Can You Cosign a Mortgage? What to Know
Learn the full scope of cosigning a mortgage, from responsibilities and eligibility to financial effects and potential release options.
Cosigning a mortgage involves more than just signing a document; it means sharing financial responsibility for a home loan. This arrangement typically arises when a primary borrower, such as a family member or friend, may not fully meet a lender’s criteria for a mortgage on their own. By adding a cosigner, the lender gains additional assurance of repayment, allowing the primary borrower to secure the financing needed for a home purchase.
Understanding Cosigner Responsibilities
When an individual cosigns a mortgage, they agree to be equally and fully liable for the entire debt. The lender views the cosigner and the primary borrower as jointly responsible for all scheduled payments. If the primary borrower fails to make payments, the lender will pursue the cosigner for repayment.
Missed payments or a default by the primary borrower will impact the cosigner’s credit score and history. A single late payment can reduce a credit score, and a foreclosure can have a lasting impact. In a default scenario, a lender can take legal action against both the primary borrower and the cosigner to recover the outstanding debt. This could lead to a judgment against the cosigner, potentially putting their assets at risk to satisfy the mortgage obligation.
Cosigner Eligibility Requirements
Lenders evaluate a potential cosigner’s financial standing to ensure they can fulfill the mortgage obligation if necessary. A strong credit history is a primary consideration, with lenders looking for a credit score of at least 670. Scores above 740 can improve approval chances.
Income requirements are important, as the cosigner must show stable employment and sufficient income to cover the mortgage payment in addition to their own existing financial obligations. Lenders assess this by reviewing tax returns, pay stubs, and employment verification. The debt-to-income (DTI) ratio of the cosigner is another factor, which compares monthly debt payments to gross monthly income. Lenders prefer a DTI ratio of 43% or lower.
Financial Implications for the Cosigner
Cosigning a mortgage carries financial implications for the cosigner, even if the primary borrower consistently makes timely payments. The entire mortgage debt appears on the cosigner’s credit report, increasing their reported debt load. This impacts the cosigner’s personal debt-to-income (DTI) ratio.
An elevated DTI ratio can limit the cosigner’s ability to qualify for other forms of credit, such as car loans, personal loans, or their own mortgage. Lenders may view them as having too much existing debt, even if they are not directly responsible for making the mortgage payments. The mortgage also affects the cosigner’s credit utilization. Even with timely payments, the presence of a large mortgage debt can increase this ratio, lowering the cosigner’s credit score.
Paths to Cosigner Release
For a cosigner to be released from a mortgage obligation, the primary borrower can refinance the loan solely in their name. This process requires the primary borrower to qualify for a new mortgage based on their own credit score, income, and debt-to-income ratio. The primary borrower will undergo a new credit check, income verification, and the property will require a new appraisal to secure the new loan.
Refinancing involves closing costs, which range from 2% to 5% of the loan amount, and these fees must be paid at the time of the new loan’s closing. Another path to release involves selling the property, as the proceeds from the sale would pay off the existing mortgage. A lender might consider a loan modification to remove the cosigner if the primary borrower’s financial situation improves. Release requires a formal process and lender approval.