borrower, co-signers have no ownership interest in the property but are held financially responsible for repaying the debt if the primary borrower doesn't.
What You Need to Qualify
As a co-signer for a house, you commit to taking over the monthly payments for a borrower if he fails to make payments on his own. Your credit score and income proved to be sufficient at the time of co-signing the mortgage application to support an additional housing payment if need be. Because you may all of a sudden become responsible for another person's mortgage, lenders will scrutinize your future mortgage applications more closely. You must either remove yourself as co-signer or prove that the primary borrower has made all payments on time for a certain period.
After You Co-Sign a Mortgage
Expect to jump through a few hoops with prospective lenders after you co-sign a mortgage. You may not have any issues if you can prove you are no longer obligated on the mortgage, which typically requires a refinance or sale by the primary borrower in order to remove you. If you're no longer responsible for the mortgage, you can simply have your credit report updated to reflect that the co-signed mortgage was paid off.
If you are still obligated as co-signer but have never had to help the borrower with payments, and the co-signed mortgage is in good standing, your lender may simply ask you to provide proof of this for the past year or more. However, if you have had to step in and help the borrower with payments, if the loan has late payments or if it is currently in default, mortgage lenders may deny your mortgage application outright.
Having Sufficient Income Helps
Having enough income to support the co-signed housing payment and a new mortgage payment of your own can help you qualify. Even if you have never had to step in to make monthly payments on the co-signed mortgage, prospective lenders may calculate your debt-to-income ratio as if you do make the payments. The DTI ratio compares your total monthly debt payments to your gross monthly income and expresses it as a percentage. The lower your DTI, the more qualified you are to get a new mortgage, and the more income you have, the higher debt load you can handle. The potential for paying two mortgages doesn't present as a high risk to the lender, thus helping you to qualify for a mortgage on your own.
Karina C. Hernandez is a real estate agent in San Diego with a background in mortgage origination. She has been licensed since 2004 and received a B.A. in English from UCLA. Karina has written on a variety of financial topics, including credit, real estate finance, insurance and taxes for online channels such as eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.