In a perfect world, you might pay cash for your dream home and live happily ever after. In reality, most people must borrow money in order to purchase a home. Lenders prefer well-established applicants with stable income, a substantial down payment and decent credit.
Fall short in any of these categories and you need a co-signer to score the money for you. Without a co-signer, your dream of a house surrounded by a white picket fence goes up in smoke.
Co-signing a mortgage means helping someone qualify for a loan by agreeing to be responsible for repayment if the borrower fails to do so.
Lender Underwriting Requirements
Every mortgage lender establishes specific underwriting guidelines for approval. You must meet specific thresholds for income, debt, assets, employment and credit scores. When you come up short, the lender rubber stamps your application with a denial. You are deemed a bad risk by the lender, who refuses to front you the money for your dream home.
The Co-Signer Approach
At this point, you need someone to intervene on your behalf. A co-signer is a person who qualifies for your mortgage loan. He has stable income, high assets, low debt and a great credit score. He signs the mortgage application and loan documents promising to be responsible for the loan.
He does not get any rights to the property. If you default, the bank may come after him for the money in your stead.
Risks of Co-Signing
Your co-signer is taking a significant risk with virtually no benefit – besides your goodwill. He is betting on you when the bank wasn't willing to take that risk. If you default on the loan, he must pay the bill or risk his credit score. The lender reports all past-due payments and defaults on his credit report, lowering his score.
In addition, the lender may pursue a judgment in court against your co-signer. He may face garnishment of wages, a bank levy or a lien on his personal property.
Some Co-Signing Safeguards
Make sure your co-signer fully understands what he is signing. Try to limit the co-signer's liability to the total owed on the loan minus fees and court costs. Your co-signer should request immediate contact by the lender if you miss a payment.
Other Co-Signer Considerations
The risk the co-signer takes could place a strain on your personal relationship. In a financial hardship, you are stressed enough over your declining credit score. Knowing you are hurting someone else could strain your relationship.
Instead of asking him to co-sign, consider borrowing money from him if he is financially able to do so. An increased down payment could get your mortgage approval without the need for a co-signer.