Does Being a Cosigner Affect Buying a House?

Cosigning a loan can be a supportive gesture, often helping someone secure financing. This act carries significant financial implications for the cosigner, particularly when planning to apply for their own mortgage. Understanding these impacts is important. This article explores how being a cosigner can influence your ability to secure a home loan.

How Cosigning Affects Your Financial Profile

When you cosign a loan, you legally agree to be responsible for the debt if the primary borrower fails to make payments. The cosigned debt appears on your credit report as your obligation, regardless of whether you are making the payments yourself. Creditors report the loan to credit bureaus as your debt, which can affect your credit profile.

The primary borrower’s payment behavior directly influences your credit score. Consistent, on-time payments can help improve your credit history, potentially boosting your score. However, if the primary borrower makes late payments, misses payments, or defaults, these negative actions will be reflected on your credit report and can significantly hurt your credit score. This negative information can remain on your credit report for up to seven years.

Beyond payment history, cosigning a loan affects your credit utilization ratio, which is the amount of credit you are using compared to your total available credit. An increase in debt from a cosigned loan can raise this ratio, potentially lowering your credit score. The cosigned debt also increases your overall debt burden, reducing your borrowing capacity for future loans. Lenders view this as a potential future liability, making it more challenging to qualify for new credit, even if the primary borrower is making all payments.

Mortgage Lender’s View of Cosigned Debt

Mortgage lenders assess cosigned debt as part of your total financial obligations when evaluating a loan application. Lenders primarily consider your Debt-to-Income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. Cosigned loans are typically included in this calculation, even if you are not making the payments, which can increase your DTI ratio and hinder your mortgage qualification. Lenders generally prefer a DTI ratio below a certain threshold, often around 36% to 43%.

To mitigate the impact of a cosigned loan on your DTI, lenders may allow the exclusion of the debt under specific conditions. You typically need to provide documentation proving that the primary borrower has consistently made payments for a specified period, often 12 consecutive months, with no delinquencies. This documentation might include 12 months of canceled checks or bank statements from the primary borrower. If this proof is provided, the cosigned debt may not be counted against your DTI, making it easier to qualify for a mortgage.

The cosigned loan’s impact on your credit score also plays a role in mortgage eligibility and interest rates. A lower credit score due to missed payments on a cosigned loan can result in less favorable mortgage terms or even denial. Lenders consider both your credit score and DTI ratio to determine your ability to repay a mortgage.

Preparing to Purchase Your Own Home

For individuals who are cosigners and aspire to purchase their own home, monitoring your credit reports from all three major bureaus is important. This allows you to track the payment status of the cosigned loan and identify any inaccuracies that could negatively affect your credit score.

One strategy to improve your financial standing is to explore options for being released from the cosigned loan. This might involve the primary borrower refinancing the loan solely in their name, which could require established credit and income. Another possibility is for the primary borrower to sell an asset securing the loan, like a vehicle, to pay it off. Some lenders may also offer a cosigner release option after a certain number of on-time payments and a credit check of the original borrower.

Building a strong credit history in other areas of your financial life is also beneficial. This involves consistently making on-time payments on all your other debts and managing your credit utilization effectively. Saving a larger down payment for your home can also help offset any remaining impact of the cosigned debt, as it reduces the amount you need to borrow and can demonstrate greater financial stability to lenders. When applying for a mortgage, be prepared to present documentation, such as bank statements or canceled checks, that proves the primary borrower has made consistent, timely payments on the cosigned loan for at least the past 12 months. This evidence can be crucial in persuading lenders to exclude the cosigned debt from your DTI calculation.