In today's tight credit market, many borrowers are wondering if
a co-signer might help them qualify for a mortgage loan. They can,
but it's not a guarantee of success.
Co-signers on a home loan are generally helpful in cases where
the primary borrower hasn't established a credit history, has
irregular income or hasn't been in their current job for at least
two years. They're less helpful in situations where the primary
borrower has bad credit, because most lenders look at the lowest
credit score when there are two borrowers listed on the
A co-signer is someone who agrees to take responsibility for a
loan if the primary borrower is unable to pay. Usually a parent or
other close relative, they have to have sufficient credit and
income to be able to pay off the loan themselves if the primary
Often used with limited credit, income history
Co-signers are most commonly used by young people whose parents
are helping them get financially established. If the borrower is
someone who previously hasn't made much use of credit, such as
buying a car or using credit cards, banks will often accept having
a co-signer with good credit back up the loan.
Another common situation is someone who's new in a job, is
establishing a business, or who has income from a variety of
irregular sources, some of which the bank won't count toward
qualifying for a mortgage. Again, having a co-singer with a stable
income and established credit can help.
In many cases, a lender may require that the primary borrower be
able to actually qualify for the mortgage on their own, but adding
a co-signer may enable them to obtain a lower interest rate or put
up a smaller down payment than would have otherwise been required.
In other cases, adding the co-signer's income may enable the
primary borrower to obtain a larger loan than they could have on
Not all lenders will allow co-signers on a mortgage loan - it
varies from lender to lender. On FHA mortgages, the co-signer must
be a parent or close blood relative; otherwise, a minimum 25
percent down payment is required.
Downsides for the co-signer
For the co-signer, the arrangement carries a lot of risk, and no
small amount of inconvenience. For starters, they have to pay off
the loan if the primary borrower defaults. There's no guarantee
they'd get the property in return, unless that's specifically
written into a side agreement.
In addition, being a co-signer on a loan reduces the credit you
have available for your own purposes. If you want to buy a car, a
vacation home or other major purpose, lenders will regard the debt
you've co-signed for as part of your own debt load when evaluating
how much you can borrow.
Obviously, you don't want to take on the risk of co-signing a
mortgage unless you have a very strong reason to want to help the
primary borrower, and are very certain they will handle their debt
obligations in a responsible manner. The very fact that a borrower
needs a co-signer in the first place means they're already at a
higher risk of default, something to bear in mind before agreeing
to co-sign a home loan.
As a co-signer, you're also stuck with responsibility for the
loan until the mortgage is paid off or refinanced - you can't
simply apply to have your name taken off the mortgage. You also
can't strike an agreement where the borrower will refinance after
so many years, since a lender may not approve a new loan.
For this reason, many parents or other close relatives chose
other means of assistance rather than co-signing a mortgage. A cash
gift to help with the down payment is one way of helping without
compromising your own credit or binding you to future
If you have the financial means and credit standing, another
alternative to co-signing is to buy the property yourself, then
sell it to the person you'll be assisting under a land contract.
This means the buyer doesn't have to deal with the bank at all -
you're acting as their lender - and you're the only one who has to
deal with the bank.
For the buyer, it works better than a rent-to-own arrangement,
since they can still deduct the interest payments on their taxes.
The deal can be structured with a balloon payment so that you have
a fixed date when they have to refinance the loan under their own
name, and you have title to the property in the event they can't
make the payments.
Not all lenders will allow land contract arrangements on
mortgages they issue, so be sure to get this cleared up beforehand.
Once again, the advice of an experienced attorney is recommended
before proceeding with such a deal, even with a close family